IMF Cuts India GDP Growth to 1.9%, Projects Sharp Contraction in Global Economy

Asia only region to see positive growth in 2020; globally, worst recession since Great Depression

Amid projection of sharp contraction in the global economy, the International Monetary Fund (IMF) on Tuesday cut India’s GDP (Gross Domestic Products) growth rate to 1.9 per cent in fiscal year 2020-21 starting April 1. However, it expects economy to bounce back strongly in fiscal 2021-22.

In its latest version of World Economic Outlook (WEO), Gita Gopinath, Economic Counsellor at IMF, termed Covid-19 crisis like no other. First, the shock is large. The output loss associated with this health emergency and the related containment measures are likely to dwarf the losses triggered by the global financial crisis. Second, like in a war or a political crisis, there is continued uncertainty about the duration and intensity of the shock. Third, under the current circumstances, there is a different role for economic policy. In normal crises, policymakers try to encourage economic activity by stimulating aggregate demand as quickly as possible.

“This time, the crisis is to a large extent the consequence of needed containment measures. This makes stimulating activity more challenging and, at least for the most-affected sectors, undesirable,” she wrote in the foreword to the report which has been released with just one chapter titled ‘The Great Lockdown’. The full report will be released next month.

For India, the report has projected GDP growth rate at 1.9 per cent for 2020-21, which is 3.9 per cent lower than the January outlook and 5.1 per cent lower than the projection made in October. However, GDP growth rate is estimated to jump to 7.4 per cent during 2021-22. This is almost one percentage point higher than the January estimate and unchanged from last October’s projection.

Talking about India and its counterparts in this continent, the report said emerging Asia is projected to be the only region with a positive growth rate in 2020 (1 per cent), albeit more than 5 percentage points below its average in the previous decade. In China, indicators such as industrial production, retail sales, and fixed asset investment suggest that the contraction in economic activity in the first quarter could be around 8 per cent year over year. Even with a sharp rebound in the remainder of the year and sizeable fiscal support, the economy is projected to grow at a subdued 1.2 per cent this year. “Several economies in the region are forecast to grow at modest rates, including India,” it said.

Commenting on the optimism during next fiscal globally, the report said in a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 per cent in 2021 as economic activity normalises, helped by policy support.

Great Lockdown

According to Gopinath, it is likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago. The Great Lockdown, as one might call it, is projected to shrink global growth dramatically. A partial recovery is projected for 2021, with above-trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound.

Much worse growth outcomes are possible and even likely. “This would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment,” she said.