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The International Monetary Fund updated its World Economic Outlook, sharpening India’s economic contraction to 4.5% in FY21. It forecasts global growth to shrink 4.9% and projects a deeper recession in 2020, followed by a gradual recovery. Mint explores the issue.

What is IMF’s World Economic Outlook?

The World Economic Outlook is an International Monetary Fund (IMF) report published on a regular basis. Its key focus is to provide an assessment of the global economy as it analyses developments across its member countries. The report majorly focuses on providing growth forecasts for different economies and regions of the world while highlighting the risks and uncertainty around these estimates. The 2020 World Economic Outlook is important as there has been significant economic disruption across the world due to the SARS-Cov-19 pandemic.

What is the report saying about India?

The April World Economic Outlook projected India’s economic growth to be at 1.9% for FY21. This was revised downwards to -4.5% in its latest update. This downgrade has come as the IMF projects a deeper economic recession across the world, and anticipates a slower economic growth in the next fiscal. “The disruption in production, breakdown of supply chains/trade channels and total washout of activities will not allow economic activity to return to normalcy in FY21," the report noted. However, the report projects India’s growth for the next year to be a robust 6%, anticipating a swift bounce-back.

Grim outlook
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Grim outlook

Are most economies likely to witness a contraction?

The latest update estimates that for the first time, all regions of the world will see an economic contraction. This implies a nearly $12 trillion worth of economic activity being lost in FY21 and FY22 and that global public debt as a share of GDP will exceed the post-World War II highs across advanced, emerging, and developing economies.

Aren’t there signs of normalization in India?

There are signs of normalization as electricity generation is gradually reaching pre-lockdown levels, and e-way bill generation and toll collections have begun to improve. Similarly, petroleum consumption increased by 47.4% in May over April, reaching 77% of the previous year’s levels while PMI for services and manufacturing showed a lower contraction in May to reach 30.8% and 12.6%, respectively. Gradual unlocking of the economy has resulted in an improvement in economic activity indicating swifter normalization.

What does this mean for the economy?

The WEO forecast paints a bleak picture of India’s economic prospects over the current year. However, the reason for economic contraction is that 65% of India’s economy was shut for nearly a quarter. This means that there was little or no activity except for essential services for a fourth of the fiscal. This is the prime reason behind the contraction in the current year. With activity gradually normalizing, the second half of the fiscal might be better.

Karan Bhasin is a New Delhi-based policy researcher.

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