South Asia as a region is set to plunge into its worst ever recession with a sharper than expected contraction of 7.7%, the World Bank said in its half-yearly South Asia Focus update released on Thursday.
India’s growth is projected to rebound to 5.4% in FY22, mostly reflecting base effects, assuming Covid19 -related restrictions are completely lifted by 2022. As per the bank, weak activity, domestically and abroad, is also likely to depress both Indian imports and exports.
India’s economy shrank an unprecedented 23.9% in the first quarter.
“India’s economy was already slowing before the pandemic. (Though) we are impressed by the government’s response with limited resources and fiscal space…the big problem is that the informal sector has no coverage. There are no systems in place to support those people,” said Hans Timmer, World Bank Chief Economist for the South Asia Region.
The report highlighted that informal workers are not generally covered by social insurance and few have savings or access to finance, and three-quarters of all workers in South Asia depend on informal employment.
“While the poor have faced rising food prices, the Covid-19 crisis has also affected informal workers in the middle of the income distribution who experienced sharp drops in earnings,” the bank said.
“The impact is not only on the poor but also people above the poverty line who have been hit hard,” said Timmer, adding that the self-employed and those in the services sector earlier had ways of absorbing the shocks but are unable to do so now.
Noting that there are serious vulnerabilities in India’s banking sector and solvency of firms, which are not being helped by the pandemic, he said the region will witness muted recovery as a whole and the case is the same for India.