India could use 3-5% of GDP stabilising economy: World Bank economists

The lockdown of economies around the world causes a much sharper decline in economic activity than in normal recessions, says World Bank chief economist south Asia region, Hans Timmer

The World Bank, in its report on South Asia, has cut projections for India’s economic growth to 1.5-2.8 per cent, from earlier 6.1 per cent, for FY21. World Bank Chief Economist (South Asia region) Hans Timmer and Country Director for India Junaid kamal Ahmad tell Indivjal Dhasmana about the situation created by Covid-19. Edited excerpts:

Why has the World Bank given a huge range of 1.5 per cent to 2.8 per cent for India’s GDP growth projection for FY21?

Timmer: Although the outlook has worsened significantly, it is not easy to determine the magnitude of that deterioration. Given the unparalleled uncertainty, this report, for the first time, presents a range forecast, rather than a point forecast. The lower and upper bound of the forecast range are consistent with two global scenarios developed by the World Bank. Under the baseline scenario, the outbreaks begin to slow such that containment measures can be lifted after two months. Under the downside scenario, the outbreaks linger such that containment measures can only be lifted after four months.

World Bank Chief Economist (South Asia region) Hans Timmer

 The report says that chall-enges are too many for south Asia in its fight against Covid-19. However, the region has more successfully contained it, compared to advanced countries such as Italy, Spain, and the US. Why is it so? 

Timmer: South Asia started containment measures faster than other regions of the world relative to the reports of the first case. The report shows that measures were being taken in early March, even though there were practically no confirmed Covid-19 cases in the region. Evidence around the world shows that strict measures early on can help reduce the contagion. It is important that the pandemic doesn’t spread broadly in South Asia. If local transmission spirals out of control, it will be extremely difficult for the health systems to cope with the many challenges.

The report says services are being seriously affected by Covid-19 in India, but even then, industrial gross value added (GVA) is shown to be flat while services are shown to be growing by 4.1 per cent in FY21. 

Timmer: The report spends some time talking about directly affected service sectors, however, there are other services that will not be as directly affected, for example, financial services, real estate services, IT and communications (for domestic use), and some business and professional services. Moreover, with Covid-19, activity in the health services will rise very quickly and even go overcapacity.

The World Bank says India’s efforts to reduce poverty were bearing fruits, but Covid-19 would dampen those efforts. How alarming would be the poverty levels now in India post-Covid-19?

Ahmad: India has made remarkable progress in reducing absolute poverty since the 2000s. (Between FY11/12 and 2015, poverty declined from 21.6 per cent to an estimated 13.4 per cent at the international poverty line: that’s more than 90 million people out of extreme poverty).The current crisis is bound to have an adverse impact on the poorest households, in India as everywhere else in the world. That being said, the extent to which poverty is impacted in the medium-to-long term depends on the spread of the contagion. If the contagion spreads and the lockdown measures are extended over several months, the risks on the poorest households will magnify. The long-term impact will also depend on how quickly the labour markets adjust and the rate at which migrant workers return to employment. A lot will also depend on the policy response and government’s policies for social protection. Schemes such as the Public Distribution System, the National Rural Employment Guarantee Act, cash transfers, pensions, and support for SMEs will have a key role to play in that respect. 

A large number of people are expected to lose jobs in India. What will be the situation according to you and which are the sectors that will witness the biggest impact? 

Ahmad: It is already clear that the sectors that will be hardest hit include tourism, hospitality and aviation for obvious reasons; and global and domestic supply chains are also seeing disruptions that could have much wider impacts. What is important now is to ensure that there are no “second round” effects whereby the difficulties in these sectors affect the others via the financial sector for instance. 

To what extent can India go to in widening its fiscal deficit?

Ahmad: Our sense is that India has 3-5 per cent of GDP that it can put into this whole process of stabilisation of the economy.

The World Bank has approved $1 billion emergency fund for India to fight Covid-19. Will more funds be forthcoming?

Ahmad: Post our record $1-billion heath support approved recently, we are focusing on supporting the Indian government’s efforts to protect the poor and vulnerable.