World Bank projects India's GDP to contract 9.6% in FY21

Mint,

October 08, 2020

NEW DELHI: The World Bank on Thursday projected India’s gross domestic product (GDP) to plunge in FY21 by 9.6% revised down since its June forecast of 3.2% drop, reflecting the impact of the nationwide lockdown and the income shock experienced by households and small urban service firms.

"However, there is substantial uncertainty related to the course and duration of the pandemic; the speed at which households and firm behavior will adjust to the lifting of lockdowns; and a possible new round of countercyclical fiscal policy," the World Bank said in its latest South Asia Economic Focus report.

While the government has signalled it is prepared to support the economy, there is no clarity about the timing or the extent of the next round of stimulus.

The Indian economy contracted a record 23.9% in the June quarter, underlining the extent of economic damage brought about by the pandemic and the ensuing lockdown. Many forecasters now expect Indian economy to contract in double digits in FY21.

The multi-lateral agency said the impact of the pandemic materialised in the backdrop of enduring fragility in the financial sector, slowing overall growth and limited fiscal buffers. "The response of the government of India to the covid-19 outbreak was swift and comprehensive. Nonetheless, there was a massive contraction in output and poor and vulnerable households experienced significant social hardship – specifically urban migrants and workers in the informal economy."

Growth is expected to rebound to 5.4% in FY22, according to the World Bank estimate, which assumes covid-related restrictions are completely lifted, but mostly reflecting base effects.

However, the Bank said, potential output is expected to remain depressed in the medium term and inflation is expected remain around the RBI’s target range mid-point of 4% in the near term.

The Bank said the covid-19 shock will lead to a long-lasting inflexion in India’s fiscal trajectory. "Assuming that the combined deficit of the states is contained within 4.5-5% of GDP, the general government fiscal deficit is projected to rise to above 12% in FY21 before improving gradually. Public debt is expected to remain elevated, around 94% (in FY23), due to the gradual pace of recovery."

While policy interventions have preserved the normal functioning of financial markets thus far, the Bank said, demand slowdown could lead to rising loan delinquencies and risk aversion.

Recent RBI analysis indicates that gross nonperforming loans to asset ratio of scheduled commercial banks may increase to 12.5% by March 2021 from 8.5% in March 2020.


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