OECD cuts India's FY21 GDP contraction rate to 9.9% from 10.2% earlier

Expects Budget to be cautious on fiscal expansion, sees rate cut by RBI around turn of the current financial year

The Organization for Economic Co-operation and Development (OECD) has raised prospects of India’s economy by pegging contraction at 9.9 per cent, against 10.2 per cent it projected in September.
 
It forecast that the economy would rebound to 8 per cent in the next fiscal year and 5 per cent a year later, but gross domestic product (GDP) loss would be substantial.
 
With fiscal deficit at around 16 per cent of GDP, it expected the Union Budget for 2021-22 (FY22) to be cautious on stimulus. However, it called for more fiscal measures to mitigate the hardships arising from Covid-19.
 
It saw limited scope of further easing of monetary stance by the Reserve Bank of India (RBI) due to high inflation, but  expected further cut in the policy rate around the turn of the current fiscal year due to easing of supply of food items.
 
In its latest world outlook, it said household consumption was still sluggish and investment largely unresponsive to easier monetary conditions in India.
 
However, it said the world economy will bounce back to pre-pandemic levels by the end of 2021, even as it warned that recovery will be uneven across the countries and risks remain.

 
“Despite a projected rebound of around 8 per cent and 5 per cent in FY22 and 2022-23, respectively, due to base effects and returning confidence, GDP loss would be substantial,” it said in a report titled A Brighter Outlook But Recovery Will Be Gradual.
 
It also cut the contraction rate of the global economy to 4.2 per cent in 2020, from 4.5 per cent earlier. It now projected the world economy to grow 4.2 per cent in 2021, from the earlier 5 per cent.
 
OECD observed that Covid-19 was exacerbating pre-existing vulnerabilities related to poverty, high informality, environmental degradation, and lack of employment opportunities in India.
 
It said significant social hardship persists and the fall in the unemployment rate must be seen against the background of declining labour force participation. 
 
Urban poverty was seen as worsening and the number of school dropouts surging, especially among first-generation pupils from disadvantaged  households. The disruption of the cooked meal programme, and of the mid-day school meal scheme, in particular, could worsen child malnutrition, it cautioned.
 
Better targeting of energy and fertiliser subsidies, as well as tax expenditures, would free resources for pro-poor fiscal policies, it advised.