The World Bank on Wednesday upgraded its GDP forecast for the Indian economy to 10% within a band of 2.5 percentage points from 5.4% estimated in October last year, highlighting uncertainty about the second wave of coronavirus infection, trajectory of vaccination drive and its resultant impact on the contact-intensive sectors in the economy.
“The infrastructure focus of the Union Budget 2021-22 is expected to aid the growth momentum and revive domestic demand. Given the significant uncertainty pertaining to both epidemiological and policy developments, real GDP growth for FY21/22 can range from 7.5% to 12.5%, depending on how the ongoing vaccination campaign proceeds, whether new restrictions to mobility are required, and how quickly the world economy recovers. Over the medium-term, growth is projected to stabilize within a 6-7% range," the global lender said in its latest South Asia Economic Focus released on Wednesday.
The Bank said though public consumption will contribute positively, pent-up private demand is expected to fade by the end of 2021, as investment will pick up very gradually spurred by a large government capital expenditure push. “Negative spillovers from financial sector distress, especially as forbearance measures expire, remain a risk to the growth outlook. Nonetheless, the Reserve Bank of India’s liquidity stance is also expected to remain accommodative during the fiscal year ending in March 2022," it added.
UNESCAP has projected Indian economy to grow at 7% in 2021 while Fitch Ratings last week upgraded India’s growth projection for FY22 to 12.8% on a stronger carryover effect, a looser fiscal stance and better virus containment.
The Bank said with India taking the regional lead in vaccine distribution and the South Asian region securing some vaccines, there is some optimism that the worst of the health crisis might be behind them, and the recovery phase has begun. “it will likely take until end-2022 at the current pace to have more than 70 percent of the South Asian population over age 15 vaccinated—the amount that epidemiologists suggest would be sufficient to break the chain of transmission to reach herd immunity," it added.
As economic activity normalizes, domestically and in key export markets, the current account is expected to return to mild deficits of around 1% in FY22 and FY23 and capital inflows are projected by continued accommodative monetary policy and abundant international liquidity conditions, the Bank said. “The covid-19 shock will lead to a long-lasting inflexion in India’s fiscal trajectory. The general government deficit is expected to remain above 10% of GDP until FY22. As a result, public debt is projected to peak at almost 90% of GDP in FY21 before declining gradually thereafter," it said.
The lockdown, in the first quarter of FY21, appears to have had a major impact on household consumption, the Bank said. “Mean per capita consumption is estimated to have dropped by 36% over April-July, 2020 y-o-y. Available household survey data indicate that relative to the “traditional poor" the most affected population were relatively younger, more urban and educated. With the end of the lockdown, however, household consumption seems to have recovered to almost pre-pandemic levels," it added.
However, the Bank said as growth resumes and the labor market prospects improve, poverty reduction is expected to return to its pre-pandemic trajectory. “The poverty rate (at the $1.90 line) is projected to return to pre-pandemic levels in FY22, falling within 6% and 9%, and fall further to between 4% and 7% by FY24," it added.
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