World Bank sees India's GDP growth at 1.5-2.8%, lowest since 1991 crisis

The World Bank had earlier projected the growth to be 6.1 per cent for 2020-21.
The World Bank has scaled down India’s gross domestic growth (GDP) growth projection to 1.5-2.8 per cent for the current fiscal year, which would be the lowest economic expansion since the balance of payments crisis of 1991-92, as Covid-19 is dragging down activities in the already slowing economy. It had earlier projected the growth to be 6.1 per cent for 2020-21.

In its South Asia Economic Update, the Bank warned that migrant workers and conditions in slum areas would make it challenging to adopt social distancing norms to arrest the spread of deadly coronavirus.

The publication, brought before the spring meetings of the IMF and the World Bank later this month, predicted industrial gross value added to be flat in 2020-21, against 1.9 per cent expected for 2019-20. Services were pegged to grow by 4.1 per cent in the current fiscal year, against 6.9 per cent a year ago, and agriculture by 2.7 per cent against 3.5 per cent.

IMF is also likely to come out with its report on world economic outlook shortly. The World Bank expected India’s economy to grow by 2.8 per cent in case lock down is not stretched much. In case of a prolonged lockdown, the growth could further slip to 1.5 per cent, it warned. At both these rates, India would be growing at the slowest pace since 1991-92, when the economic expansion fell to 1.1 per cent.

Some other agencies predicted far worse scenario for India. For instance, Nomura predicted India’s economy to contract by 0.5 per cent during 2020 calendar year. However, some others predicted bit better scenario.  Asian Development Bank expected India’s economy to grow four per cent in 2020-21.

However, the growth is expected to recover to 4-5 per cent in the next year or in other words almost same or worse than where it stood in 2019-20, according to the World Bank.

The Bank predicted GDP growth at 4.8-5 per cent for 2019-20, against the second advance estimate of 5 per cent.

“Growth is estimated to have decelerated to 5.0 percent in FY20 and it is expected to slow down again in FY21. Structural and financial-sector weaknesses are compounded by severe disruptions to economic activity caused by the Covid-19 outbreak,” it said.

The Bank pegged general fiscal deficit (Centre and states combined) to touch 9 per cent in the current fiscal year as the governments spend more and revenues dwindled. The deficit could widen more depending on the period of lockdown, it said.

The crisis may dampen the country’s efforts to reduce poverty. “While poverty declined to an estimated 13.4 per cent in 2015, at the $1.90 a day international poverty line, the slowdown in growth and in the rural economy may have dampened the pace of poverty reduction,” the Bank said.

Even in countries at a higher level of GDP per capita in south Asia, such as India and Pakistan, still around 70 per cent suffer from this basic deprivation.

“It should not be a surprise that a highly transmissible disease could spread more quickly among those in poorer groups,” it said.

The multi-lateral agency said the Covid-19 outbreak came at a time when India’s economy was already slowing, due to persistent financial sector weaknesses. To contain it, the government imposed a ‘lockdown’ with restrictions on mobility of goods and people.

The resulting domestic supply and demand disruptions on the back of weak external demand are expected to result in a sharp growth deceleration in FY21 with the services sector particularly impacted. It said a revival in the domestic investment was likely to be delayed given enhanced risk aversion on a global scale and renewed concerns about financial sector resilience.

In such a situation, the only silver lining would be the balance of payments position which is expected to improve on weak domestic demand, low oil prices, and Covid-related disruptions.

The current account deficit is expected to narrow to 0.2 per cent in FY21 from expected 1 per cent a year ago.

The Bank warned that the high density of households in urban slums further reduces the efficacy of social distancing measures.

The lockdown will also have an adverse economic impact on self-employed and casual workers. The closure of shops, hotels and restaurants alone will affect 11 per cent of such workers in these sectors. Domestic migrants scrambling to return to their homes in rural areas and currently stuck in transit are also facing significant vulnerabilities, it said.

A welfare package from the government can help poorer households cope with short-term Covid-related losses. However, it said India set aside just over 1 per cent of GDP for programmes to increase health sector spending and compensate the unemployed, with the bulk of the money going towards cash transfers, free food and gas cylinders, and interest-free loans. In India, some economists doubt that the planned economic stimulus will be enough, it said.

The Bank warned that south Asia has some of the highest population densities in the world, particularly in urban areas. This makes contagion easier, especially among the most-vulnerable people — slum dwellers and migrant workers. “In India, Bangladesh and Pakistan, the time between the announcement of suspension of inland passenger transport and its enforcement was less than a day, which created chaos as migrants scrambled to get back to their provinces, exacerbating the crowding and making enforcement of social distancing impossible,” it said.

It quoted a non-governmental organisation, Aajeevika Bureau, to say that the total number of migrant workers in India might be as high as 120 million or more.

The top three labour sending districts are west Tripura, Solapur in Maharashtra, and Imphal West in Manipur, the Bank said quoting official statistics.

It said if it was not possible to prevent reverse migration to rural districts via urban-centered social protection programmes, the governments in south Asia should consider immediate assistance to migrants to limit suffering and loss of life during the strenuous long-distance journeys, by providing information and food and water to journeying migrants.

In India, balance sheet vulnerabilities of listed corporate and their refinancing needs in 2020 were already high before the crisis, the Bank said.

With central banks providing much-needed room to extend credit in the region, state-owned banks may be the best vehicle to on-lend funds. For example, governments could create Covid-19 bonds to lend to affected companies and step up through state-owned banks, it said.

It said public banks are both a cause and a potential balm for the severe stress financial markets now face. It called for stronger governance and accountability reforms to improve efficiency of these banks.

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