Covid-19 impact: India's GDP may contract 10.3% in FY21, says IMF

IMF now expected the world economy to fall less severely by 4.4 per cent than 5.2 per cent it projected earlier for 2020

The International Monetary Fund (IMF) on Tuesday sharply revised its projection of contraction in India’s gross domestic product (GDP) for 2020-21 – from 4.5 per cent earlier to 10.3 per cent – citing the rise in Covid-19 cases. The organisation, however, added that the country’s economy might rebound with an 8.8 per cent growth rate in 2021-22, higher than the 6 per cent it forecast earlier.

The IMF, on the other hand, expected the world economy to fall less severely, by 4.4 per cent as against 5.2 per cent it projected earlier, in 2020.

Chief Economic Advisor Krishnamurthy Subramanian  told CNBC TV18 on Tuesday that the government's internal assessment is "a few basis points here and there" from the Reserve Bank of India's projection of a 9.6 per cent contraction for the full year.

The IMF in its latest World Economic Outlook, titled A Long and Difficult Ascent, projected that only the Chinese economy would grow. China is expected to grow by 1.9 per cent this year, faster than the earlier forecast of 1 per cent.

The projections are in line with most other economists and analysts who expected India’s economy to contract in double digits during FY21. The World Bank recently projected that the Indian economy would contract by 9.6 per cent, upping the scale of contraction from 3.2 per cent.

The IMF sees the global recovery at an uneven pace, with the advanced world now expected to contract less and developing countries, including India, at a higher rate. The global economy was projected to de-grow by 4.4 per cent in 2020, as against 5.2 per cent earlier.

IMF Economic Counsellor and Director of Research Gita Gopinath said while the global economy was coming back, the ascent would likely be long, uneven, and uncertain. “Indeed, compared to our forecast in June, prospects have worsened significantly in some emerging markets and developing economies where infections are rising rapidly,” she said.

Consequently, she added, emerging market and developing economies, excluding China, are projected to incur a greater loss of output over 2020-21 relative to the pre-pandemic projected path when compared to advanced economies. “These uneven recoveries significantly worsen the prospects for global convergence in income levels,” Gopinath said.

The IMF said second-quarter GDP (the first quarter in terms of the fiscal year 2020-21) was weaker than projected in India where domestic demand plunged following a very sharp compression in consumption and a collapse in investment. India’s GDP contracted 23.9 per cent in the quarter.

Signs of recovery are also uneven across the world, said IMF. For instance, business surveys of purchasing managers show firms in the United States, euro area, China, and Brazil expanded output successively in July and August compared with the previous month, whereas the opposite was true for India, Japan, and Korea. For September, these indicators point to stronger activity in manufacturing but some setbacks for services, most likely reflecting the increase in infections, it said.

The Fund said inflation in emerging market and developing economies inflation declined sharply in the initial stages of the pandemic, although it has since picked up in some countries such as India, reflecting supply disruptions and a rise in food prices. India’s retail inflation rose to an eight-month high of 7.34 per cent in September, pushed up by the double-digit food inflation. This was the sixth month in a row that the inflation rate remained above the RBI’s comfort zone of above 6 per cent.

The IMF said India's current account balance may show a surplus of 0.3 per cent of GDP in 2020-21, a rarity in the country. It attributed this to lower oil prices and weak domestic demand.

Carbon emissions

The IMF said while advanced economies had historically contributed the lion’s share of emissions, China and India, as large and fast-growing emerging market economies, were significant emitters and were expected to continue to account for growing shares of carbon emissions.

It said advanced economies could not successfully mitigate climate change by themselves, as they accounted for a declining share of global emissions. By contrast, the five largest countries/economic union — the United States, China, the European Union, Japan, and India — acting jointly could make a large dent in global emissions.

China remains a key driver of emission growth, and its impact picked up again in 2019, after a period of gradual regression. India and other emerging markets’ contribution in 2019 fell substantially, it said.