Since the 2000s, India has made remarkable progress in reducing absolute poverty. Poverty levels are estimated to have declined from 21.6 percent in 2011 to 13.4 percent in 2015 (at the international poverty line), lifting more than 90 million people out of extreme poverty. In recent years it has undertaken important reforms to spur economic growth – introducing the bankruptcy code, implementation of the GST to integrate the national market and undertook a series of reforms to ease the conduct of business.
Growth was, however, already slowing when the Covid-19 pandemic struck. This was mostly due to a combination of domestic issues – including impaired balance sheets in the banking and corporate sectors and weak growth in rural incomes – as well as the slowdown in global trade.
After March 25, when a national lockdown, forced by the onset of Covid – 19, was implemented and several states imposed additional curfew measures, economic activity – particularly industry and services – slowed sharply. Real GDP contracted by an unprecedented 23.9 percent (year-on-year) in Q1 FY21.
The response of the Government of India to the COVID-19 outbreak has been swift and comprehensive. The government implemented a national lockdown to contain the health emergency. This was followed by a comprehensive policy package to mitigate the impact on the poorest through various social protection measures as well as liquidity and financial support for small and medium enterprises.
The impact of pandemic, however, as in most large countries continues to be severe. The informal sector, where the vast majority of India’s labor force is employed, has been particularly affected. Half of India’s population already live precariously close to the poverty line and any income and job losses will increase their risk of slipping back into poverty. The pandemic has also exacerbated the vulnerabilities for traditionally excluded groups, such as youth and women.
Recognizing these challenges, India is reworking its social protection architecture to protect its workers, particularly informal sector workers, hit hard by the COVID-19 pandemic. Until now, 70 percent of its vast social protection programs focused on the rural poor. Internal migrants who crossed state borders to work were not covered. The country is now pivoting from a social protection program with a primarily rural focus into an integrated pan-India system that encompasses the informal sector and the urban poor.
The Indian Government has also announced range of other initiatives including – MSME incentives, infrastructure sector boost, Agriculture infrastructure, micro food enterprises, increased public employment outlay, special liquidity window, etc.
To build back better, it will be essential for India to continue to keep a strong focus on reducing inequality, as it seeks to implement growth oriented reforms to get the economy back on track. The World Bank is partnering with the government in this effort by helping strengthen policies, institutions, and investments to create a better future for the country and its people.
Economic Outlook
Before the pandemic, the economy was already decelerating. Real GDP growth had moderated from an average of 7.4 percent in FY16/19 to 4.2 percent in FY19/20 due to long-standing structural rigidities in key input markets; continuing balance sheet stress in the banking and corporate sector, compounded more recently by stress in the non-banking segment of the financial sector; increased risk aversion among banks and corporates; a decline in rural demand; and a subdued global economy. Although the government initiated several policy actions to arrest the slowdown, the pandemic accentuated the down turn and real GDP contracted by an unprecedented 23.9 percent (year-on-year) in Q1 FY21.
In the fiscal year starting in April 2020, India’s economy is expected to contract by 9.6 percent, and recover only very gradually thereafter, with risks tilted on the downside. Weak activity, domestically and abroad, is also likely to depress both Indian imports and exports.
The significant fiscal and other policy responses announced by both the federal and state governments are expected to provide some relief, mostly to avoid an even deeper contraction. But, a potential source of risk to this effort stems from preexisting financial sector weaknesses and high levels of NPLs, which have been amplified by the crisis.
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