OPEN APP
Home / Economy / ‘Growth revival depends on household income recovery’
Listen to this article

The extent of India’s economic recovery in FY22 will depend on how quickly household income, activity in the informal sector and smaller firms normalizes, the World Bank said on Thursday, retaining its earlier projection of 8.3% GDP growth for the current financial year.   

 “Despite the devastating health consequences, the economic impact of the recent waves is relatively small compared to the impact from the waves in 2020. Real GDP in the current fiscal year is expected to grow by 8.3%, which is consistent with the last forecast from June 2021, and a 1.8 percentage point downward revision from the forecast in March 2021. The projected growth is supported by an increase in public investment to boost domestic demand and production-linked incentive schemes to boost manufacturing," the World Bank said in its latest South Asia Economic Focus.  

However, downside risks include worsening of financial sector stress, higher-than-expected inflation constraining monetary-policy support, and a slowdown in vaccination, the multilateral lending organization said.   

 “The pandemic has had profound impacts on South Asia’s economy. Going forward, much will depend on the speed of vaccination, the possible emergence of new COVID variants, as well as any major slowdown in the momentum of global growth," said Hartwig Schafer, World Bank Vice President for the South Asia Region. “While short-term recovery is important, policymakers should also seize the opportunity to address deep-rooted challenges and pursue a development path that is green, resilient and inclusive." 

Over the next two years, as the base effect fades, the World Bank said growth is expected to stabilize at around 7%, aided by structural reforms to ease supply-side constraints and infrastructure investment. “In the medium term, uncertainty around asset-quality deterioration from the pandemic, higher-than-expected inflation, and slow recovery in the informal sector are the main downside risks," it added.  

Indian economy shrank by 7.3% in FY21 as both private consumption and investment contracted by 9.1% and 10.8%, respectively. On the supply-side, services contracted more than industry, due to the contact-intensive nature of the former, whereas agriculture growth remained steady. 

The World Bank said the toll of the crisis has not been equal, and the recovery so far is uneven, leaving behind the most vulnerable sections of the society—low-skilled, women, self-employed and small firms. “As labor markets continue to improve, poverty reduction is expected to slowly resume its pre-pandemic trajectory. However, employment rates are still lingering well below pre-pandemic levels despite improvements after the 2020 lockdown. As earnings of low skill workers remain well below 2019 levels, it might take longer than previously expected for India to achieve the goal of reducing extreme poverty to below 3%," it added. 

The Bank said India’s fiscal deficit is projected to shrink in FY22 as revenues recover and pandemic-related support winds down. “Still, it will remain above 10% of GDP in FY22, driven by a rise in capital spending. Public debt is expected to decline gradually in the medium-run driven by lower deficits and a favorable growth-interest rate dynamic," it said. 

On Tuesday, Moody’s Investors Service upgraded India’s credit outlook to stable from negative while maintaining sovereign rating at the lowest investment grade citing receding risks posed by the financial sector to the overall economy.  

The rating agency expects Indian economy to grow at 9.3% in FY22 holding that downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave. 

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout