Economic Contraction may Lead to Permanent Income Loss in India; GDP may Shrink 5.9% in 2020, says UNCTAD

The contraction in the Indian economy due to the pandemic-led disruptions may disappear next year, but it can cause some irreversible damage to the economy. Although a rebound in 2021 is expected in line with the growth rates of the Indian economy in recent years, the contraction registered in 2020 is likely to translate into a permanent income loss, said ‘Trade and Development Report 2020’ by United Nations Conference on Trade and Development. The report estimated that India’s economy is likely to contract 5.9 per cent in 2020, and grow 3.9 per cent next year.

UNCTAD has warned India to not repeat its past mistake of announcing austerity measures. It said that among G20 countries, Argentina, Brazil, India, Mexico, and South Africa have all implemented austerity in the past years but are now struggling to access reliable sources of finance. The UN trade body has held the strict lockdown responsible for a sharp recession in the current calendar year. In the case of India, the baseline scenario is a sharp recession in 2020 as strict lockdown measures to stem the virus’ spread brought many productive activities to a halt across the country, it said.

Effect on the global economy

While India is poised to face the trough, the global economy is also expected to take a major hit. The global economy will contract by an estimated 4.3 per cent this year, leaving global output by year’s end over $6 trillion short of the pre-Covid estimates, UNCTAD said. In short, the world is grappling with the equivalent of a complete wipeout of the Brazilian, Indian and Mexican economies, it added.

The estimates showed that trade will shrink by around one fifth this year, foreign direct investment (FDI) flows by up to 40 per cent, and remittances will drop by over $100 billion. The biggest falls in output are expected in the developed world but the greatest economic and social damage is likely to be in the developing world where levels of informality are high, there is continued reliance on a few commodities or tourism as a source of foreign exchange, and fiscal and policy space is limited.

Meanwhile, the UN Trade body underlined that the current situation is not like a war economy where a switch to military spending sees output expand, nor is it a traditional global supply-side shock where inflationary pressure is the big challenge for policymakers. Nor the world is facing a financial crisis where the banking sector is in the eye of the storm. In a global health crisis, putting lives before profits have triggered a series of simultaneous and mutually reinforcing supply, demand, and financial shocks, the report noted.