India’s economy will shrink 3.2 per cent in the current fiscal, the World Bank said on Monday as it joined a chorus of international agencies that are forecasting a contraction in the growth rate because of the the coronavirus-induced lockdown halting economic activity.

The Washington-based multilateral lender said that the Covid-19 pandemic and the multi-phased lockdown imposed to curb its spread has resulted in a devastating blow to the Indian economy.

The global economy will shrink 5.2 per cent this year, the World Bank said.

The Covid-19 recession is the first since 1870 to be triggered solely by a pandemic, World Bank president David Malpass said in his foreword to the latest edition of the Global Economic Prospect report.

In April, the World Bank projected the economy to grow in the range of 1.5 per cent to 2.8 per cent in this fiscal. The economy is expected to bounce back in 2021, the World Bank said.

“In India, growth is estimated to have slowed to 4.2 per cent in the fiscal year 2019-20 (the year ending in March-2020) and output is projected to contract 3.2 per cent in fiscal year 2020-21, when the impact of Covid-19 will largely materialise.

“Stringent measures to restrict the spread of the virus, which heavily curtail short-term activity, will contribute to the contraction,” it said in the report.

International rating agencies such as Moody’s Investors Service, Fitch Rating and S&P Global Ratings have all predicted a 4-5 per cent contraction in India’s economic growth rate during April 2020 to March 2021 fiscal.

Crisil has said this would be the country’s fourth recession since Independence, the first since liberalisation, and perhaps the worst to date.

The World Bank said spillovers from the weaker global growth and balance sheet stress in the financial sector will also weigh on activity, despite some support from the fiscal stimulus and continued monetary policy easing.

According to the report, the central bank has been purchasing government bonds to further ease the financial conditions.

The Indian government has also increased its spending on healthcare to bolster the Covid-19 response, wage support, in-kind and cash transfers to lower-income households, deferral of tax payments, as well as loan and liquidity support for small businesses and financial institutions.

The growth rate of the Indian economy in fiscal 2017 was seven per cent, which dropped to 6.1 per cent in fiscal 2018 and to 4.2 per cent in fiscal 2020, it said. The real impact of Covid-19 and lockdown would be felt in the current fiscal (2020-21) beginning April, the bank said as it forecast a negative growth rate of 3.2 per cent.

Spillover effect

The contraction in the Indian economy will have a spillover impact in South Asia.

Growth in the region is projected to register a contraction of -2.7 per cent in 2020 and is marked by high uncertainty, the report said.

Across the region, the pandemic mitigation measures will severely hinder consumption and services activity, while high uncertainty about the pandemic will constrain private investment.

The sheer depth of global contractionary activity in the current environment will also weigh substantially on South Asian regional activity, despite relatively more modest trade linkages with the advanced economies than other EMDE (Emerging Market and Developing Economies) regions.