IMF raises forecast for Indian economy by 100 basis points to 12.5 percent for 2021-22
The International Monetary Fund (IMF) last week raised its growth forecast for the Indian economy by 100 basis points to 12.5 percent for fiscal year 2021-22, the highest among emerging and advanced economies. India’s GDP growth for fiscal year 2023 is pegged at 6.9 percent.
Economists, however, say the new wave, which is more vicious, could deal a major blow to India’s growth rate and economic prospects.
As India battles the second wave of COVID-19 with over 100,000 cases reported every day over the past six days, experts fear the spike will cause a huge setback to the country’s economy.
Last year, the outbreak of COVID-19 led to an abrupt cessation of economic activities and loss of jobs, plunging India’s economy into its worst phase in four decades. The country’s gross domestic product (GDP) contracted 23.9 percent in the 2020 April-June quarter amid the government’s response to impose a countrywide lockdown to contain the spread of the coronavirus.
At the beginning of this year, as the daily COVID-19 cases saw a decline and cities returned to business, experts and rating agencies predicted a quick economic turnaround for India. However, these estimates did not take into account the possibility of a fresh wave of COVID-19, which has again cast a shadow on the country’s struggling economy.
Although the government led by Indian Prime Minister Narendra Modi has not announced a countrywide lockdown, limited restrictions have been announced by local governments in respective states, triggering panic among migrant workers who are once again heading back to their hometowns from cities like Mumbai and New Delhi.
The limited restrictions in the form of night curfews and weekend lockdowns in the states have hit businesses and economic activities.
Amid the spike in infections, experts say both the organized and unorganized sectors would be hit badly, but it is the contact intensive services like hospitals, hotels, restaurants, travel and tourism that will be hit especially hard once again.
“The organized sector which was recovering will receive a setback and as a result, it will knock down the other sector. The unorganized sector which was already suffering will continue to suffer because the demand will come down as people are losing income and moving back to their homes,” said Arun Kumar, a New Delhi-based economist.
Kumar said though it was early to predict the full impact of the second wave, the rate at which the infection was rising will not reach its peak in the next 20 to 25 days.
“I think the rate of growth of the economy will go down. The unorganized sector too is getting hit and huge uncertainty looms large. Business confidence will not revive, consumer confidence was already down and that will also get hit,” Kumar said. “Going forward with what the government was saying is that we will have good growth this year, certainly it will be better than last year, but it will not go back to the 2019 GDP.”
Kumar said India’s vaccination drive was not proceeding fast enough to get the country to herd immunity.
The abrupt nationwide lockdown announced by Modi in March last year was one of the most stringent lockdowns in the world, forcing over 1.3 billion Indians to stay indoors. Almost all businesses and economic activities were shut, which had a drastic impact on India’s economy.
Estimates say the lockdown devastated the livelihood of over 40 million migrant workers, who play a pivotal role in the country’s agricultural and industrial sectors.
The Centre for Monitoring Indian Economy reported that around 21 million salaried employees lost their jobs during April-August last year.
To infuse life into the economy, the Modi government last year announced a slew of measures including an economic stimulus package designed to revive the economy.
IMF chief economist Gita Gopinath told an Indian news channel last week that its 2021 GDP numbers for India were locked on March 5, around the same time the country started seeing an upsurge in COVID-19 cases and that there could be a downward risk if the country goes for a nationwide lockdown.
However, economist DK Panth said that it’s highly unlikely that India will see another nationalized lockdown.
“There may be regional or local lockdowns. However, the severity of the lockdowns is unlikely going to be what it was last year,” he said. “Economy is going to perform better than last year, mainly because of the base effect but the impact will depend on the length of prohibitions or control or how severe those controls are.”
Fitch Ratings, an American credit rating agency, last week said the second wave of COVID-19 infections poses increased risks to India’s fragile economic recovery and its banks. The rating agency expects a moderately worse environment for India’s banking sector in 2021, adding that rising infections and follow-up measures to contain the virus would affect business and economic activity.
“Over 80 percent of the new infections are in six prominent states, which combined account for roughly 45 percent of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely,” Fitch Ratings said in a statement.
“We consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk. Retail loans have been performing better than our expectations, but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring.”