The World Bank has projected a 9.6 percent contraction for the Indian economy in FY 2020-2021, 6.4 percentage points lower than its previous forecast in June 2020.
In its latest January 2021 Global Economic Prospects report, the World Bank said the contraction in India’s output reflects a sharp drop in household spending and private investment.
“In India, the pandemic hit the economy at a time when growth was already decelerating. The output is projected to fall by 9.6 percent in FY2020/21, reflecting a sharp drop in household spending and private investment,” the report said.
The report notes that the pandemic disproportionately affected activity in the services sector in India, mainly in urban areas, such as retail). It also paralysed consumption, and caused significant unemployment. The informal sector, which accounts for four-fifths of employment, also suffered severe income losses, the World Bank said.
In India, growth is expected to recover to 5.4 percent in 2021, as the rebound from a low base is offset by muted private investment growth given financial sector weaknesses, the report said.
“The pandemic will likely lower potential growth, including through eroding human capital and investment growth. In the financial sector, nonperforming loans were already at high levels before the pandemic and the economic downturn may lead to further insolvencies among financial and non-financial corporations,” said World Bank in the outlook report.
India’s government debt is also expected to rise by 17 percentage points of GDP amid a severe output contraction of more than 9 percent, it found. India is also expected to post a current account surplus in FY2020/21, mainly driven by weak domestic demand.
According to the report, the global economic output is expected to expand 4 percent in 2021 but still remain more than 5 percent below its pre-pandemic trend.
Moreover, there is a material risk that setbacks in containing the pandemic or other adverse events derail the recovery. Growth in emerging market and developing economies (EMDEs) is envisioned to firm to 5 percent in 2021, but EMDE output is also expected to remain well below its pre-pandemic projection. Global growth is projected to moderate to 3.8 percent in 2022, weighed down by the pandemic’s lasting damage to potential growth, the World Bank said.
“The pandemic has exacerbated the risks associated with a decade-long wave of global debt accumulation. Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress. The pandemic is likely to steepen the long-expected slowdown in potential growth over the next decade, undermining prospects for poverty reduction,” the World Bank said.
The heightened level of uncertainty around the global outlook highlights policymakers’ role in raising the likelihood of better growth outcomes while warding off worse ones. Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities, it said. With weak fiscal positions severely constraining government support measures in many countries, an emphasis on ambitious reforms is needed to rekindle robust, sustainable and equitable growth.
A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit the global expansion to 1.6 percent in 2021 and 2.5 percent in 2022, it said. According to the World Bank, in a more severe downside scenario including widespread financial stress, global growth could even be negative in 2021. However, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent in 2021, noted the World Bank.
Advanced economies are seen contracting by 5.4 percent in 2020, rebounding to 3.3 percent growth by 2021, and thereafter to 3.5 percent growth by 2022. Emerging market and developing economies (EMDEs)on the other hand, are expected to contract by 2.6 percent in 2020, grow by 4.6 percent in 2021-22 largely reflecting a rebound in Chinese growth.
The World Bank said that the impact of the pandemic on investment and human capital is expected to erode growth prospects in EMDEs, set back key development goals.