World Bank sees higher GDP fall in India than 3.2% it projected for FY21

Cautions against using tariff policy to attract firms from China; says there is credit risk as economy slows and half India's population may fall back into poverty

The World Bank on Wednesday said it was likely to project a steeper contraction in India’s economy than the 3.2 per cent it had forecast for the current financial year, given the rising number of Covid-19 cases and the resultant regional lockdowns. 

It cautioned India against using its tariff policy to attract firms seeking a shift away from China. 

In its report on India Development Update, 2020, it also warned that credit risks could play out as firms and households find it more difficult to service interest and repayment obligations. It called for full privatisation of some public sector banks and private capital injection in others.

Despite India making progress in poverty reduction in recent years, the deadly virus has made half of the population vulnerable to be pushed to poverty, the report  said.  

“In our revised projections, which will be available in October 2020, we will likely project a steeper contraction in the economy,” the Bank said.

By then, it added, new information would have been incorporated, especially given the rising infections resulting in several state and district lockdowns. Further, the available high frequency indicators show that the economy is yet to revert to baseline. 

Various agencies and economists have provided varying figures for India’s GDP contraction for FY21. While former chief statistician Pronab Sen has pegged it at 12.5 per cent, ICRA had forecast 9.5 per cent and India Ratings 5.3 per cent.  

By the time the Bank comes out with its revised projection, official data for the first quarter GDP will be out, but not all lead indicators for the second quarter would have been released. 

The present crisis can open new opportunities for India, it said, adding that one expected impact of the crisis was that MNCs will seek greater diversification of activity away from China. 

“Whether India can seize this opportunity or not depends on its capacity to implement economic reforms, which may not include the use of tariffs as a recommended policy. On the contrary, trade policy must be “an enabler”, the multi-lateral agency prescribed. 

On credit risk, the Bank said collateral value could decline and NBFCs will be particularly vulnerable as they lend to sectors susceptible to economic and asset price cycles. 

Banks may need to make higher provisioning, with additional infusion of capital hard to mobilise under the situation of both fiscal stress and subdued valuations in financial markets. There are concerns over liquidity challenges turning into solvency challenges.

The Bank projected the Centre’s fiscal deficit to increase to 6.6 per cent of the GDP during FY21 and remain at a high of 5.5 per cent the following year. 

“Assuming states’ deficit is contained within 3.5-4.5 per cent of the GDP, the deficit of the Centre may rise to 11 per cent in FY21,” it said. 

While there is a significant level of uncertainty around the projections, the general government debt-to-GDP ratio is projected to peak at 89 per cent in FY23 before gradually declining thereafter. In alternative scenarios, deficit and debt numbers may turn out to be even higher, it added. 

Though poverty has reduced from 21.6 per cent to 13.4 per cent between 2011-12 and 2015 (on a poverty line of $1.9 a person a day), half of India’s population remains vulnerable to a higher exposure to the Covid-19 impact, with consumption levels precariously close to the poverty line, the Bank said. 

These households are at risk of slipping back into poverty on account of income and job losses, it said. Poorer households are more prone to getting infected since it is more difficult for them to implement social distancing. 

Lockdowns have had an adverse economic impact on the informal sector, in which poorer households are employed. Any potential rise in prices could erode their purchasing power, the Bank said.

In addition, it cautioned that migrants and the urban poor were at risk of exclusion from receiving adequate social protection through the Prime Minister Garib Kalyan Yojna (PMGKY) and the general social protection architecture. 

"This is because none of the six national social assistance programs being leveraged to provide additional support are portable, as they only provide benefits to state residents," the Bank said. 

Moreover, the PMGKY package has lower coverage in urban areas. Programmes such as PM-KISAN and MGNREGS only operate in rural India, it said, adding that those like Pradhan Mantri Ujjwala Yojana (PMUY), NSAP, and PDS report a larger beneficiary base in rural India. 

Given that shocks in urban areas are transmitted to rural areas through a drop-in demand and remittances, PMGKY coverage in rural India remains critical.