In its Asian Development Outlook (ADO) 2020 Update, ADB forecasts a strong recovery for the economy in FY2021, with GDP to grow by 8.0% as mobility and business activities resume more widely.
“India imposed strict lockdown measures to contain the spread of the pandemic and this has had a severe impact on economic activity,” said ADB Chief Economist Yasuyuki Sawada. “It is crucial that containment measures, such as robust testing, tracking, and ensuring treatment capacities, are implemented consistently and effectively to stop the spread of COVID-19 and provide a sustainable platform for the economy’s recovery for the next fiscal year and beyond.”
The growth outlook remains highly vulnerable to either a prolonged outbreak or a resurgence of cases, with the country now having one of the highest number of COVID-19 cases globally. Other downside risks include increasing public and private debt levels that could affect technology and infrastructure investment, as well as rising nonperforming loans caused by the pandemic that could further weaken the financial sector and its ability to support economic growth.
Government initiatives to address the pandemic, including the rural employment guarantee program and other social protection measures, will aid rural incomes protecting the vulnerable people, but private consumption may continue to suffer. Investment is also expected to contract as investors remain deterred by heightened risks and uncertainties. The fiscal deficit is expected to rise significantly in FY2020 as government revenues fall and expenditures rise.
The government also initiated reforms in response to the COVID-19 pandemic focusing on enhancing agriculture markets, upgrading industrial park infrastructure, and implementing the National Infrastructure Pipeline. These efforts will promote foreign investment, incentivize global supply chains to reallocate to India, and create manufacturing hubs across the country. Financial support to low-income groups and small businesses can also help revive the economy in a more inclusive way.
Inflation is expected to fall in the remainder of FY2020 to 4.5% with tamed food prices and decreased economic activity, and then further decline to 4.0% in FY2021. India’s current account deficit is forecast to shrink to 0.3% of GDP this fiscal year, then widen to 0.6% of GDP in FY2021 with exports expected to recover as global growth rebounds./.