World Bank slashes India’s growth projection to 1.5-2.8% for this fiscal

Our Bureau New Delhi | Updated on April 12, 2020

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Warns of further fiscal slippages, growth headwinds if lockdown is extended

The Indian economy is expected to slow down this fiscal (2020-21) with growth rate in the 1.5-2.8 per cent range, said a World Bank report on Sunday. However, the good news is that the next fiscal — 2021-22 or FY22 — is expected to see a growth reversal.

The GDP (Gross Domestic Product) growth rate is estimated at 5 per cent or even lower during fiscal year 2019-20, which ended on March 31.

The World Bank’s report on South Asia noted that the Indian government imposed a lockdown on March 25 to contain the spread of Covid-19. “The resulting domestic supply and demand disruptions (on the back of weak external demand) are expected to result in a sharp growth deceleration in FY21 to 2.8 per cent in a baseline scenario (an estimate subject to wide confidence intervals),” it said. The lockdown brought almost 70 per cent of economic activities to a standstill. An SBI research report estimated that the first 21 days of the lockdown could result in losses of over ₹8-lakh crore.

The services sector will be particularly impacted by the lockdown, the World Bank report said. A revival in domestic investment is likely to be delayed, given the enhanced risk aversion on a global scale, and renewed concerns about financial sector resilience. The services sector is the biggest contributor to the GDP with over 54 per cent share, followed by industries with 30 per cent and agriculture with 16 per cent.

“Growth is expected to rebound to 5 per cent in FY22 as the impact of Covid-19 dissipates, and fiscal and monetary policy support pays off with a lag,” the report said.

Fiscal deficit to widen

Talking about fiscal deficit, it said that the general government deficit (difference between income and expenditure) is anticipated to rise, owing to recently adopted tax cuts and the impact of significantly slower growth of tax proceeds, before moderating towards the end of the forecast horizon. “The combined fiscal deficit of the Centre and the States is projected to widen to 9 per cent in FY21, as revenue performance dips with the growth slowdown and expenditure commitments increase in line with the stimulus programme announced. Thereafter, it should improve gradually,” it mentioned. However, the current account deficit (difference between payment received and made in US dollar) will improve.

“The balance of payments position is expected to improve. Weak domestic demand, low oil prices and Covid-19-related disruptions are expected to narrow the current account deficit to 0.2 per cent in FY21 and keep it low in the following years,” the report said.

The report added that the pandemic has magnified pre-existing risks to the outlook.

Risks and challenges

The government is undertaking measures to contain the health and economic fallout, and the RBI has begun providing calibrated support in the form of policy rate cuts and regulatory forbearance.

Given the uncertainties, there is a wide confidence interval around the baseline estimate. If a large-scale domestic contagion scenario is avoided, early policy measures pay off, and restrictions on the mobility of goods and people are lifted swiftly, an upside scenario could materialise in FY21, with growth around 4 per cent. However, “if the domestic contagion is not contained, and the nationwide shutdown is extended, growth projections could be revised downwards to 1.5 per cent, and fiscal slippages would be larger.”

Published on April 12, 2020

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