World Bank ups FY21 GDP contraction forecast for India to 9.6%

Says Indian economy could fare thrice as poorly as projected earlier in the wake of coronavirus-induced lockdowns and a decline in household income

The World Bank has trebled its projection of contraction in India’s gross domestic product (GDP) in 2020-21 — from 3.2 per cent earlier to 9.6 per cent — especially in the wake of lockdowns and a decline in household income.

While it saw half the households in the country as vulnerable to shocks, it said the government’s recent reforms as part of its safety net programmes should help preserve its gains against poverty.

The projection, in the World Bank’s “South Asia Economic Focus”, released on Thursday, is more or less in line with what other economists have said but a shade better than the double-digit decline forecast by many.

The report said there was uncertainty over the course and duration of the pandemic, the speed at which household and firm behaviour would adjust to the lifting of lockdowns, and a possible new round of countercyclical fiscal policy.

The institution said India needed to sustain economic reforms.

India is the largest economy in South Asia but its projected contraction is not likely to be the steepest in the region.

Maldives was projected to see a 1.5 per cent decline in 2020. Other countries —Afghanistan, Sri Lanka, Bangladesh, Bhutan, Nepal, and Pakistan — were forecast to see a smaller contraction than India’s. 

The World Bank saw the region’s economy declining by 7.7 per cent in 2020 against the 2.7 per cent estimated earlier.

India’s economy is projected to rebound to 5.4 per cent in FY22, mostly reflecting base effects, assuming the Covid-related restrictions go by then, the report said.

Weak activity, both domestically and abroad, is also likely to depress India’s imports and exports. So the current account is expected to reach a surplus of 0.7 per cent of GDP in FY21 and return to a deficit in later years.  The observation comes even as merchandise exports rose by 5 per cent in September after six months of contraction.

The World Bank saw inflation remaining close to the Reserve Bank of India’s target range mid-point (4 per cent) in the near term. It has said the pandemic shock would lead to a long-lasting inflexion in India’s fiscal trajectory. Assuming that the combined deficit of the Indian states is contained within 4.5-5 per cent of GDP, the general government fiscal deficit is projected to rise to above 12 per cent in FY21.

Public debt is expected to remain elevated, around 94 per cent, due to the gradual pace of recovery, it has said. 

“The response of the government to the Covid-19 outbreak was swift and comprehensive. The World Bank is partnering the government in strengthening policies, institutions, and investments,” said Hartwig Schafer, World Bank vice-president for the South Asia region.

Policy interventions have preserved the normal functioning of the financial markets so far. However, the demand slowdown could lead to rising loan delinquencies and risk aversion. 

“India is undertaking far-reaching reforms in its safety net programme. This will help the country preserve its hard-won gains against poverty as nearly half of all households are vulnerable and the majority of the workforce lacks formal social security benefits,” said Junaid Ahmad, World Bank Country Director in India.