The World Bank on Wednesday said the Indian economy was projected to contract by 9.6% in fiscal year 2020-21 because of the Covid-19 pandemic, and it was in a far graver situation than it was during the balance of payment crisis of the 1980s leading up to 1991.
South Asia as a region is set to plunge into its worst ever recession with a sharper than expected contraction of 7.7%, the World Bank said in its half-yearly South Asia Focus update released on Thursday.
“The situation is much worse in India than we have ever seen before,” Hans Timmer, World Bank’s chief economist for the South Asia region, told reporters. He added that it was “much worse” than the balance of payment crisis, which had marked a record low for India and the region.
India was forced to pledge parts of its gold reserves in 1991 – physically shipped to the Bank of England and Bank of Japan – to secure a bailout package from the International Monetary Fund (IMF) to avoid defaulting on overseas payment obligations. The year 1991 also marked the start of economic reforms.
Timmer said one reason why India was hit hard was the “lockdown that was imposed initially (that) was very strict”. It was reflected in the quarterly growth of -25%, he added.
Akhil Berry of Eurasia Group, a global consultancy, said, “The estimated contraction is shocking but is in line with other projections, given that India imposed one of the world’s most stringent lockdowns and the caseload in major economic centres such as Mumbai and Delhi are still high.”
Fitch has projected India’s economy will contract by -10.5%, Goldman predicts a contraction of -14.8% and the Asian Development Bank (ADB) at -9%.
The World Bank said Covid-19 caught India as its economy was already slowing down and it was weakened by financial sector problems, and commended the Modi government’s “swift and comprehensive” response: a strict lockdown, complemented by social protection measures for the poor and support for businesses.
“Nonetheless, there was a massive contraction in output and poor and vulnerable households experienced significant social hardship – specifically urban migrants and workers in the informal economy,” the report said.
It added, “Overall, the pandemic has likely raised urban poverty, creating a set of ‘new poor’ characterised by non-farm employment and secondary or tertiary education.”
The bank has projected growth will rebound to 5.4% in the financial year 2021-22. But Timmer said what has been made clear by this crisis is that India “has to rethink federal policies, especially the policies related to the informal sector… there are no systems in place to support those people”.
While the poor suffered due to rising food prices, Covid-19 delivered “a further blow to many informal workers” who experienced a sharp drop in earnings and didn’t have social insurance or savings to fall back on, the report said, urging governments in the South Asia region to “design universal social protection as well as policies that support greater productivity, skills development, and human capital”.