World Bank on India’s Growth | 13 Apr 2020

Why in News

The World Bank has released the South Asia Economic Focus report. The report saw India’s growth at 1.5-2.8% in 2020-21 which is the slowest since 1991 economic reforms.

Key Points

  • The South Asian region has been estimated to grow by 1.8-2.8% in 2020, down from the 6.3%, projected six months ago.
  • For 2020-21, for India, estimated growth (1.5-2.8%) is lower than 4.1-5.4% estimated in October, 2019.
  • It estimated that India will grow 4.8% to 5% in the 2019-20 fiscal year that ended on March 31, 2020.
    • This is lower by 1.2-1% of the estimate made in October 2019.
  • India is likely to record its worst growth performance in 2020-21 since the 1991 liberalisation as the coronavirus outbreak severely disrupts the economy.
    • Growth recovery estimated at the end of 2019 have been overtaken by the negative impacts of the global crisis.
  • Disruptions due to Coronavirus:
    • The Covid-19 outbreak came at a time when India’s economy was already slowing due to persistent financial sector weaknesses.
    • To contain it, the government imposed a lockdown, shutting factories and businesses, suspending flights, stopping trains and restricting mobility of goods and people.
    • This resulted in domestic supply and demand disruptions.
  • Impact :
    • A sharp growth deceleration in FY21 (April 2020 to March 2021).
    • The services sector will be particularly hit.
    • A revival in domestic investment is likely to be delayed given enhanced risk aversion on a global scale, and renewed concerns about financial sector resilience.
  • Growth is expected to rebound to 5% in Fiscal 2022 (2021-22) as the impact of Covid-19 dissipates, and due to fiscal and monetary policy support.
    • India has set aside just over 1% of Gross Domestic Product (GDP) for programs to increase health sector spending and compensate the unemployed, with the bulk of the money going towards cash transfers, free food and gas cylinders, and interest-free loans.
  • Suggestions by the World Bank:
    • India should focus on mitigating the spread of the disease, and to make sure that everybody has food.
    • It should also focus on temporary jobs programmes, especially at the local levels. These initiatives should be supported.
    • It should prevent bankruptcies, especially of a small and medium sized enterprise.
  • World Bank’s Support to India
    • The World Bank has approved USD 1 billion to India, of which the first tranche has already been released to deal with the emergency in the health care sector.
    • The first tranche aims at delivering civilian diagnostic equipment, put in place additional capacity to deal with testing and make testing available that benefits the entire population.
    • It is also working with India on two additional operations, which is anticipated to be ready in a matter of weeks.
      • These include, employment, banking and micro, small and medium enterprises sectors.
  • Other international agencies that have made a similar growth estimates:
    • The Asian Development Bank (ADB) sees India’s economic growth decrease to 4% in the current fiscal.
    • S&P Global Ratings has estimated the GDP growth forecast for the country to 3.5% from a previous downgrade of 5.2%.
    • Moody’s Investors Service has slashed its estimate of India’s GDP growth during the 2020 calendar year to 2.5%, from an earlier estimate of 5.3%.

1991 Economic Reforms

  • Year 1990-1991 Indian economy faced several uncertainties and strains. Inflation had increased to an annual rate of 17%.
  • The fiscal deficit reached a peak of 8.2% of GDP while revenue deficit reached to a height of 2.6% of GDP, growth rate decelerated to about 1% showing symptoms of recession and industrial production falling at low level.
  • The foreign exchange reserves of the Reserve Bank of India (RBI) had fallen to less than USD $1 billion resulting in an unprecedented external debt crisis.
  • Hence, the New Economic Policy was introduced, which consisted of a gradual process of easing out government controls of industrial deregulations and some import liberalization.
    • Significant changes in national policy with regards to Taxation, Industrial Licensing, Imports, Technology and Investment priorities were made.

South Asia Economic Focus

  • The South Asia Economic Focus is a biannual economic update presenting recent economic developments and a near-term economic outlook for South Asia.
  • It aims at providing important background information and timely analysis of key indicators and economic and financial developments of relevance to World Bank Group operations and interaction with counterparts in the region, particularly during annual and spring meetings.
  • This biannual series is prepared by the Office of the Chief Economist for the South Asia region.
  • It includes a Focus section presenting more in-depth analysis of an economic topic of relevance for stability, growth, and prosperity in the region as well as country briefs covering Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
  • It concludes with a data section providing key economic indicators for South Asia “at a glance."

Source :IE