Higher growth expectations should not lead to policy complacency

The economic fallout of the COVID-19 pandemic around the world is likely to be less severe than previously expected. Not only is the extent of contraction in 2020 likely to have been shallower than expected, but as per the International Monetary Fund (IMF), the pace of recovery in 2021 is could surpass earlier expectations, as the rollout of the vaccine is expected to power economic activity. The Fund now believes that the global economy is likely to have contracted by 3.5 per cent in 2020, lower than its earlier expectation of a 4.4 per cent contraction, as “economic activity appears to be adapting to subdued contact-intensive activity with the passage of time”. A shallower contraction, coupled with additional policy measures, suggests that the prospects for 2021 are brighter — the Fund now expects the world economy to grow at 5.5 per cent, up 0.3 percentage points from its earlier forecast.

For India, the IMF now expects the economy to contract by 8 per cent in 2020-21, marginally higher than the 7.7 per cent projected by the National Statistical Office in the first advance estimates. However, considering that the data on economic indicators used by the NSO in arriving at its estimates was only available till October/November, and that economic activity has remained healthy in the months thereafter, there is a possibility of the contraction actually being lower. For 2021-22, the IMF now expects the Indian economy to grow at 11.5 per cent, 2.7 percentage points higher than its previous forecast. While this upswing is in part due to the base effect, several caveats are in order. First, as the official estimates do not tend to accurately capture the informal economy, they may be underestimating the stress in the economy. Second, despite faster growth, the economy is likely to reach pre-COVID levels only by the end of 2021-22. However, the rate the economy is expected to grow at in the next fiscal year assumes significance as it will form the basis of the Union budget’s estimates — the nominal GDP growth rate will have a bearing on the government’s revenue expectations and the space it has for enhanced spending.

Expectations of higher growth should not lead to policy complacency. The recovery has been uneven. And the sharp slowdown prior to the pandemic suggests that medium-term challenges to growth remain. The possibility of another surge in infections, vaccine hesitancy and logistical problems in distribution disrupting economic activity cannot be ruled out. The economy will continue to need careful policy support.

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