Virendra Pandit
Mumbai: The World Bank has said India’s economy may contract by 9.6% in the fiscal 2020-21 financial year and then recover to 5.4% in the next financial year, 2021-22.
The Bank said India’s expected contraction is because of a sharp decline in household spending and private investment as the coronavirus pandemic badly hit the informal sector that accounts for four-fifths of jobs in the country.
“In India, the pandemic hit the economy at a time when growth was already decelerating,” the World Bank said in its Global Economic Prospects report. “The output is estimated to contract by 9.6% in the fiscal year 2020/21, reflecting a sharp drop in household spending and private investment.
“In India, growth is expected to recover to 5.4% in 2021, as the rebound from a low base is offset by muted private investment growth given financial sector weaknesses.”
During the 76-day-long nationwide lockdown from March to June because of the COVID-19 pandemic, household spending and private investment suffered grievously and many lost their jobs thereafter due to lack of demand and continuing overhead expenses. In the subsequent months also, demand could pick up only slowly.
The Bank pointed out that non-performing loans in the financial sector were “already high” in India even before the coronavirus crisis. But the services and manufacturing sectors were recovering fast, it noted.
The Indian economy suffered its worst contraction in decades, with the Gross Domestic Product (GDP) shrinking by a record 23.9%, in the first quarter of 2020-21 (April to June) and reflected the severe impact of the coronavirus-induced lockdown.
India’s GDP growth rate contracted by 7.5% in the second quarter (July-September). With this, the country’s economy slipped into a technical recessionary phase for the first time ever – when its GDP growth remained negative or declining for two consecutive quarters or more.
Since the pandemic shut businesses late in March, unemployment in the country also surged sharply. On August 18, a report by the Centre for Monitoring Indian Economy said nearly 50 lakh salaried persons lost their jobs in July because of a partial lockdown.
After the first two gloomy quarters of 2020-21, however, the trend from the third quarter has been rather positive as some sectors began to recover from the early shock. In particular, the automobile sector showed green shoots as people bought more private vehicles rather than traveling by public transport and many migrant laborers returned to work.
The Diwali festival, despite restrictions, also contributed to recovery because of increased demand.
But this did not stop some global rating agencies to look down upon the Indian economy. The Asian Development Bank said that India’s economy will contract by 9% in the 2020-21 financial year. On September 8, American credit rating agency Fitch Ratings sharply lowered its growth forecast for India, saying that the country’s GDP for FY21 is expected to contract by 10.5%, instead of its earlier estimate of a 5% contraction.
The World Bank also said the global economic output may grow by 4% in 2021.
The United States’ GDP is expected to grow at 3.5% in 2021 and that in the Euro area at 3.6%.