Covid-19 impact: IMF projects Indian economy to contract by 4.5% in FY21

In comparison, emerging markets and developing countries group saw a 2 percentage reduction in outlook while the world outlook was only cut by 1.9 percentage points

The International Monetary Fund (IMF) has warned that the Indian economy faces an even deeper downturn than what it had projected in April as the country grapples with the Covid-19 pandemic. It has projected a sharp contraction of 4.5 per cent in FY21, a steep drop from its April forecast of a 1.9 per cent expansion, calling it a "historic low" for India.

In fact, India faced the sharpest cut in the outlook — a 6.4-percentage point revision due to a more severe fallout of the pandemic than anticipated. In comparison, emerging markets (EMs) and developing countries saw a 2-percentage point reduction in outlook, while the global outlook was cut by 1.9 percentage points.

The silver lining, however, is that the country is expected to bounce back in FY22 with a 6 per cent growth rate, the IMF said in its latest World Economic Outlook titled A Crisis like No Other, An Uncertain Outlook. However, it is lower than even the ASEAN-5 average of 6.2 per cent estimated for 2021 by the agency.

China is estimated to post 1 per cent growth in 2020 and revive to 8.2 per cent in 2021, retaining the fastest-growing economy tag for the third straight year.

“We are projecting a sharp contraction of 4.5 per cent. Given the unprecedented nature of this crisis, as is the case for almost all countries, this projected contraction is a historic low,” IMF Chief Economist Gita Gopinath said after releasing the WEO update. According to the IMF’s record, this is the lowest ever for India since 1961.

However, according to the back-series data released by the Ministry of Statistics and Programme Implementation (MoSPI), taking 2011-12 as base, the economy shrunk by 5.2 per cent in 1979-80. 

The Indian economy grew by 4.2 per cent in 2019-20. The global output is seen shrinking 4.9 per cent, and EMs by 3 per cent. “For the first time, all regions are projected to experience negative growth in 2020,” said the IMF.

“The Covid-19 pandemic pushed economies into a Great Lockdown, which helped contain the virus and save lives, but also triggered the worst recession since the Great Depression,” Gopinath said.

With the updated forecast, the IMF joins other international agencies in projecting negative growth for India in the current fiscal. Last week, the Asian Development Bank also scaled down India’s growth forecast to -4 per cent from a 4 per cent expansion. The IMF’s WEO said that in 2021, global economy was projected to grow at 5.4 per cent. “The pandemic has had a more negative impact on activity in the first half of 2020, with recovery projected to be more gradual than expected,” said the IMF. It further pointed out that economies struggling to control infection rates would see lengthier lockdowns, inflicting additional toll on economic activity.

“Over 75 per cent of countries are now reopening at the same time as the pandemic is intensifying in many emerging markets and developing economies. Several countries have started to recover. However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven," added Gopinath.

It, however, cautioned that similar to April 2020’s WEO projections, there was pervasive uncertainty around this forecast. “The forecast depends on the depth of the contraction in the second quarter of 2020 (for which complete data are not yet available) as well as the magnitude and persistence of the adverse shock.”

 With lockdowns in different countries now easing, the IMF said fiscal policies would have to balance the need to protect people, stabilise demand, and facilitate recovery. It emphasised public investment to accelerate recovery and expanded social safety net spending to protect the most vulnerable.

 “India has unveiled liquidity support (4.5 per cent of GDP) through loans and guarantees for businesses and farmers, and equity injections into financial institutions and electricity sector,” the report mentioned. 

It said that where the fiscal space was limited, countries needed to reorient revenue and spending to increase and incentivise productive investment.

“Making some provisions (for example, relaxing eligibility) of social protection programmes to be more long-lasting, could enhance automatic stabilisers and help tackle rising poverty and inequality. All measures should be embedded in a medium-term fiscal framework and transparently managed and recorded to mitigate fiscal risks, including loans and guarantees that do not have an immediate effect on government debt and deficits,” it said.

It warned that global public debt could reach an all-time high, exceeding 101 per cent of GDP in FY21 — a surge of 19 percentage points from a last year.

According to reports, several economists have projected India’s debt-to-GDP-ratio to increase to as high as 90 per cent in FY21, from the 70 per cent at present. The IMF said countries with elevated debt levels could constrain the scope of further fiscal support, poising an important medium-term challenge.

“To ensure that economies are well prepared to counter further shocks, policymakers should consider strengthening mechanisms for automatic, timely, and temporary support in downturns,” it said.