Context: The International Monetary Fund updated its World Economic Outlook, sharpening India’s economic contraction to 4.5% in FY21.
More on the news:
The IMF held that the ‘Great Lockdown’ to combat the covid-19 outbreak will throw the world economy into the worst recession since the Great Depression in the 1930s.
- An economic slowdown occurs when the rate of economic growth slows in an economy.
- The rate of economic growth or decline is calculated by determining the percentage change in GDP from one period to another.
- Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
- A depression is commonly defined as an extreme recession that lasts three or more years or which leads to a decline in real gross domestic product (GDP) of at least 10% in a given year.
- Over 75 percent of countries are now reopening at the same time as the pandemic is intensifying in many emerging markets and developing economies.
- However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven.
- The coronavirus pandemic came at a time when India’s economy was already slowing, due to persistent financial sector weaknesses.
- The severe disruption of economic activities caused by covid-19, both through demand and supply shocks, has led to massive job losses.
Findings of the World Economic Outlook
- Most severe economic contraction since the Great Depression:
- The IMF projected the global economy to contract sharply by 3% in 2020, much worse than during the 2008-09 financial crisis.
- The report noted that nearly $12 trillion worth of economic activity being lost in FY21 and FY22 and that global public debt as a share of GDP will exceed the post-World War II highs across advanced, emerging, and developing economies.
- Travel and mobility remain depressed, and the virus has dealt a blow to consumption and business investment.
- It is due to an expectation of more persistent social distancing into the second half of this year, and damage to supply potential.
- The labor market has been severely hit and particularly so for lower-income and semi-skilled workers who do not have the option of teleworking.
- Weaker global recovery: Even as it projected a strong recovery for the global economy at 5.8% in 2021, IMF said the recovery could be weaker than expected after the spread of the virus has slowed, for a host of other reasons. These include
- lingering uncertainty about contagion,
- confidence failing to improve, and
- establishment closures and structural shifts in firm and household behaviour, leading to more lasting supply chain disruptions and
- weakness in aggregate demand.
- Extreme uncertainty: Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices.
- Better news on vaccines and treatments, and additional policy support can lead to a quicker resumption of economic activity.
- Further waves of infections can reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress.
- Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.
- Exceptional policy support has helped: Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.
- In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.
India specific findings
- The April World Economic Outlook projected India’s economic growth to be at 1.9% for FY21.
- However,this was revised downwards to -4.5% in its latest update.
- This downgrade has come as the IMF projects a deeper economic recession across the world, and anticipates a slower economic growth in the next fiscal.
- “The disruption in production, breakdown of supply chains/trade channels and total washout of activities will not allow economic activity to return to normalcy in FY21," the report noted.
- However, the report projects India’s growth for the next year to be a robust 6%, anticipating a swift bounce-back.
Signs of normalization in India
- There are signs of normalization as electricity generation is gradually reaching pre-lockdown levels, and e-way bill generation and toll collections have begun to improve.
- Similarly, petroleum consumption increased, while PMI for services and manufacturing showed a lower contraction in May to reach 30.8% and 12.6%, respectively.
- Gradual unlocking of the economy has resulted in an improvement in economic activity indicating swifter normalization.
What does this mean for the economy?
- The WEO forecast paints a bleak picture of India’s economic prospects over the current year.
- However, the reason for current economic contraction is that 65% of India’s economy was shut for nearly a quarter.
- With economic activity gradually normalizing, the second half of the fiscal might be better.
- A priority is to manage health risks even as countries reopen. This requires continuing to build health capacity, widespread testing, tracing, isolation, and practicing safe distancing (and wearing masks).
- People directly impacted should receive income support through unemployment insurance, wage subsidies, and cash transfers, and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.
- Sector specific measures: IMF said because the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses.
- Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals.
- Policy support will need to gradually shift toward encouraging people to return to work, and to facilitating a reallocation of workers to sectors with growing demand and away from shrinking sectors.
- The international community must ensure that developing economies -
- Can finance critical spending through provision of concessional financing, debt relief and grants.
- Have access to international liquidity, via ensuring financial market stability, central bank swap lines, and deployment of a global financial safety net.
- Medium-term consolidation can be done through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.
At the same time, this crisis also presents an opportunity to accelerate the shift to a more productive, sustainable, and equitable growth through investment in new green and digital technologies and wider social safety nets.
The International Monetary Fund (IMF) is an organization of 189 member countries, each of which has representation on the IMF's executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.
- Foster global monetary cooperation
- Secure financial stability
- Facilitate international trade
- Promote high employment and sustainable economic growth
- Reduce poverty around the world
- As part of its World Economic and Financial Surveys, the IMF publishes flagship reports on multilateral surveillance twice a year:
- World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Fiscal Monitor (FM).
World Economic Outlook,2020
- The World Economic Outlook is an International Monetary Fund (IMF) report published on a regular basis.
- Its key focus is to provide an assessment of the global economy as it analyses developments across its member countries.
- The report majorly focuses on providing growth forecasts for different economies and regions of the world while highlighting the risks and uncertainty around these estimates.
- The 2020 World Economic Outlook is important as there has been significant economic disruption across the world due to the COVID-19 pandemic.