The World Bank added that it expected growth to return to 5.4 percent in FY22, assuming COVID-19-related restrictions are completely lifted by 2022.
The World Bank has cut India’s gross domestic product (GDP) forecast for FY21.
India’s GDP for the fiscal started March is expected to contract by 9.6 percent, compared to June estimates of 4.5 percent contraction, it said in its South Asia Economic Focus report released on October 8.
“India’s GDP forecast has been revised down since June from a 3.2 percent drop, reflecting the impact of the national lockdown (for COVID-19) and the income shock experienced by households and small urban service firms,” it said.
It added that it expects growth to return to 5.4 percent in FY22, assuming COVID-19-related restrictions are completely lifted by 2022, but mostly reflecting base effects.
“The forecast calls for a short-term improvement in current account balances, while capital inflows are forecasted to remain positive in the baseline, barring any unexpected events,” it said.
Impact of COVID-19, “materialised against a backdrop of (i) enduring fragility in the financial sector, (ii) slowing overall growth, and (iii) limited fiscal buffers,” were listed as reasons by WB.
It noted that government response to the pandemic was “swift and comprehensive” with strict lockdown implemented to contain the health emergency.
It also noted social protection measures taken to mitigate impact on the poorest, and liquidity and regulatory support provided by the Reserve Bank of India (RBI) and the Centre to ensure that businesses could maintain operations.
“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,” it observed.
There is “substantial uncertainty related to (i) the course and duration of the pandemic, (ii) the speed at which households and firm behavior will adjust to the lifting of lockdowns, and (iii) a possible new round of countercyclical fiscal policy,” WB noted, stating that confidence around baseline projections is thus “wide”.
“Growth is expected to rebound to 5.4 percent in FY22, but mostly reflecting base effects, while potential output is expected to remain depressed in the medium-term. Inflation is expected remain around the RBI’s target range mid-point (4 percent) in the near-term,” it added.
Weak activity, domestically and abroad, will depress both imports and exports. Thus, the current account is expected to reach a surplus of 0.7 percent of GDP in FY21 and is projected to gradually return to a deficit in later years, the report stated.
“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 percent of GDP, the general government fiscal deficit is projected to rise to above 12 percent in FY21 before improving gradually. Public debt is expected to remain elevated, around 94 percent, due to the gradual pace of recovery,” WB said.It further noted that while policy interventions have preserved the normal functioning of financial markets thus far, demand slowdown could lead to rising loan delinquencies and risk aversion.