The revision comes on the back of S&P Ratings and Nomura changing their forecasts to a sharper contraction of 9% for India’s economy in the current financial year as against their earlier expectations.
ADB, however, forecasts a strong recovery for India’s economy in FY2021-22 in its Asian Development Outlook (ADO) 2020 Update, with gross domestic product (GDP) to grow by 8% 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,” he said.
India’s 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. India had recorded over 4.9 million cases as of September 13, just behind the US which has over 6.5 million cases.
Rising non-performing loans caused by the pandemic that could further weaken the financial sector and its ability to support economic growth, while increasing public and private debt levels could affect technology and infrastructure investment, ADB cautioned.
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
ADB flagged other downside risks including contraction of investment as investors remain deterred by heightened risks and uncertainties, while private consumption may continue to suffer.
“The fiscal deficit is expected to rise significantly in FY2020 as government revenues fall and expenditures rise,” it added.
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, ADB said adding that the financial support to low-income groups and small businesses can also help revive the economy in a more inclusive way.
The upside is likely to be inflation which is expected to fall in the remainder of FY2020-21 to 4.5% with tamed food prices and decreased economic activity, and then further decline to 4.0% in FY2021-22.
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.