Why India is poised to grow at world's fastest rate despite pandemic

SNAP ANALYSIS
Why India is poised to grow at world's fastest rate despite pandemic
Provided the pandemic can be contained quickly, GDP growth could still be around 10% in FY 2021-22 and 8.25% in FY 2022-23.Courtesy: ANI

OECD pegs India's GDP growth forecast at 9.9% - far ahead of the global average of 5.8% for yet another virus-hit fiscal.

The Organisation for Economic Cooperation and Development’s (OECD) projections for the Indian economy to grow at 9.9 per cent this year despite a devastating second wave of the coronavirus across the country is yet another vote of confidence in India’s strong economic fundamentals.

"In India, the rapid rebound in activity since mid-2020 has paused with resurgence of the Covid-19 pandemic and renewed localised containment measures raising uncertainty and hitting mobility," OECD said in its latest Economic Outlook. Higher commodity prices have also pushed up inflation, reducing household real incomes. Monetary policy remains accommodative with plans for gradual normalisation being put on hold, but scope for additional fiscal support is limited. "Provided the pandemic can be contained quickly, GDP growth could still be around 10 per cent in FY 2021-22 and 8.25 per cent in FY 2022-23 with pent-up consumer demand, easy financial conditions and strong external market growth helping the recovery to gain momentum."

The OECD now sees global GDP growth at 5.8 per cent this year (compared with 4.2 per cent projected in December), helped by a government stimulus-led upturn in the United States, and at 4.4 per cent in 2022 (3.7 per cent in December).

Economy on track for recovery

The projections by OECD came as Bloomberg separately assessed that the Indian economy is on track to grow 10% in the year that began April 1, according to the median of 12 estimates compiled by it. That's after several economists downgraded their forecasts in recent weeks to factor in local curbs on activity, including in India's political and commercial hubs.

“The Indian economy's resilience will be tested by its ability to overcome a devastating outbreak of Covid-19, although no one's yet doubting its potential to pull off the world's fastest pace of growth among major economies this year,” Bloomberg economists said in their assessment.

The same sentiments were expressed by India’s Chief Economic Adviser (CEA) K.V. Subramanian – who said that the overall impact of the second wave of Covid-19 is unlikely to be significant, although there is uncertainty over possible double-digit growth in the current financial year. His comments came at the release of the latest growth figures, where India reported a 7.3 per cent contraction in its GDP for FY21.

Subramanian said providing any actual numbers for economic forecasts would not be prudent as the pandemic is evolving and the economic trajectory of the country totally depends on the severity of the pandemic. "Whether or not that will be double digit or single digit there is uncertainty because scientists are also talking of a possibility of a third wave. Economic activity is inexplicably linked to the path of the pandemic," Subramanian said.

He noted that "the speed and the scale of the second wave does lend caution" towards the economic recovery.

The CEA was of the view that with the country still battling with the pandemic, continued monetary and fiscal policy support will be crucial going ahead. India's GDP growth rate plunged 7.3 per cent in 2020-21. Though not comparable, the GDP had grown by 4 per cent in 2019-20.

A car manufacturing unit in India. Economists say the relaxation of restrictions across India’s states will determine the strength of the rebound, while the willingness of consumers to spend will also be key.
A car manufacturing unit in India. Economists say the relaxation of restrictions across India’s states will determine the strength of the rebound, while the willingness of consumers to spend will also be key.Courtesy: Getty Images

Brighter prospects

The pandemic-triggered national lockdown (from late March 2020) during Q1FY21 had a massive impact on the economy, which suffered a GDP contraction of 24.4 per cent. It was only on June 1, 2020, that the partial unlock measures were implemented.

On the other hand, in terms of sequential basis, India's economy grew during the fourth quarter, which ended on 31 March, 2021, by 1.6 per cent.
Economists say the relaxation of restrictions across India’s states will determine the strength of the rebound, while the willingness of consumers to spend – as they did last year when lockdown curbs were lifted – will also be key.

The biggest hit from the second wave of Covid infections has been to demand, with a loss of mobility, discretionary spending and employment, the Reserve Bank of India said earlier this month.

The central bank, which will review interest rates later this week, has kept monetary policy loose and injected liquidity into the system to support growth.

Globally, the prospects for the world economy have brightened but the recovery is likely to remain uneven and dependent on the effectiveness of public health measures and policy support, OECD said.

India’s defence minister Rajnath Singh at the manufacturing facility of Bharat Earth Movers Limited. The biggest hit from the second wave of Covid infections has been to demand, with a loss of mobility, discretionary spending and employment.
India’s defence minister Rajnath Singh at the manufacturing facility of Bharat Earth Movers Limited. The biggest hit from the second wave of Covid infections has been to demand, with a loss of mobility, discretionary spending and employment.Courtesy: ANI

In many advanced economies more and more people are being vaccinated, government stimulus is helping to boost demand and businesses are adapting better to the restrictions to stop the spread of the virus. But elsewhere, including in many emerging-market economies where access to vaccines as well as the scope for government support are limited, the economic recovery will be modest.

The OECD now sees global GDP growth at 5.8 per cent this year (compared with 4.2 per cent projected in December), helped by a government stimulus-led upturn in the United States, and at 4.4 per cent in 2022 (3.7 per cent in December). "The world economy has now returned to pre-pandemic activity levels, but real global income will still be some 3 trillion dollars less by the end of 2022 than it would have been without a crisis," it said.

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