That 2020 would be one of the worst years on record for India and the rest of the world was not in doubt, courtesy the covid-19 pandemic, but just how bad this year’s economic recession will get has had a wide range of estimates. For those hopeful of just a minor contraction in output, an update of the World Economic Outlook of the International Monetary Fund (IMF) issued on Wednesday offers a sobering picture. By its new forecasts, the world’s gross domestic product (GDP) is set to contract by 4.9% in 2020. This is worse than the decline of 3% it had projected back in April. The devastation wrought by the Great Lockdown, as IMF’s chief economist Gita Gopinath termed it, accounts for most of the revision. Worldwide, policy responses have been mounted to ease the suffocation of commerce, but they are unlikely to save the global economy from its plunge. India’s shutdown has been among the world’s harshest, and it should be no surprise that IMF’s outlook for our GDP has gone from positive to negative in a span of just about two months. In April, IMF had predicted growth of 1.9% for India this year. Now the global institution projects a reduction in GDP of 4.5%. Gopinath attributed this to the dual effect of a lockdown that lasted far longer than anticipated and a sustained rise in covid cases here.
It is no consolation that most major economies, barring China’s, which may grow by 1%, are expected to become smaller than they were in 2019. The US could see its economy shrink by 8% this year, despite running a stimulus programme worth one-tenth of its GDP, while the Eurozone’s output could be 10.2% less than last year’s. This is a crisis like no other, and so question marks hover over how each economy would respond to fiscal and monetary rescue efforts. The broad idea of these was to support aggregate demand. Yet, the fog hanging over the future means that all GDP numbers could be up for further revision. As the IMF report’s caveats have it, there is a higher-than-usual degree of uncertainty around these forecasts. Its baseline projections rest on key assumptions of the pandemic’s fallout. Much would depend on the trajectory of corona infections. News reports suggest that many regions are in the grip of a second wave of the pandemic, even as others still battle to contain their initial outbreaks. In the absence of a covid cure, we are likely to see only fitful and episodic resumptions of business. This complicates the task of forecasters. So long as corona contagion is expanding, prospects of a V-shaped recovery would arguably be dim, no matter how much is spent on achieving a recovery.
That does not mean, however, that policymakers can do little to mitigate the crisis. In India, particularly, a weak stimulus so far might have dampened the ability of our economy to stage a recovery in the near term. Overall demand is likely to stay low for a prolonged phase. The West’s mega-stimulus, meanwhile, might have the unintended effect of inflating asset bubbles everywhere, as seen in past episodes, causing financial markets to diverge from the real economy. Signs of this are visible in India already. Stock indices, for instance, have been buoyant. These should not give us a false sense of optimism. If we are to alleviate this year’s pain, we must keep a fiscal pump handy. That is what IMF would have us do. As economies reopen, it says, stimulus measures should be adopted to bolster demand.