Indian economy to contract by 10.3% in 2020; to bounce back with 8.8% growth in 2021: IMF
The International Monetary Fund (IMF) on Tuesday slashed the growth forecast for India for the second time this year saying that the country’s economy will contract 10.3% in FY21, the third steepest decline after Spain and Italy, and the sharpest fall among emerging markets and developing countries.
This is the second downgrade for India by IMF after it reversed its forecast of 1.9% growth in April to a 4.5% contraction in June for 2020-21. The economies of Spain and Italy are seen shrinking 12.8% and 10.6%, respectively.
“Revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second quarter. As a result, the economy is projected to contract by 10.3% in 2020, before rebounding by 8.8% in 2021,” the multilateral lending institution said in its World Economic Outlook (WEO) Update. The growth in FY22 would be the highest in the world.
IMF’s forecast for the Indian economy is gloomier than the Reserve Bank of India’s projection of 9.5% contraction in real gross domestic product (GDP) in the full fiscal. The economy shrank an unprecedented 23.9% in the June quarter. Last week, the World Bank said the situation in India is worse than ever, forecasting the country’s economy will shrink 9.6% in FY21, much steeper than the 3.2% fall the multilateral lender had estimated in June.
China is expected to grow 1.9% in FY21.
As per the report, all emerging market and developing economy regions are expected to contract this year, including India and Indonesia, which continue to try to bring the pandemic under control.
However, it said that in India, the second quarter (quarter ended June 30, 2020) GDP was weaker than projected where domestic demand plunged following a very sharp compression in consumption and a collapse in investment. Further, inflation declined sharply in the initial stages of the pandemic, although it has since picked up in some countries like India reflecting supply disruptions and a rise in food prices.
Retail inflation in India in September rose to an eight month high of 7.34% as food inflation reached double-digits at 10.68%.
Among debtor countries, smaller deficits are projected for India on the back of lower oil prices and weak domestic demand.
IMF said that the revisions for China and India together mostly account for the smaller shares of emerging Asia and emerging market and developing economies based on an updated set of purchasing-power-parity weights for individual economies.
The IMF also commented that late 2019 and early 2020 saw major protests in the Middle East, South America, India, Hong Kong and Iran, among others, and that social unrest across many countries was rising before the Covid-19 outbreak.
Global recovery
The estimates for India are in contrast to global growth which is projected at –4.4% in 2020, 0.8 percentage point above the June forecast.
IMF said the stronger projection for 2020 compared with the June update reflects the net effect of two competing factors: the upward impetus from better-than-anticipated second quarter GDP outturns (mostly in advanced economies) versus the downdraft from persistent social distancing and stalled reopenings in the second half of the year.
“A recovery has taken root in the third quarter of 2020. It is expected to strengthen gradually over 2021…characterized by persistent social distancing until health risks are addressed and countries may have to again tighten mitigation measures depending on the spread of the virus,” it said.
Global growth is projected at 5.2% in 2021, 0.2 percentage point lower than June estimates.
It said the pandemic continues to spread. By late September, the number of confirmed infections worldwide exceeded 33 million, with over a million deaths—up from more than 7 million infections and 400,000 deaths with confirmed cases rising dramatically in the US, Latin America, India, and South Africa.
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