World Bank Cuts India’s Growth Forecast, Cautions On Impact Over Informal Economy
World Bank expects India’s GDP to contract 9.6% in FY21 compared with an earlier forecast of 3.2% contraction.
The World Bank has cut India’s growth estimate for the ongoing financial year, cautioning that the pandemic continues to severely affect the nation’s informal sector.
The global financial institution that provides loans to governments of low- and middle-income countries expects India’s GDP to contract 9.6% in the fiscal ending March 2021 compared with an earlier forecast of 3.2% contraction, according to its regional update titled South Asia Economic Focus, Fall 2020.
This reflects the impact of the national lockdown and income shock experienced by households and small urban service firms, the statement said. “Recent household survey data indicate significant disruptions to jobs due to Covid-19 that likely boosted the poverty rate, with 2020 rates back to levels over served in 2016,” the report said.
The slowdown in India, according to the World Bank, is expected to depress manufacturing and exporting industries. The construction sector, which relies on migrant workers, is also likely to experience a protracted slowdown due to a limited pipeline of public sector infrastructure projects.
Growth, however, is expected to return to 5.4% in the next fiscal, assuming Covid-related restrictions are completely lifted by 2022, mostly reflecting base effects, the report said. Inflation is expected remain around the Reserve Bank of India’s target range mid-point in the near term, while potential output is expected to remain depressed in the medium term. The World Bank expects India’s GDP to grow 5.2% in 2022-23.
The general government fiscal deficit is projected to rise to above 12% in the ongoing fiscal before improving gradually. This is assuming that the combined deficit of states is contained within 4.5-5% of GDP.
Public debt is expected to remain elevated at around 94% due to gradual pace of recovery.
Current account is likely to reach a surplus of 0.7% of GDP in FY21 and is projected to gradually return to a deficit in later years.
While policy interventions have preserved the normal functioning of financial markets so far, demand slowdown may lead to rising loan delinquencies and risk aversion.
Lower Employment & Incomes In Informal Sector
The pandemic is sharply reducing wage employment in India, with informal sector workers most affected, according to the World Bank.
Forty-three percent of those employed in December last year were either unemployed or out of the labor force in April 2020, the World Bank said citing data from the Consumer Pyramids Household Survey by CMIE. Despite a recovery in employment levels, the labor market churn and flows into self-employment remain unusually high.
Among those still holding formal sector jobs as of April 2020, 51% were in informal employment by August. As a result, the April to August transition rate out of the formal sector is nearly as high as it was in the early Covid phase, the analysis found.
Outlook For South Asia
For South Asia, GDP is expected to contract 7.7% this year—the steepest decline on record.
As such, the economic crisis is pushing many people into poverty. On the basis of downside scenarios developed in June, the World Bank estimated that 49.3-56.5 million people in the South Asia region will have become poor by the end of 2020 compared to a counterfactual without Covid-19.
“Now South Asia’s new extreme poor due to Covid-19 will comprise more than half of the new global poor,” the World Bank said. This may be a conservative figure, given the recent downward revision to the growth forecast of India, it said.