New Delhi: Amidst India battling on several challenging fronts—Covid-19, China, ongoing financial restricting, economic reforms et al–the World Bank has predicted a contraction of Gross National Product (GDP) by 9.6 percent in fiscal 2020-21, even as it saw a muted recovery.
But what India has done within its limited resources and fiscal space was really “very impressive” a senior World Bank official observed on Thursday.
The WB’s report also praised as “swift and comprehensive” the response of the Government of India to the Covid-19 outbreak. A strict lockdown was implemented to contain the health emergency, it added.
The Washington-headquartered global lender underlined that the contraction of GDP is reflective of the national lockdown–which is still being phased out after more than six months–and the income shock experienced by households and firms due to the pandemic.
It noted that India’s economic situation could be worse than ever seen before.
In its latest South Asia Economic Focus report ahead of the annual meeting of the World Bank and International Monetary Fund, the lender forecast a sharper than expected economic slump across the South Asian region, with its 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 the 2019 estimates, indicating that the expected rebound will not offset the lasting economic damage caused by the pandemic.
“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.
There was a 25% decline in GDP in the first quarter of India’s fiscal year 2020-21 (April-June).
The World Bank said the spread of the global pandemic and containment measures severely disrupted supply and demand conditions in India.
Prime Minister Narendra Modi had announced a nationwide complete lockdown from March 25, 2020, 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 biggest lockdown, the step taken to combat the pandemic shut a majority of the factories and businesses, suspended flights, stopped trains, and restricted the movement of vehicles and people.
The WB report said monetary policy was deployed aggressively and fiscal resources channeled to augment measures for 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.
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 realize 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,” he added.
“There’s a big problem that the informal sector has no coverage in 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 that as a result of the pandemic, 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%, growth decelerated in each subsequent year to 7.0, 6.1, and 4.2%.
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.
