NEW DELHI: The World Bank on Thursday projected a 9.2% contraction for the Indian economy, steeper than the 3.2% estimated in June, highlighting the impact of the pandemic-induced lockdown and the income impact experienced by households and small businesses. urban service companies.
“However, there is substantial uncertainty related to the course and duration of the pandemic; the speed at which households and business behavior will adjust to the lifting of the lockdowns; and a possible new round of countercyclical fiscal policy.” said the World Bank in its latest South Asia Economic Focus report.
While the government has signaled that it is prepared to support the economy, there is no clarity on the timing or scope of the next round of stimulus.
The Indian economy contracted a record 23.9% in the June quarter, underscoring the scale of the economic damage caused by the pandemic and the ensuing lockdown. Many forecasters now expect the Indian economy to contract in double digits in fiscal year 21.
The multilateral agency said that the impact of the pandemic materialized in a context of lasting fragility in the financial sector, a slowdown in general growth and limited fiscal reserves. “The Indian government’s response to the COVID-19 outbreak was swift and comprehensive. However, there was a massive contraction in production and poor and vulnerable households experienced significant social hardship, specifically urban migrants and workers in the informal economy. “.
Growth is expected to rebound to 5.4% in fiscal year 22, based on the World Bank estimate, which assumes that covid-related restrictions have been removed entirely, but primarily reflect base effects.
However, the Bank said, potential output is expected to remain depressed in the medium term and inflation is expected to remain around the RBI target range at the mid-point of 4% in the short term.
The Bank said that the impact of COVID-19 will lead to a lasting tipping in India’s fiscal trajectory. “Assuming that the states’ combined deficit is contained between 4.5% and 5% of GDP, the general government fiscal deficit is projected to increase above 12% in fiscal year 21 before gradually improving. expects public debt to remain high, around 94% (in fiscal year 23), due to the gradual pace of recovery. “
While policy interventions have preserved the normal functioning of financial markets so far, the Bank said, the slowdown in demand could lead to increased loan defaults and risk aversion.
Recent RBI analysis indicates that the ratio of gross non-performing loans to scheduled commercial bank assets may rise to 12.5% in March 2021 from 8.5% in March 2020.
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