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The International Monetary Fund released it’s bi-annual World Economic Outlook report earlier this month. While the report mostly speaks about what the IMF does, this particular edition stands out for one specific reason – COVID-19. The last edition came out in April, at a time when COVID was very much a reality, but the economic effects of which were not yet fully felt.. For this reason, the latest edition has caught the attention of many as it highlights the major losses to global output and the time it will take for us to get back on track.

Grim forecast for India

The analysis done by the IMF primarily looks at major economies . Since India is amongst the largest economies in the world, the report covers our country rather extensively. To put it bluntly, the forecast for India is dire. GDP in 2020 is projected to decelerate at (-) 10.3%. This is the worst projection amongst all the major economies. Only Italy and Spain and expected to perform worse. It might be important to note that no country other than China is expected to grow during this most peculiar of years.

 It is not just that India will be the worst-performing major economy in 2020, but the IMF also predicts that India will be the worst hit over the short (2019-21) and medium-term (2019-25). The Government’s response to the pandemic has, unsurprisingly, been called into question. The IMF’s report praises the stimulus packages introduced in some parts of the world, claiming that these fiscal injections saved economies from certain financial catastrophe.

The problem in India was that the Government relied heavily on the monetary policy of the RBI, viz. lowering the interest rates in order to encourage economic activity & increasing liquidity in the market. Little has been done by way of direct transfers, which as the IMF says is key to tackling the economic fallout from the pandemic.

The Government did announce a relief package to the tune of USD$260 billion, but this is primarily made up of liquidity measures and tax measures. Gita Gopinath, the head of the IMF, alluded to the fact that these sort of measures only begin to scratch the surface. Heavy spending from the Government’s own purse though essential, was largely absent.

One particular graph published in the report compares India’s industrial output with other major economies:

The month of April was clearly the worst month from an economic point of view, as this was when most countries had to enforce a complete lockdown as the virus first started to spread. We can see that China witnessed its biggest slump a little earlier in February since the virus originated there. While manufacturing started to pick up along with an ease in restrictions in the following months, the output levels still didn’t touch the numbers seen in December of 2019.

Why was India the worst hit in this regard? The answer might lie in the fact that India was subject to one of the strictest lockdown measures seen anywhere in the world. Another reason likely has to do with the fact that India’s economic performance in 2019-20 was a mere 4.2%, which was the lowest growth rate seen since 2008 i.e, the global recession. In fact, GDP growth in India has been declining steadily since the latter half of 2016.

While the lockdown was indeed needed, it is not clear if the time gained was used effectively. What happened was that we just delayed the spread of the virus to a later date. So we ended up in a situation where we were in strict lockdown for at least 2 months, after which point the virus started spreading rapidly. When the country started opening up again, businesses opened too, but since the virus was spreading at such an alarming rate, a lot of people were forced to exercise caution in resuming normal activities.

GDP Per Capita Woes

Another major talking point from the IMF’s report has to do with the revelation that Bangladesh’s per capita GDP is currently higher ($1,888) than that of India’s ($1,877). Since India gained its independence, there has only been one other occasion where our eastern neighbours have had a higher GDP per capita than ourselves, and that was in 1990/91, during what was perhaps the worst economic crisis the country has ever witnessed. 

While it is very likely that India’s GDP per capita will surpass that of Bangladesh’s in the next year or so, the fact that it has dropped so low is a poor reflection of the current administrations handling of economic affairs. Having said that, it must be noted that Bangladesh has done well to focus on exports that require low-skilled labour, primarily in the garments industry. The country has grown rapidly since 2004 owing to many positive social changes.

While Bangladesh was focusing on creating jobs for its low-skilled labour, India tended to focus harder on high-skill jobs in the IT industry. There is no doubt that IT contributes significantly to India’s GDP (7.7% in 2017), however, a recent paper co-authored by the former Indian Chief Economic Advisor Arvind Subramanian speaks to the $140 billion in  foregone income in the textile and clothing sector, which would make up around 5% of GDP on its own. 

Mukesh Ambani, speaking at an online book launch recently made the comment that, “India needs bricks as much as clicks”. This was in response to a question regarding the competitiveness of India’s manufacturing. Ambani shares the view put forth in Subramanians paper that the country ought to focus on small and medium scale enterprises in order to be competitive at the global stage. 


There is a need to rethink and redefine manufacturing in India. We need to strengthen our small and medium scale enterprises. There should be a focus on bricks as much as clicks.
Mukesh Ambani
Reliance Industries

The Way Forward

With respect to what lies ahead of us, the IMF has outlined two scenarios and provided forecasts for each. The first is known as the ‘downside’ scenario, wherein the virus proves difficult to contain due to slow progress on vaccines and treatments, and emerging economies rely heavily on automatic stabilzers (monetary policy), rather than direct transfers (fiscal policy). In this scenario, unemployment will continue to rise and productivity will remain low. Emerging Market (EMs) economies like India will be hit twice as hard as the Advanced Economies (AEs).

The alternative is the ‘upside’ scenario. Under these circumstances, treatments improve leading to a reduction in the fatality rate. This restores some confidence in the public, assuaging fears about the virus. Investments in vaccines increase and there is international cooperation leading to greater accessibility for the general public. Under the upside scenario, emerging market economies are expected to benefit more than their advanced counterparts.


In order for economies to make the upside scenario a reality, the IMF’s chief Gita Gopinath stressed on the importance of appropriate policies that have to be enacted to limit the economic damage. These include direct cash transfers, wage subsidies, and unemployment insurance. Vulnerable firms should be granted tax deferrals and equity-like injections. Gopinath also recommends that governments pay attention to re-skilling sections of the labour force, drawing them away from industries like travel which are likely to contract over the next few years. E-commerce, on the other hand, will become even bigger and as such it may bode well for governments to nudge sections of their labour force in that direction.

The report largely paints a worrying picture for the world’s economy in the coming years, doubly so for India. Yet, it also outlines policy measures that can be taken to mitigate the disaster at least to some extent. It is up to the government to loosen the purse strings and offer adequate support to those in need, for without it we could be looking at a recession that persists for the better part of the new decade.

Those interested, can read the full report here. For views, feedback and thoughts, write to pavan@bclindia.in 

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