IMF: Indian Economy Will Contract by 4.5% This Fiscal

By Luigi Wewege Wednesday, July 1, 2020

As the Indian economy continues its battle to recover from the devastation of COVID-19, pandemic’s impact has once again been reiterated by a report from the International Monetary Fund (IMF). The report projects a sharp contraction of 4.5% in this fiscal.

However, the report also offered some sense of optimism, as it projects that the country is expected to bounce back in 2021 with a significant 6% growth rate.

According to IMF’s Chief Economist Gina Gopinath, "We are projecting a sharp contraction in 2020 of -4.5%. Given the unprecedented nature of this crisis, as is the case for almost all countries, this projected contraction is a historic low.”

IMF: Indian Economy Will Contract by 4.5% This Fiscal

The Pandemic’s Impact on India's Economy in the First Half of 2020

The current global pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecasted.

The IMF report predicts that in 2021, global growth is projected at 5.4%. While this will be one form of recovery, the value will only represent a fraction of what things were like only four months ago. The IMF's records also reveal that this is the lowest ever for India since 1961.

How Long Will It Take for India’s Economy to Recover?

India’s manufacturing and services activity was affected heavily during the first quarter of this year, owing to a nationwide lockdown to stem the coronavirus pandemic. That’s put Asia’s third-largest economy on course for its first annual contraction in more than four decades this year, with some economists seeing a return to 8%-plus growth rates taking as long as a decade.

These predictions are hopeful, but in no way surprising, as they are in line with what other economy experts are predicting all over the world.

What the Global Reopening Means for India

Roughly three-quarters of the world is now reopening at the same time as the pandemic is intensifying in many emerging markets and developing economies. Several countries have started to recover. However, in the absence of a medical solution, the recovery's strength is highly uncertain, and the impact on sectors and countries uneven.

That being said, if India is isolated in the market because of this pandemic, this could spell more bad news.

Containing COVID-19 Could Lead to V-Shaped Recovery

Alternatively, India’s top economic adviser Krishnamurthy Subramanian offers a more optimistic outlook in a recent interview: he believes that a V-shaped recovery for the economy is possible this year.

He does add a significant caveat to this, however. This recovery depends on whether a vaccine is found, which will help curb the spread of coronavirus. Subramanian's recent comments have been met with some suspicion, but his reputation and knowledge often allow him to make such bold claims.

When Could This Recovery Happen?

Subramanian, speaking at a recent virtual conference, gave his thoughts as to when he thinks this recovery could happen: “The recovery will happen after that uncertainty from the health side is taken care of, If it so happens that in the latter half of the year we have the vaccine, then one can anticipate V-shape recovery starting in the second half.”

India’s government has already unveiled a 21-trillion rupee ($276 billion) package to support the economy, including easing access to credit for small businesses and offering cheap loans to workers and farmers.

Should People Listen to Predictions Regarding the Economy?

The problem with making predictions about the Indian economy is that they are dependent on several factors, most of which are not very predictable. Even though these predictions are provided by scientific data and good authority on the subject, the public cannot look past the fact that no one truly knows what will happen in the coming months.

Many small businesses in India are preparing for the worse and hoping for the best, and these predictions are unlikely to be taken too seriously for the moment, at least by members of the general public.

About the Author

Headshot of author Luigi Wewege

Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.

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