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IMF slashes India’s growth forecast by 580 bps, sees economy contracting by 10.3% in FY21

Updated : October 13, 2020 08:41 PM IST

The RBI recently forecast a 9.5 percent contraction for the Indian economy for FY21.

IMF sees India’s GDP growth at 7.2 percent by FY 2025-26.

The International Monetary Fund (IMF) handed India yet another sharp cut in its growth projection for the year amid a worse than expected contraction seen in the June quarter. In its latest World Economic Outlook update for October released on Tuesday evening, IMF has forecast a steep 10.3 percent contraction for India’s economy for the current financial year, 580 basis points lower than its June forecast. One basis point is one-hundredth of a percentage point.

The report pegs India’s FY 2021-22 growth at 8.8 percent, which is 280 basis points higher than what it had forecast in June. Thereafter, the IMF sees India’s GDP growth at 7.2 percent by FY 2025-26.

The Reserve Bank of India recently forecast a 9.5 percent contraction for the Indian economy for FY21, with risks to the downside. It expects the contraction in growth to reverse by the March quarter, sees a three-speed economic recovery.

While the COVID-19 induced economic stress has taken a toll on economies all over the world, India’s first-quarter GDP numbers painted a much grimmer picture. The Indian economy contracted by a record 23.9 percent for the April-June quarter, its slowest growth recorded in four decades.

Various global agencies have since revised India’s growth outlook downwards for the current fiscal. For instance, World Bank estimates India’s GDP will contract by 9.6 percent, Standard & Poor’s (S&P) expects a 9 percent contraction, Moody’s 11.5 percent, and State Bank of India 10.9 percent for FY21.

While IMF continues to project a deep recession in 2020 for the global economy, it has revised its projection upwards in the October review. Global growth is projected to be -4.4 percent, an upward revision of 0.8 percentage points compared to the June update. “This upgrade owes to somewhat less dire outcomes in the second quarter, as well as signs of a stronger recovery in the third quarter, offset partly by downgrades in some emerging and developing economies,” IMF’s Chief Economist Gita Gopinath said.

In 2021, global growth is projected to rebound to 5.2 percent, -0.2 percentage points below IMF’s earlier forecast. “While the global economy is coming back, the ascent will likely be long, uneven, and uncertain,” IMF said.

Advanced economies are now seen contracting by 5.8 percent in 2020, a 230 bps improvement over the June forecast. They’re expected to further rebound to a 3.9 percent growth by 2021, which is 90 basis points lower than the last estimates.

Emerging Market & Developing Economies (EMDEs) are seen contracting by 3.3 percent in 2021, before rebounding by 6 percent in 2021, the report said.

After the rebound in 2021, the baseline forecast for the global economy envisages growth to slow to about 3.5 percent into the medium term. “This implies that both advanced and emerging market and developing economies will only modestly progress toward the 2020–25 path of economic activity projected before the COVID-19 pandemic, pointing to a severe setback to the projected pace of improvement in average living standards across all country groups,” IMF noted.

The projections for growth assume that social distancing will continue into 2021, but gradually fade thereafter.

The report further added that the cumulative loss in output relative to the pre-pandemic projected path is projected to grow from USD 11 trillion over 2020-21 to USD 28 trillion over 2020-25.

There remains tremendous uncertainty around the outlook with both downside and upside risks, IMF said. The virus is resurging with localized lockdowns being re-instituted. “If this worsens and prospects for treatments and vaccines deteriorate, the toll on economic activity would be severe, and likely amplified by severe financial market turmoil” Gopinath added. Growing restrictions on trade and investment and rising geopolitical uncertainty could harm the recovery. On the upside, faster and more widespread availability of tests, treatments, vaccines, and additional policy stimulus can significantly improve outcomes, the report showed.

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