WORLD BANK FORECAST ON GDP OF INDIA 2020-21
CONTEXT:
- Recently, the World Bank released its South Asia Economic Focus report which estimated that India’s Gross Domestic Product (GDP) can contract by 9.6% in 2020-21.
- This estimate is way below the earlier forecast of 3.2% contraction, made in June.
HIGHLIGHTS:
- The contraction is due to the impact of the national lockdown against the outbreak of the Covid-19 pandemic.
- The manufacturing and exporting industries are likely to be depressed, and the construction sector is also likely to experience a protracted slowdown.
- This is due to a limited pipeline of public sector infrastructure projects.
- Significant disruptions to jobs are likely to boost the poverty rate, with 2020 rates back to levels in 2016.
- The demand slowdown could lead to rising loan non-repayment and risk aversion impacting the financial markets.
- Other concerns include health care system capacity constraints, rising food prices, sharp drops in earnings of informal workers, impact on the MSMEs etc.
SOUTH ASIAN SCENARIO:
- The entire South Asia region may face its worst-ever recession.
- The regional GDP is estimated to contract by 7.7% in 2020, which stayed above 6% annually in the past five years.
- This recession will be different from previous ones as earlier downturns were mainly due to falling investment and exports but this pandemic-induced recession is due to a decline in private consumption.
- Private consumption, which has been traditionally the backbone of demand in South Asia and a core indicator of economic welfare, will decline by more than 10%. This will spike poverty rates.
- A decline in remittances is also expected to accelerate the loss of livelihoods for the poorest in some countries.
- The collapse of South Asian economies during Covid-19 has been the worst of all for small businesses and informal workers who suffer sudden job losses and vanishing wages.
EXPECTED REBOUND OF ECONOMY IN 2021-22
- India’s growth is estimated to rebound to 5.4% in 2021-22.
- However, this will be reflecting base effects and are based on the assumption that Covid-related restrictions will be completely lifted by 2022.
- Base Effect: It is the distortion in a monthly inflation figure that results from abnormally high or low levels of inflation in the year-ago month.
- South Asia’s growth is projected to rebound to 4.5% in 2021.
- However, due to population growth, per-capita income in the region will remain 6% below 2019 estimates.
- The expected rebound will not offset the lasting economic damage caused by the pandemic.
- However, the pandemic could spur innovations that improve South Asia’s future participation in global value chains.
- The Supply Chain Resilience Initiative is a step in this direction which would reduce the dependence on imports from a handful of countries.
- The comparative advantage that South Asia and India have in tech services and niche tourism will likely be in higher demand as the global economy becomes more digital.
WAY FORWARD:
- The World Bank urged governments to design universal social protection as well as policies that support greater productivity, skills development, and human capital.
- The governments need to address the deep-seated vulnerabilities of their informal sectors through smart policies and allocate their scarce resources wisely.