World Economic Outlook: India’s GDP shrinking at sharper 8% in FY21, says IMF

The International Monetary Fund (IMF) has projected the Indian economy to contract at eight per cent in the current fiscal year, higher than 7.7 per cent projected by the official advance estimates. It also projected the growth to rise to 11.5 per cent in the next fiscal year before slowing down to 6.8 per cent, making Indian economy the fastest growing large economy in the world in both the years.

In the World Economic Outlook released on Tuesday, IMF said the second quarter GDP numbers for India surprised it as India’s economy declined by 7.5 per cent in the quarter, while most experts had expected it to be in the double digits. The Fund was also surprised on the upside by the growth numbers for Australia, Euro Area, Japan, South Korea, New Zealand, Turkey and the United States for the same quarter.


Earlier, the IMF expected Indian economy to decline by 10.3 per cent in FY21. The IMF had also projected the economy to grow by 8.8 per cent in FY22, but now it has revised it up by 2.7 percentage points.

Union Budget for the next financial year will be out on 1 February. The Budget assumes economic growth at current prices, which has an inflation component in it. If it also projects the economy to grow by 11.5 per cent and assumes an inflation rate (called deflator in the GDP methodology) of 3.5 per cent, as projected by advance estimates for 2020-21, the GDP growth would be 15 per cent for the next financial year. Then all the important calculations such as tax collections, fiscal deficit, revenue deficit would be calculated based on this number. A 15 per cent growth would mean robust tax collections, though fiscal deficit remains high as the government might go for high capex to revive the economy. Health outlay may also add to the expenditure side.

IMF projected sharper contraction in the economy for Spain, UK, Italy and France than India.

The IMF projected the global growth contraction for 2020 at 3.5 per cent, 0.9 percentage point less than projected in the previous forecast, reflecting stronger-than-expected momentum in the second half of 2020.

IMF said amid exceptional uncertainty, the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022 but renewed waves and new variants of the virus pose concerns for the outlook. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

“The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors,” it said.

Favorable news on vaccine manufacture, distribution, and effectiveness of therapies could increase expectations of a faster end to the pandemic than assumed in the baseline, boosting confidence among firms and households. On the other hand, growth could turn out weaker than projected now if the virus surge (including from new variants) proves difficult to contain, infections and deaths mount rapidly before vaccines are widely available, and voluntary distancing or lockdowns prove stronger than anticipated.