According to the recently released South Asia Economic Focus report by the World Bank, it is anticipated that India’s Gross Domestic Product (GDP) will contract by 9.6% in 2020-21, a significant dip from the previous forecast of a 3.2% contraction made in June 2020.
Fallout of the Indian Economy in 2020-21
This economic contraction is primarily due to the national lockdown implemented to curb the spread of Covid-19. The lockdown has led to an income shock for households and small urban service companies. Consequently, there will be a depression in the manufacturing and exporting industries.
The construction sector, heavily dependent on migrant workers, faces a bleak future due to limited public sector infrastructural projects and reduced availability of the workforce. A significant disruption to jobs is expected to roll back poverty rates to 2016 levels.
Pandemic-Induced Poverty and Financial Risk
As stated in the biennial Poverty and Shared Prosperity Report by the World Bank, the Covid-19 pandemic could plunge roughly 27-40 million people into poverty in Sub-Saharan Africa and between 49-57 million in the South Asian region. This shift will cause more than 1.4% of the global population to fall into extreme poverty.
The pandemic-induced slowdown in demand may increase the risk of loan non-payments, triggering a chain reaction that could impact financial markets severely.
South Asian Economic Scenario
The entire South Asia region might face one of its worst recessions ever with the regional GDP estimated to contract by 7.7% in 2020. Unlike previous recessions caused by falling investments and exports, the current recession stems from a decline in private consumption, traditionally considered the backbone of demand in South Asia.
Effect on South Asian Countries
Countries such as the Maldives and Sri Lanka are set to experience an economic contraction, while countries like Pakistan, Bangladesh, and Bhutan will witness slow growth in 2020-21. Small businesses and informal workers are the hardest hit by the economic collapse during Covid-19, suffering from sudden job losses and vanishing wages.
Predicted Economic Recovery in 2021-22
The World Bank estimates that India’s growth will bounce back to 5.4% in 2021-22. This recovery is based on the presumption that Covid-related restrictions will be completely lifted by 2022. South Asia’s growth is projected to rebound to 4.5% in 2021, however due to population growth, per-capita income will remain 6% below 2019 estimates.
Impact of Covid-19 on Core Industrial Sectors in India
India’s eight core industrial sectors contracted by 8.5% in August 2020 when compared to August 2019, marking six consecutive months of shrinking output. National Statistical Office (NSO) data reveals that India’s GDP growth contracted by 23.9% in the first quarter (April-June) of 2020 when compared to the same period in 2019.
Recommendations for Economic Recovery
The World Bank advises governments to institute universal social protection policies that promote productivity, skills development, and human capital. Amid the harsh economic effects of the pandemic, South Asian governments have tried to stabilize their economies through measures like monetary easing, fiscal stimulus, and supportive financial regulations. However, the current situation is fragile and requires governments to address the deep-seated vulnerabilities of informal sectors through effective policies and prudent resource allocation.