The World Bank forecast highlights uncertainty about the second wave of covid-19
The World Bank upgraded its GDP forecast for India from 5.4% estimated in October last year
The World Bank on Wednesday upgraded its gross domestic product (GDP) forecast for the Indian economy to 10% within a band of 2.5 percentage points from 5.4% estimated in October last year, highlighting uncertainty about the second wave of coronavirus infections, the trajectory of the vaccination drive and its resultant impact on the contact-intensive sectors in the economy.
“The infrastructure focus of Union budget 2021-22 is expected to aid the growth momentum and revive domestic demand. Given the significant uncertainty pertaining to both epidemiological and policy developments, real GDP growth for FY21/22 can range from 7.5% to 12.5%, depending on how the vaccination campaign proceeds, whether new restrictions to mobility are required and how quickly the world economy recovers. Over the medium term, growth is projected to stabilize within a 6-7% range," the lender said in its latest South Asia Economic Focus released on Wednesday.
Public consumption will contribute positively, but pent-up private demand is expected to fade by the end of 2021, as investments will pick up very gradually spurred by a large government capital expenditure push, the World Bank said. “Negative spillovers from financial sector distress, especially as forbearance measures expire, remain a risk to the growth outlook. Nonetheless, the Reserve Bank of India’s liquidity stance is also expected to remain accommodative during the fiscal year ending in March 2022," it said.
UNESCAP has projected the Indian economy to grow at 7% in 2021, while Fitch Ratings upgraded India’s growth projection for FY22 to 12.8% on a stronger carry-over effect, a looser fiscal stance and better virus containment.
With India taking the regional lead in vaccine distribution and the South Asian region securing some vaccines, there is some optimism that the worst of the health crisis might be behind them and the recovery phase has begun, the World Bank said. “It will likely take until end 2022 at the current pace to have more than 70% of the South Asian population over age 15 vaccinated, the amount that epidemiologists suggest would be sufficient to break the chain of transmission to reach herd immunity," it said.
As economic activity normalizes, the current account is expected to return to mild deficits of around 1% in FY22 and FY23 and capital inflows are projected by continued accommodative monetary policy and abundant international liquidity conditions, the World Bank said. “The covid-19 shock will lead to a long-lasting inflexion in India’s fiscal trajectory. The general government deficit is expected to remain above 10% of GDP until FY22. As a result, public debt is projected to peak at almost 90% of GDP in FY21 before declining gradually thereafter," the lender said.