Covid-19 impact: IMF projects India’s GDP to contract 10.3% in 2020

  • However, India is likely to bounce back with an impressive 8.8% per cent growth rate in 2021, says IMF
  • The projection reflects a severe-than-anticipated contraction in economic activities in the first quarter as a result of the nationwide lockdown as well as the rapidly spreading pandemic.

Asit Ranjan Mishra
First Published13 Oct 2020
IMF chief economist Gita Gopinath said it is essential that fiscal and monetary policy support are not prematurely withdrawn.
IMF chief economist Gita Gopinath said it is essential that fiscal and monetary policy support are not prematurely withdrawn.

The International Monetary Fund (IMF) on Tuesday projected India’s gross domestic product (GDP) to plunge in FY21 by 10.3%, revised down since its June forecast of 4.5% drop, reflecting a severe-than-anticipated contraction in economic activities in the first quarter as a result of the nationwide lockdown as well as the rapidly spreading pandemic.

In its biannual World Economic Outlook, IMF said all emerging market and developing economy regions are expected to contract this year, including notably emerging Asia, where large economies, such as India and Indonesia, continue to try to bring the pandemic under control. “Revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second (June) quarter. As a result, the economy is projected to contract by 10.3% in 2020, before rebounding by 8.8% in 2021,” it added.

IMF said June quarter GDP was weaker than projected in India where domestic demand plunged following a very sharp compression in consumption and a collapse in investment. India’s GDP contracted 23.9% in June quarter, making it the worst performer among the G20 economies. The Reserve bank of India (RBI) on Friday for the first time admitted that the economy will contract 9.5% in FY21, with a mild expansion in economic activity in the March quarter.

The multilateral lending organization, however, said global growth may see less severe contraction at -4.4% in 2020 than it envisaged in June (-5.2%), reflecting better-than anticipated June quarter GDP growth in advanced economies, where activity began to improve sooner than expected, indicating a stronger recovery in the September quarter.

“The ascent out of this calamity is likely to be long, uneven, and highly uncertain. It is essential that fiscal and monetary policy support are not prematurely withdrawn, as best possible,” IMF chief economist Gita Gopinath said.

Without naming India, Gopinath said emerging market and developing economies are managing this crisis with fewer resources, as many are constrained by elevated debt and higher borrowing costs. “These economies will need to prioritize critical spending for health and transfers to the poor and ensure maximum efficiency. Where debt is unsustainable it should be restructured sooner than later to free up finances to deal with this crisis,” she added.

IMF warned that the pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality. “People who rely on daily wage labour and are outside the formal safety net faced sudden income losses when mobility restrictions were imposed. Among them, migrant workers who live far from home had even less recourse to traditional support networks. Close to 90 million people could fall below the $1.90 a day income threshold of extreme deprivation this year,” it added.

Global growth is assumed to progressively decline from 3.7% in 2021 to 2.1% in 2050, reflecting a tapering off of growth in emerging market economies as they catch up toward the income levels of advanced economies.

Gopinath said the cumulative loss in output relative to the pre-pandemic projected path is projected to grow from 11 trillion over 2020-21 to 28 trillion over 2020-25. “This represents a severe setback to the improvement in average living standards across all country groups,” she added.

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