India’s road to economic recovery has more curves; World Bank likely to project steeper GDP contraction

As India steps out of the nationwide lockdown with an expectation of a gradual economic recovery, the World Bank on Wednesday hammered the expectation by saying that it is likely to project a steeper contraction for India’s GDP in the current fiscal. Earlier, the World Bank had estimated a 3.2 per cent contraction in the economy. However, with the increasing number of Covid-19 cases and the resultant regional lockdowns, the optimism has faded to an extent. The World Bank cautioned India against using its tariff policy to attract the firms that want to shift base from China. 

In a report on India Development Update, 2020, the Bank also warned that credit risks play out as firms and households find it more difficult to service their interest and repayment obligations in a slowing economy. While the governmnet is already looking towards disinvestment and allowing private players in strategic sectors, the World Bank suggested full privatisation of some public sector banks and private capital injections in some other sectors after the market conditions improve.

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Further, the World Bank has suggested India to accelerate reforms in key areas such as health, labour, land, skills, and finance so that the country can come out stronger from the impact of the Covid-19 pandemic. The green shoots of economic recovery started to surface as India stepped out of the lockdown in June, however, in the month of July, many indicators reflected contraction as cases started to rise.  

Meanwhile, given the uncertainty mounting over the economy, there is a wide gap between the forecast of various rating agencies. While former chief statistician Pronab Sen has put it at 12.5 per cent, ICRA expected it to be 9.5 per cent, and India Ratings had projected a contraction of 5.3 per cent this fiscal.