Covid-19 impact: India's economy to shrink by 3.2% in FY21, says World Bank

India to lose tag of fastest growing large economy to China for another two years

World Bank on Monday sharply scaled down its projections for India’s economy, forecasting 3.2 per cent contraction in the fiscal year 2020-21 because of the Covid-induced lockdown. It had earlier predicted 1.5-2.8 per cent growth.

The country's economy grew 4.2 per cent in 2019-20, the slowest in 11 years. 

“Stringent measures to restrict the spread of the virus, which heavily curtail short-term activity, will 

contribute to the contraction,” World Bank said in its latest edition of the Global Economic Prospect.

It, however, stressed India’s economy should bounce back in 2021-22 and pegged growth at 3.1 per cent. Still, it is lower than 4-5 per cent growth projected by the bank earlier. 

India could lose the tag of the fastest-growing large economy to China for two years. China is projected to grow at 1 per cent in CY2020, and 6.9 per cent for CY2021.

The bank also sharply cut its 2020 forecast for the world economy — 5.2 per cent contraction, as against 2.5 per cent growth projected in January. 

If this comes true, the contraction will be the deepest global recession in eight decades, despite unprecedented policy support. 

Following the report, World Bank has joined scores of international agencies that forecast contraction in the Indian economy as the aftermath of the lockdown. The worst has been predicted by US-based brokerage firm Bernstein, which sees India's economy contracting 7 per cent in FY21.

Most agencies have pegged it to shrink 5 per cent.

Now, the International Monetary Fund (IMF) remains one of the few institutions which still foresee India's economy growing. It pegged growth at 1.9 per cent in 2020-21. It is also slated to come out with revised projections later this month and is likely to see a contraction in the economy. 

Earlier, former chief economic advisor Arvind Subramanian had termed World Bank's and the IMF's 

projections as “optimistic”. 

The Washington-based multilateral lender said the Covid-19 pandemic and the multi-phased lockdown imposed to curb its spread dealt a devastating blow to the Indian economy. 

World Bank said spillovers from weaker global growth and balance-sheet stress in the financial sector will also weigh on activity, despite some support from the fiscal stimulus and continued monetary policy easing.

According to the report, the central bank has been purchasing government bonds to further ease the financial conditions. 

The Indian government has also increased its spending on healthcare to bolster the Covid-19 response, wage support, in-kind and cash transfers to lower-income households, and deferral of tax payments, as well as loan and liquidity support for small businesses and financial institutions.