In light of the worsening Covid situation after the second wave and supply disruptions, the International Monetary Fund (IMF) has kept its projection for India’s economic growth in the current fiscal year at 9.5 percent. This prediction for 2021-22 is lower than the IMF’s April forecast of 12.5 percent GDP growth before the second wave hit. It has also moderately scaled down its forecast for the world economy in 2021 by 10 basis points to 5.9 percent. It has kept its predictions for India’s gross domestic product (GDP) for the next fiscal year at 8.5 percent in its World Economic Outlook (WEO), unchanged from July expectations, which is greater than the 6.9% which it had predicted in April of this year.
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While the World Bank forecasts 8.3% GDP growth from April 2021 to March 2022, the Asian Development Bank (ADB) reduced India’s economic growth prediction this week from 11% to 10% in April. Moody’s has predicted a growth of 9.3% in the current fiscal year. In spite of being down from $2.87 trillion in 2019-20 to $2.66 trillion the following year, the GDP is expected to reach $4 trillion in 2024-25.
If the forecasts about Indian economic growth are true, India’s GDP will grow at the highest rate amongst big economies in this as well as the next financial year. China would come in second at 8.5 percent in 2021, but it is expected that in the next financial year, China’s growth is expected to decrease to 5.8%.
The global economic recovery though is expected to continue, with a widening gap between advanced nations and many emerging markets and developing economies, with the growth of 6% in 2021 and 4.9 percent in 2022.
These predictions are in the wake of the Covid-19 pandemic and lockdowns which brought the world’s as well as India’s economies to a standstill. In the financial year 2020-21, the Indian economy fell into a recession, showing negative growth rates for two consecutive quarters, -24.4% for Q1, -7.4% for Q2 and 0.5% for Q3, which led to an overall GDP growth rate of -7.3%. On the other hand, the overall economy of the world contracted by 4.9%.
The Covid-Era Economy
Before the pandemic, between 2013 and 2018 India was the fastest-growing major economy in the world and had even surpassed China with an average growth rate of above 7%. But since 2016 India’s growth has been slowing down rapidly. In the fourth quarter of the financial year 2019-2020, before the Covid-19 pandemic and lockdown hit the country, the economy grew at a paltry rate of 3.1%. This low rate of economic growth has been due to various miscalculated policy decisions and a lack of necessary reforms in the right areas.
Due to demonetization, large amounts of wealth in the informal sector was lost due to the cash crunch in the market causing many to lose business or to shut down shops entirely, this lack of freely available liquidity in a market which, back in the day almost entirely relied on cash transactions (no Paytm, Google Pay back then), caused severe disruption in the informal sector something which was not fully encapsulated by the statistics provided by the government.
The Economics of GST
Another problem was the implementation of the Goods and Services Tax (GST). The process of filing tax returns has been unnecessarily overcomplicated. The changes in regulations and processes are difficult for the average Indian to understand and is forced to rely on CAs to get the taxes done. On top of that rules are changed every few years showcasing a lack of regulatory consistency which discourages foreign investments. The four tax slab system has been disastrous for the common businessman. It is almost impossible to effectively define the contours of which product can be classified into which slab leaving room for ambiguity. This ambiguity is exploited by GST officials with overarching powers to raid and file cases on individuals, most of which are frivolous and are intended to harass businessmen and extract bribes.
Due to these reasons, the disposable income of the people has fallen significantly which has led to a demand shortage in the market and lack of economic activity. Even before the pandemic many companies across the sectors, from automobiles to FMCG products, have reported a fall in their sales. The government has been unable to solve the demand crisis and in many cases has underplayed the severity of the crisis.
Good News for India’s Economy?
With respect to the World Bank report, it can be said that a generally high growth rate can be expected for this year as the economy bounces back from the deep recession in the form of a V-shaped recovery. This high growth rate is necessary to restore the economy back to its pre-Covid levels. In spite of the deep contraction in the economy the projected rate of growth has not been as high as it was expected due to the second wave which is believed to have taken the lives of hundreds of thousands of people.
The World Bank for all the credibility it possesses has been quite inconsistent with its GDP predictions for India, for example in the year 2018-19 it predicted a growth rate of 7.3% while the actual growth rate was around 6.5%. Similarly, for the year 2019-20, its prediction was 7.5% while the actual growth fell to 4%. As such at this point in time predictions cannot guarantee anything. Most of these predictions made by organizations like IMF, ADB, Moody’s etc., go off of each other’s or the predictions of the central bank and as such need to be taken by a rather large pinch of salt. That which is certain for now is that after the post-Covid economic recovery, India’s prospects of economic growth with help of necessary reforms in the right sectors in the future is bright.