India's GDP is forecast to plunge shaper than earlier estimated by 9.6 per cent in fiscal 2020-21consequent to the severe impact of the national lockdown and the income shock experienced by households and small urban service firms, the World Bank said in its latest assessment on Thursday.
For the South Asia region, the Washington-based global lender predicted a sharper than expected economic slump across the region, with regional growth expected to contract by 7.7 per cent in 2020, after topping six per cent annually in the past five years.
The latest forecast is starker than the bank's June estimate of a contraction of 3.2 per cent for Asia's third-largest economic power, which had set an ambitious goal of becoming a $5 trillion economy by 2024-25 before the outbreak of Covid-19.
Given the current size of India's economy at $2.8 trillion, to achieve the $5 trillion target in four years, the nation of 1.3 billion people requires a growth rate of at least 12 per cent in nominal terms and nine per cent in real terms.
Nonetheless, Prime Minister Narendra Modi sounded optimistic that the goal can still achieved by 2024 on the solid foundation created by his government. "The country has made itself so strong in the last five years that we can set such targets and achieve them too," he said at a function in August.
"The situation now is much worse in India than we have ever seen before," Hans Timmer, World Bank chief economist for South Asia, said in a conference call.
"It is an exceptional situation in India. A very dire outlook," he said. Nevertheless, what the Indian government has done with limited resources and limited fiscal space is very impressive, he said.
India's growth is forecast to return to 5.4 per cent in fiscal 2022, assuming Covid-related restrictions are completely lifted by 2022, the World Bank said in its latest South Asia Economic Focus report ahead of the annual meeting of the World bank and International Monetary Fund.
India's GDP contracted 23.4 per cent in the June quarter, the sharpest fall among global economies but several key economic indicators have pointed to some recovery as the economy unlocks and several sectors open up for business.
There was a 25 per cent decline in GDP in the second quarter of the year, which is the first quarter of the current fiscal year in India.
The World Bank said that the spread of the Covid-19 and containment measures have severely disrupted supply and demand conditions in India.
"Monetary policy has been deployed aggressively and fiscal resources have been channelled to public health and social protection, but additional counter-cyclical measures will be needed, within a revised medium-term fiscal framework," the report said.
The multilateral agency said the Covid-19 shock will lead to a long-lasting inflection in India's fiscal trajectory.
"Assuming that the combined deficit of the states is contained within 4.5 to five per cent of GDP, the general government fiscal deficit is projected to rise to above 12 per cent in FY21 before improving gradually. Public debt is expected to remain elevated, around 94 per cent in FY23, due to the gradual pace of recovery."
KV Kamath, former chief of the New Development Bank of Brics countries, has said Indian economy is resetting at a faster pace than expected.
In an interview, he was quoted as saying that the major reason behind this fast reset is India's strong domestic market, which gives the required momentum.
- issacjohn@khaleejtimes.com
