India’s GDP is expected to grow at 5.4% in the following financial year, owing to faster rebound of several large emerging-market economies, the global body said in its interim economic outlook Tuesday.
For FY21, India’s GDP is expected to contract at 7.4%, instead of the December 2020 projection of contraction of 9.9%, on the back of strong fiscal measures and recovery in manufacturing and construction.
“Activity moved above pre-pandemic levels in China, India and Turkey, helped by strong fiscal and quasi-fiscal measures and a recovery in manufacturing and construction,” the report said Tuesday.
Significant fiscal and monetary support continues to underpin activity while additional discretionary fiscal measures during the past three months will add to the overall support this year, it added.
The economic impact of the pandemic and its aftermath remains well contained in many Asia-Pacific economies, reflecting effective public health measures, and the significant regional boost provided by the upturn in industrial activity and the rebound in China.
“Additional fiscal support will also help the recovery in Japan and India,” the report added.
The report also highlighted downside risks that may affect recovery, the most prominent being the speed of vaccine production and deployment not being fast enough to stop transmission of the virus, especially if emergence of new mutations is much wider that require new or modified vaccines.
A slower-than-expected vaccine rollout was an immediate concern that could dampen spending in emerging and developing economies.
“The advanced economies, as well as vaccine suppliers such as China, India and Russia, also face potential risks from the spread of new mutations and the re-imposition of containment measures from the latter half of 2021, but face less near-term uncertainty about vaccine production and deployment, which is likely to be completed during 2021,” the report added.
If the downside risks prevail, global GDP growth could be lowered by close to 1 percentage point in 2021 and 1.25 percentage point in 2022 respectively, taking it to 4.5% and 2.75%, respectively. It cautioned that output would remain below the pre-crisis path for an extended period, raising the chances of long-lasting costs from the pandemic.
Worries of inflation have also begun to surface as headline inflation remains high in some emerging-market economies, in part due to jumps in commodity prices and past currency depreciation.
“Higher commodity prices will also raise inflation in net commodity importers, such as India and Turkey, relative to commodity exporters,” it said, flagging rising prices of food, metals and oil – having rebounded to 2019 levels – besides high input costs from due to supply shortages of semi-conductors and shipping.
OECD projected global GDP growth at 5.5% in 2021 and 4% in 2022, with global output rising above the pre-pandemic level by mid-2021.
OECD said premature tightening of fiscal policy must be avoided, while fiscal policy support should be contingent on the state of the economy and the pace of vaccinations.
The current very accommodative monetary policy stance should be maintained, and allow temporary overshooting of headline inflation provided underlying price pressures remain well contained, with macro-prudential policies deployed where necessary to ensure financial stability.
It backed continuation of income support for households and companies until vaccination allows a significant easing of restraints on face-to-face activities. Income support should be refocused to support people and help companies with grants and equity rather than debt.
Speed of economic recovery will hinge on the progress of vaccine deployment across all countries. Faster progress would enable restrictions to be lifted more quickly and enhance confidence and spending but slow progress and the emergence of new virus mutations resistant to existing vaccines would result in a weaker recovery, larger job losses and more business failures.