Washington: The World Bank on Thursday said that India’s gross domestic product (GDP) is expected to contract by 9.6% this fiscal, highlighting the impact of the national lockdown and the income shock experienced by households and firms due to the COVID-19 pandemic.
India’s GDP is expected to contract by 9.6% in the fiscal year 2020-21 (FY21), the World Bank said in its report titled ‘South Asia Economic Focus’, noting that the country’s economic situation is much worse than ever seen before. The World Bank earlier in June had estimated the Indian economy to shrink by 3.2% in the current fiscal.
The report also forecasted a sharper than expected economic slump across the South Asian region, with regional growth expected to contract by 7.7% in 2020, after topping 6% annually in the past five years. Regional growth is projected to rebound to 4.5% in 2021, it said.
Factoring in population growth, however, income per capita in the region will remain 6% below 2019 estimates, indicating that the expected rebound will not offset the lasting economic damage caused by the pandemic, it said.
The situation is much worse in India than we have ever seen before, Hans Timmer, World Bank chief economist for South Asia told reporters during a conference call. It is an exceptional situation in India, a very dire outlook, he said.
India’s GDP declined 25% in the first quarter (April-June quarter) of the current fiscal year – the deepest economic contraction for the country in at least four decades.
In the report, the World Bank said that the spread of the coronavirus and containment measures have severely disrupted supply and demand conditions in India.
With the intent to contain the spread of COVID-19, Prime Minister Narendra Modi, with effect from March 25, 2020, announced a nationwide complete lockdown that brought as much as 70% of economic activity, investment, exports and discretionary consumption to a standstill. Only essential goods and services such as agriculture, mining, utility services, some financial and IT services and public services were allowed to operate.
Dubbed as the world’s most stringent lockdown, the government shut a majority of the factories and businesses, suspended flights, stopped trains and restricted movement of vehicles and people.
According to the World Bank, monetary policy has been deployed aggressively and fiscal resources have been channelled to public health and social protection, but additional counter-cyclical measures will be needed, within a revised medium-term fiscal framework.
Despite measures to shield vulnerable households and firms, the trajectory of poverty reduction has slowed, if not reversed, it said.
We have seen from the rapid survey that many people have lost their jobs, Timmer said, adding that this is happening against a background when India’s economy was already slowing down before the pandemic.
We had seen a rise in non-performing loans. Those are all vulnerabilities that India has to deal with, he said.
Government’s response to COVID-19
Responding to a question, Timmer said what the Indian government has done with limited resources and limited fiscal space is very impressive.
We have seen a loosening of monetary policy. You have seen attempts to increase credit to the private sector to help a company survive, he said, adding that there have been big efforts in the health sector and expansion of a social safety net.
But with every big crisis, I think, we have to realise that this will not go over anytime soon. And it will actually change the longer-term future also. What this reveals is really as good as federal policies, especially the policies related to the informal sector.
There’s a big problem that the informal sector has no coverage on social insurance. What we see now is that especially the informal workers in the middle of the income distribution have lost their jobs. There are no systems in place to support those people, Timmer said.
Responding to another question, Timmer said that as a result of COVID-19, the World Bank estimates that in one year, the number of people living below the poverty line has increased by 33%.
In its report, the World Bank said that the response of the government of India to the COVID-19 outbreak was swift and comprehensive. A strict lockdown was implemented to contain the health emergency.
To mitigate its impact on the poorest, it was complemented by social protection measures; to ensure that businesses could maintain their operations, the Reserve Bank of India and the government also provided liquidity and other regulatory support, it said.
Nonetheless, there was a massive contraction in output and poor and vulnerable households experienced significant social hardships specifically urban migrants and workers in the informal economy, the bank said.
After fiscal 2017, during which the economy grew at 8.3 per cent, growth decelerated in each subsequent year to 7.0, 6.1 and 4.2 per cent.
This was on account of two mutually reinforcing dynamics: emerging weaknesses in non-bank financial companies (a major source of credit growth, making up for risk aversion from banks) and slowing private consumption growth, the bank added.