Coronavirus-hit Indian economy to contract by 4% in FY21: ADB forecast

Hit hard by the coronavirus pandemic, the Indian economy is expected to contract by 4 per cent during the current financial year, the ADB said in a supplement to its Asian Development Outlook (ADO) on Thursday. Countries in Developing Asia will "barely grow" in 2020, as per the ADB forecast.

China, however, is expected to record a positive growth of 1.8 per cent in 2020, sharply down from 6.1 per cent in 2019, said the ADO.

"Growth in Indian GDP slowed to 3.1 per cent in the last quarter of financial year 2019 (FY2019, ended 31 March 2020), its slowest since early 2003. Economic growth slowed to 4.2 per cent in the whole of FY2019 as both exports and investment started to contract.

"High-frequency indicators such as purchasing managers' indexes fell to all-time lows in April, reflecting the bleak outlook. Migrant workers have gone home to their villages after losing their jobs in the cities and will be slow to return even after containment measures are relaxed. GDP is expected to contract by 4.0 per cent in FY2020 before rebounding by 5.0 per cent in FY2021," it said.

In its annual flagship ADO published on April 3, ADB had projected that India's economic growth rate will slip to 4 per cent in the current financial year on account of the global health emergency created by the Covid-19 pandemic.

Developing Asia will barely grow in 2020, as containment measures to address the coronavirus disease (Covid-19) pandemic is expected to hamper economic activity and weaken external demand, ADB said. For the countries in developing Asia, ADB forecasts growth of 0.1 per cent for the region in 2020. This is down from the 2.2 per cent forecast in April and would be the slowest growth for the region since 1961, it said.

"Growth in 2021 is expected to rise to 6.2 per cent, as forecast in April. Gross domestic product (GDP) levels in 2021 will remain below what had been envisioned and below pre-crisis trends."

"Developing Asia" refers to a group of over 40 countries that are members of the ADB.

"Economies in Asia and the Pacific will continue to feel the blow of the Covid-19 pandemic this year even as lockdowns are slowly eased and select economic activities restart in a 'new normal' scenario," said ADB Chief Economist Yasuyuki Sawada.

Sawada further said, "while we see a higher growth outlook for the region in 2021, this is mainly due to weak numbers this year, and this will not be a V-shaped recovery. Governments should undertake policy measures to reduce the negative impact of Covid-19 and ensure that no further waves of outbreaks occur."

Excluding the newly industrialised economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei, China, Developing Asia is forecast to grow 0.4 per cent this year and 6.6 per cent in 2021, it added.

Hit hard by Covid-19, South Asia is forecast to contract by 3 per cent in 2020, compared to 4.1 per cent growth predicted in April. Growth prospects for 2021 are revised down to 4.9 per cent from 6 per cent, ADB said.

As per the ADB forecast, risks to the outlook remain on the downside. The Covid-19 pandemic may see multiple waves of outbreaks in the coming period and sovereign debt and financial crises can not be ruled out.

"There is also the risk of renewed escalation in trade tensions between the United States and the People's Republic of China (PRC)," it added.

The Reserve Bank of India (RBI) earlier in May projected a gloomy picture of the economy, saying the impact of Covid-19 is more severe than anticipated and the GDP growth during 2020-21 is likely to remain in the negative territory. However, RBI has not given any number to the projected contraction of the Indian economy.

The outlook of inflation also remains "highly uncertain",RBI Governor Shaktikanta Das had said on May 22, while announcing a 40-basis point cut in the repo rate as part of the monetary measures to deal with the current crisis.

Earlier this month, Washington headquartered World Bank projected India's economy to shrink by 3.2 per cent in the current financial year due to the coronavirus pandemic that has hit a hard blow to the economy due to the lockdown.

International rating agencies like Moody's Investors Service, Fitch Rating and S&P Global Ratings have all predicted a 4-5 per cent contraction in India's economic growth rate during April 2020 to March 2021 financial year. Crisil has said this would be the country's fourth recession since Independence, first since liberalisation, and perhaps the worst to date.