Bengaluru, Oct 17 (Agency) The economic outlook remains clouded due to pandemic-related uncertainties contributing to both downside and upside risks, according to the International Monetary Fund. A persistent negative impact of COVID-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth, it said. While India benefits from favorable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital, IMF said. At the same time, the recovery could also be faster than expected because faster vaccination and better therapeutics could help contain the spread and limit the impact of Covid pandemic, it said.
In addition, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential, IMF said. India was among the fastest-growing economies in the world in the decade before the pandemic, lifting millions out of poverty, it said. “While the economy was moderating prior to the COVID-19 shock, the pandemic implied unprecedented challenges. Two COVID-19 waves caused a health and economic crisis, however, the economy is gradually recovering,” IMF said. Following the first wave, GDP contracted an unprecedented 7.3 percent in FY 2020/21 and the second wave resulted in another sharp fall in activity, albeit smaller and shorter, and recent high frequency indicators suggest an ongoing recovery.
Inflation pressures have been elevated, yet inflation eased to 5.6 percent in July, returning to within the RBI’s inflation target of 4±2 percent, driven by softer food prices and base effects, IMF said.
India’s growth is projected at 9.5 percent in FY 2021/22 and 8.5 percent in FY 2022/23. Headline inflation is projected at 5.6 percent in FY 2021/22, amid elevated price pressures. The contraction in economic activity, lower revenue, and pandemic-related support measures are estimated to have led to a widening of the fiscal deficit to 8.6 and 12.8 percent of GDP in FY 2020/21 for the central and general governments, respectively, IMF said. Fiscal policy continues to support the economy in FY 2021/22, it said. Despite policy support, bank credit growth has remained subdued, while large corporates have benefited from easier conditions in capital markets, IMF said. Net inflows and improvement in the current account have supported an increase in foreign exchange reserves. The current account balance is projected to return to a deficit of about 1 percent of GDP in FY 2021/22, due to a gradual recovery in domestic demand and higher oil prices, IMF said.