The International Monetary Fund (IMF) has sharply cut India’s growth forecast for the current fiscal following the setback from the second COVID-19 wave. India’s gross domestic product (GDP) is estimated to grow by 9.5 percent in FY22, according to the latest World Economic Outlook report released by the IMF on July 27.
The latest estimate is 300 basis points lower than IMF’s April projection. “Growth prospects in India have been downgraded following the severe second COVID wave during March–May and expected slow recovery in confidence from that setback,” IMF said in the report. This forecast is in line with the Reserve Bank of India’s estimate of 9.5 percent growth for the current fiscal.
For FY23, IMF has forecast an 8.5 percent growth for India, 160 basis points higher than its April forecast. The upward revision is likely because the previous year’s growth forecast (base) has been lowered.
“Steady recovery is not assured anywhere so long as segments of the population remain susceptible to the virus and its mutations. Recovery has been set back severely in countries that experienced renewed waves— notably India,” it said.
IMF has predicted a continued global recovery in 2021 but warned of widening gaps between countries linked to their pace of vaccination.
The world economy is seen growing by 6 percent in 2021, unchanged from the April forecast. The 2022 growth forecast has been revised upwards by 50 basis points to 4.9 percent. The “0.5 percentage point upgrade for 2022 derives largely from the forecast upgrade for advanced economies, particularly the United States, reflecting the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics more broadly across the group,” IMF said.
Gita Gopinath, Chief Economist of the IMF said, the world body’s latest global growth forecast of 6 percent for 2021 is unchanged from the previous outlook, however, the composition has changed.
“Growth prospects for advanced economies this year have improved by 0.5 percentage point, but this is offset exactly by a downward revision for emerging market and developing economies driven by a significant downgrade for emerging Asia. For 2022, we project global growth of 4.9 percent, up from our previous forecast of 4.4 percent. But again, underlying this is a sizeable upgrade for advanced economies, and a more modest one for emerging market and developing economies,” she said.
IMF estimates the pandemic has reduced per capita incomes in advanced economies by 2.8 percent relative to pre-pandemic trends over 2020-2022, compared with an annual per capita loss of 6.3 percent a year for emerging market and developing economies (excluding China).
The revisions reflect an important extent of differences in pandemic developments as the Delta variant takes over. Close to 40 percent of the population in advanced economies has been fully vaccinated, compared with 11 percent in emerging market economies, and a tiny fraction of 1.2 percent in low-income developing countries.
“Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of COVID-19 cases in some countries, notably India, have led to downgrades,” said Gopinath.
Divergences in policy support are a second source of the deepening divide, the report claimed. “We are seeing continued sizable fiscal support in advanced economies with $4.6 trillion of announced pandemic related measures available in 2021 and beyond. The upward global growth revision for 2022 largely reflects anticipated additional fiscal support in the United States and from the Next Generation European Union funds,” Gita Gopinath said.
She added that while fiscal support in advanced economies continues, most measures in emerging markets and developing economies expired in 2020.
The advanced economies are seen growing 5.6 percent in 2021 (up 50 bps vs April), and 4.4 percent in 2022 (up 80 bps vs April). Emerging Market and Developing Economies (EMDEs), on the other hand, are seen growing by 6.3 percent in 2021 (down 40 bps vs April), and by 5.2 percent in 2022 (up 20 bps vs April).
The 2021 growth forecast for the low-income developing country group is marked down 0.4 percentage point, with the slow rollout of vaccines as the main factor weighing on the recovery (partially offset by stronger external demand from advanced economies). IMF staff analysis indicates that low-income developing countries will require close to $200 billion in spending to combat the pandemic and an additional $250 billion to regain their pre-pandemic convergence paths.
Achieving the 40 percent vaccination target by the end of 2021 will require sustaining the growth in global vaccinations and ensuring their equitable distribution, IMF said in its report. At the end of June 2021, the pace of daily global vaccinations stood at about 40 million doses a day, according to IMF data. China alone accounted for more than 20 million of those daily doses.
High-income countries accounted for 7 million doses a day. In contrast, fewer than 100,000 doses a day are being administered in low-income countries, IMF reported. “Vaccine supplies and deliveries to low and lower-middle-income countries must increase sharply to meet the proposal’s targets. In close to half of countries recent daily vaccination rates fell below the rate needed to meet the 40 percent target by the end of 2021,” the report said.
Better global cooperation on vaccines, a sooner-than-anticipated end to the health crisis, and a faster normalisation of activity, especially in EMDEs are seen as key upside risks to the global growth forecast. On the other hand, any logistical hurdles leading to slower vaccination, weaker than expected fiscal impulse in the United States, any abrupt tightening of financial conditions or social unrest, geopolitical tensions, cyberattacks on critical infrastructure are key downside risks.
In a downside scenario, where new infection waves are caused by virus mutations, financial conditions are tighter and vaccination supply increases only gradually, IMF estimates that global growth could be hit by 75-80 basis points from the 6 percent baseline growth scenario in 2021, and by 80-150 basis points in 2022 from a 4.9 percent baseline estimate.