India’s economy to contract by 10.3%, says International Monetary Fund

World Output by 4.4% in 2020, it says

With the country and world reeling under the impact of the coronavirus pandemic, the Indian economy is expected to grow at -10.3 % ( i.e., a contraction) in 2020 as per the International Monetary Fund (IMF). Global growth was projected to be -4.4% ( i.e., a contraction in output of 4.4%) for this year , the IMF said with the release of its World Economic Outlook October 2020 report titled, “A Long and Difficult Ascent”.

The 2020 projection for India is a downgrade of -5.8 percentage points from the IMF’s June projection for the country. India is expected to rebound in 2021 with 8.8 percent growth – an upgrade of 2.8 percentage points relative to the June update.

Also read: In charts: International Monetary Fund’s World Economic Outlook

“Revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second quarter,” the report said.

Consumer prices in India are expected to grow at 4.9% this year and 3.7% in 2021. The current account balance is projected to grow by 0.3% this year and -0.9% (i.e., a contraction) next year.

Also read: Coronavirus | IMF projects 1.9% growth for India in 2020

For the world as a whole, the 2020 growth projection has been revised upwards by 0.8 percentage points relative to June– a result of a less dire second quarter and signs of a stronger recovery in the third quarter, partly offset by downgrades in certain developing countries and emerging economies (except China).

The recovery in 2021 is projected to be at 5.2% – lower than the June 2020 projections. After 2021, global growth is expected to ease off at 3.5% in the medium term. Except for China, where output this year was expected to exceed 2019 levels, the advanced, developing and emerging market economies were expected to see lower output even next year, IMF Chief Economist Gita Gopinath said in a note that illustrated the uneven recovery across country groups.

Also read: IMF MD ropes in Raghuram Rajan, 11 others to key external advisory group

U.S. economy

The U.S. economy is expected to grow by -4.3 % this year (i.e., contract) and grow by 3.1% next year. The corresponding numbers for the Euro Area are -8.3% and 5.2%. For China, they are 1.9% and 8.2% respectively.

Also read: U.S. economy shrank at record-breaking 33% rate last quarter

“The crisis is however far from over,” Ms. Gopinath noted. She warned that the labour market had become more polarised, with low-income workers, women and youth being hit harder.

The world would not catch up fully to its pre-pandemic 2020-25 projected growth trajectory, the report said, reversing the progress made since the 1990s in reducing poverty and increasing inequality and causing a “severe setback” to projected improvements in living-standards across all groups of countries.

The Fund projects that close to 90 million people could fall below the $ 1.90/day extreme poverty threshold (the World Bank last week projected that there could be up to 150 million additional extreme poor in 2020, 2021).

Along with subdued growth for the medium term, the stock of sovereign debt is expected to increase. The projections are based on the assumption that social distancing continues into 2021 fading as vaccine coverage expands and therapies improve. By the end of 2022 local transmission is expected to be low in the forecasting model. However, these projections come with “unusually large” uncertainties.

Fund: more action required

Global fiscal support, totalling some $12 trillion, and measures such as rate cuts, asset purchases and liquidity injections by central banks protected lives and livelihoods and “prevented a financial catastrophe”, Ms. Gopinath pointed out.

“There is still much that needs to be done to ensure a sustained recovery,” she said. “First, is a need for greater international collaboration on tests, treatments and vaccines. If these are made available faster than accounted for in the IMF mode’s baseline scenario, it could mean an increase in global cumulative income by $ 9 trillion by the end of 2025”.

Second, policies should “aggressively” seek to limit persistent economic damage. Governments should support incomes, Ms. Gopinath said, by well targeted cash transfers, wage subsidies and unemployment insurance. For firms that are viable but vulnerable, Ms Gopinath recommended support such as tax deferrals, debt servicing moratoria, equity-like injections.

Third, policies should aid workers’ transition to growing sectors (e.g. e-commerce) and away from sectors like travel which are likely to shrink. Other measures include support to governments via institutional grants, concession financing and debt relief “in some cases” so these governments can prioritize critical spending for health and transfers to the poor.

Along with the necessary easing of monetary policy across the world, Ms. Gopinath said, measures to prevent the build-up of financial risks over the medium should be pursued and “central bank independence should be safeguarded at all costs.”

“The challenges are daunting. But there are reasons to be hopeful,” Ms Gopinath said, citing policy measures and the use of digital technology to get assistance to citizens as examples.

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