IMF reverses its optimism for India, sees 4.5% GDP contraction in FY21

Most forecasting agencies now expect Indian economy to contract between 3-5% in FY21 with varied projections of a rebound in FY22. (Photo: Bloomberg)
Most forecasting agencies now expect Indian economy to contract between 3-5% in FY21 with varied projections of a rebound in FY22. (Photo: Bloomberg)

Livemint

3 min read.  24 Jun 2020 Asit Ranjan Mishra

  • India’s economy is projected to contract by 4.5% following a longer period of lockdown and slower recovery than anticipated in April, the IMF said in its World Economic Outlook Update
  • Growth revival is now tempered to 6% in FY22 from 7.4% estimated in April

NEW DELHI : The International Monetary Fund (IMF) on Wednesday said Indian economy will contract 4.5% in FY21, reversing its rather optimistic forecast in April of 1.9% growth for the same year, citing the larger-than anticipated disruption to domestic activity in Asia’s third largest economy due to a more severe nationwide lockdown.

“India’s economy is projected to contract by 4.5% following a longer period of lockdown and slower recovery than anticipated in April,” the multilateral lending institution said in its World Economic Outlook (WEO) Update. Growth revival is now tempered to 6% in FY22 from 7.4% estimated in April.

After IMF released its WEO in April, the pandemic rapidly intensified in many countries including India, necessitating stringent lockdown measures for a prolonged period, thus resulting in even larger disruptions to activity and massive job losses than forecast. India has lifted almost all mobility and business restrictions to nurture the economy back to normalcy.

Most forecasting agencies now expect Indian economy to contract between 3-5% in FY21 with varied projections of a rebound in FY22. India Ratings on Wednesday projected the Indian economy to contract by 5.3% in FY21, hoping for a bounce back in the range of 5%-6% in FY22, aided by a lower base in the preceding year and return of gradual normalcy in the domestic as well as global economy. “The disorder caused by the covid-19 pandemic unfolded with such a speed and scale that the disruption in production, breakdown of supply chains/trade channels and total wash out of activities in aviation (some activities have started now), tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21. As a result, besides contracting for the whole year, GDP will contract in each quarter in FY21,” it added.

IMF now expects the world economy to shrink by 4.9% in 2020 against its earlier estimate of 3% contraction, holding that the coronavirus pandemic has had a more negative impact on activity in the first half of the calendar year than anticipated, and the recovery is projected to be more gradual than previously forecast.

In its baseline scenario, IMF said global activity is expected to trough in the June quarter, recovering thereafter. “Consumption is projected to strengthen gradually next year, and investment is also expected to firm up, but to remain subdued. Global GDP for the year 2021 as a whole is forecast to just exceed its 2019 level,” it added.

While noting that India has unveiled liquidity support (4.5% of GDP) through loans and guarantees for businesses and farmers and equity injections into financial institutions and the electricity sector, IMF said in countries where fiscal space is limited, they need to reorient revenue and spending to increase and incentivize productive investment. “Making some provisions (for example, relaxing eligibility) of social protection programs more long-lasting, can enhance automatic stabilizers and help tackle rising poverty and inequality. All measures should be embedded in a medium-term fiscal framework and transparently managed and recorded to mitigate fiscal risks, including loans and guarantees that do not have an immediate effect on government debt and deficits,” it said without naming India.

IMF said as the Great Lockdown begins to ease in several parts of the world, fiscal policies will have to adapt to country circumstances, balancing the need to protect people, stabilize demand, and facilitate recovery. “Where the pandemic remains acute and stringent lockdowns continue, fiscal policies should accommodate health care services to save lives and provide emergency lifelines to protect people. Where lockdowns are easing, fiscal policies should gradually transition away from firm support to better targeted household support, taking into account the extent of informality in the economy,” it added.

Holding that the pandemic will have particularly acute negative impact on low-income households worldwide that could significantly raise inequality, IMF said the progress made since 1990 in reducing extreme poverty may be imperiled as more than 90% of emerging market and developing economies are projected to register negative per capita income growth in 2020. “In countries with high shares of informal employment, lockdowns have led to joblessness and abrupt income losses for many of those workers where migrants work far from home, separated from support networks,” it added.

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