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The World Bank on Thursday said India’s gross domestic product (GDP) will contract 9.6% this fiscal, in a sharp cut to its June forecast of a 3.2% decline, reflecting the impact of the nationwide lockdown and the income shock experienced by households and small companies. The Bank expects the Indian economy to rebound in FY22 with a 5.4% growth.

“However, there is substantial uncertainty related to the course and duration of the pandemic; the speed at which households and firm behaviour will adjust to the lifting of lockdowns; and a possible new round of countercyclical fiscal policy," the Bank said in its latest South Asia Economic Focus report.

While the government has signalled that it is prepared to support the economy further, there is no clarity on a new stimulus package.

India’s economy contracted at a record 23.9% in the June quarter, underlining the extent of economic damage inflicted by covid. Many forecasters now expect the economy to contract in double digits in FY21.

Graphic: Mint
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Graphic: Mint


The Bank said the impact of covid-19 materialized against a backdrop of enduring fragility in the financial sector, slowing overall growth and limited fiscal buffers. “The response of the government of India to the covid-19 outbreak was swift and comprehensive. Nonetheless, there was a massive contraction in output and poor and vulnerable households experienced significant social hardship—specifically urban migrants and workers in the informal economy," it added.

The Bank’s estimates of a revival in India’s GDP growth in FY22 assume that covid-related curbs are completely lifted, but mostly underscore the base effect. However, the Bank said potential output is expected to remain depressed in the medium-term and inflation is expected remain around the Reserve Bank of India’s target range mid-point of 4% in the near-term.

The Bank said the pandemic shock will lead to a long-lasting inflexion in India’s fiscal trajectory. “Assuming that the combined deficit of the states is contained within 4.5-5% of GDP, the general government fiscal deficit is projected to rise to above 12% in FY21 before improving gradually. Public debt is expected to remain elevated, around 94% (in FY23), due to the gradual pace of recovery," it added.

While policy interventions have preserved the normal functioning of financial markets so far, the Bank said the demand slowdown could lead to rising loan delinquencies and risk aversion.

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