India needs to grow faster to make up for contraction during COVID-19 pandemic: IMF

Washington: India, which is projected to grow at an impressive rate of 12.5 per cent this year, needs to grow at a much faster pace to make up for the unprecedented contraction of eight per cent that it clocked during the COVID-19 pandemic in 2020, according to a senior IMF official.

The International Monetary Fund Deputy Chief Economist, Petya Koeva Brooks, in an interview to PTI on Friday also made a strong case for an additional economic stimulus to address the impact of the pandemic on the country’s economy.

“When it comes to India there was a major collapse of output last fiscal year and the number as you mentioned is eight.

“So, we are very glad to see the strong rebound this year with projected growth of 12.5 for fiscal year 21-22 and we are seeing also high frequency indicators including PMI (Purchasing Managers’ Index), and trade and more mobility indicators which give us a sense that there is continued recovery in the first quarter of this year,” she said.

That said, there are some recent emergencies of the new variants in the localised lockdowns that are seen as one of the threats to this recovery, Brooks noted.

“On the recovery itself, when it comes to level in terms of the level of output, we are expecting that level to return to the pre-crisis one from 2019 to this fiscal year. That is what we have in our projections.

Output gap

“However, if you look at a concept of scarring, which just compares what the level of output would have been hadn’t there not been a crisis in 2024, which is the measure which we are using. Then at and compare where our current growth trajectory is for India that gap is much larger,” Brooks said.

The gap, she said, which is eight per cent of GDP is significantly larger than what it is for the world as a whole.

“For the world as a whole it’s about three (per cent), which is another way of saying that even though in the near term we have this real rebound, there’s still scope in the coming years to see higher growth which would reduce and hopefully, eliminate that scarring, which we are currently expecting,” the top IMF official said in response to a question.

“If we were to just think about the level of output that it was prior to being a pandemic then that catch happens this year, which is not surprising also given the very high level of the underlying high level of growth which India has. But again, if we compare it to the path of what it would have been without the pandemic then we are getting too many larger gaps there,” she said.

Noting that the Indian government took several steps to address the COVID-19 crisis, Brooks said, “We have seen policy responses, which have been coordinated and in several areas. We have seen that the fiscal support, the monetary easing as well as the liquidity and regulatory measures that were taken.”

What makes sense is to maintain the focus on having that coordinated policy response because this is what’s going to prevent the long-term damage to the economy. Providing that support to small and medium-sized firms as well as vulnerable houses would be particularly important, she said.

Case for more stimulus

Brooks said the IMF very much welcomes the measures that were announced by India during its budget. It is particularly supportive of maintaining the accommodative fiscal stance and also emphasising expenditures on health and infrastructure.

“We estimate that the positive impact of the measures for this fiscal year is going to be of the order of point six percentage points on growth,” she said, adding that several measures announced in the budget were in line of the IMF’s advice.

Prominent among them are that there would not be a withdrawal of fiscal stimulus at the general government level and also that state governments would be given the temporary flexibility to go over their budget ceilings. And last, but not least, the fact that some of the other budget items on food subsidies were actually brought into the budget. Overall, the IMF is very supportive of this focus on growth.

At the same time, Brooks made a strong case for an additional economic stimulus.

“We do think that additional fiscal stimulus would be helpful. Focusing that stimulus again on the most vulnerable is something that makes sense to us. We note that some of the income support schemes were not extended beyond November 2020 and such,” she said.

Taking measures in that area would be particularly helpful as well as making sure that there’s priority spending on education, the economist noted.

“Last, but not the least, also ensuring that there is a very concrete medium-term fiscal framework is an area where we can see some room for more work in that area,” she said.

“Now when it comes to monetary policy, we think that given the underlying slack in the economy, maintaining the accommodative monetary policy stance makes sense. This is what we understand is being planned at the moment.

“This has been our long-standing recommendation that we see scope for additional policy measures to address the weaknesses in the financial sector, in the banking part in the non-bank part of the financial sector. We think that this is going to be particularly important as we come out of the crisis to have that efficient credit intermediation, which is going to allow the economy to grow,” the IMF official said.

Responding to a question on the stimulus package, Brooks underscored the need to essentially have targeted support for households and for the firms that have been most affected is the most efficient and sensible way to provide that support.