The IMF’s assessment of Omicron disruption

It was hoped that the Omicron variant of covid may prove no more than a pin-prick for economic activity. The latest gross domestic product (GDP) growth forecasts by the International Monetary Fund (IMF), however, suggest its impact may not be all that feeble after all. In the January release of its World Economic Outlook (WEO) published on Tuesday, the IMF downgraded its growth forecast for the global economy to 4.4% in 2022 from 4.9% projected by its previous update last October. That’s a big downgrade in a matter of a few months. For India too, its GDP estimate has been cut by 50 basis points to 9% from 9.5% three months ago, though this is for the fiscal year 2021-22. The IMF’s latest projection is less than both the government’s advance estimate of 9.2% put out earlier this month and our central bank’s forecast of 9.5%, an earlier calculation that it stuck with in its December policy review. Since Omicron cases flared up only in the past couple of fortnights, it seems likely that our data crunchers would not have adequately assessed this variant’s full impact and might need to notch their numbers down. For 2022-23, however, the IMF’s WEO has raised our expected growth from 8.5% to 9%.

As the Fund sees it, while both the US and China are likely to lose pace over calendar 2022, India may be able to keep going. This could make India the world’s fastest-growing major economy by a wide margin. As China watches its real estate sector slump and its zero-covid policy compress commerce in a dicey battle against Omicron, its growth forecast for 2022 was reduced to 4.8% from 5.6%. America could face not just supply-chain disruptions and rising capital costs as high inflation demands monetary policy action, but also a political cloud over a big fiscal package. The US economy’s 2022 forecast was revised to 4%, down from 5.2% projected in the WEO’s October update. Clearly, Omicron has erupted at a particularly bad time for the world’s two largest national economies. Both look poised to drag global growth down. The Eurozone, which has its own set of covid worries, is also expected to fare worse this calendar year than expected earlier. In such a scenario, if rapid Indian growth holds up, it would be a matter of some satisfaction. Our leaders, however, ought not to make a big deal of it before we have clear signs that a 9% clip will be achieved this fiscal year and sustained in 2022-23, the budget for which is to be unveiled next week.

We must remember that growth in 2021-22 only represents a recovery of the output lost in 2020-21 after the pandemic struck. While our overall resilience has been noteworthy, our revival remains uneven. Moreover, the actual test of economic expansion lies ahead. High-frequency scanners of activity showed a slight dip as a third wave of covid arose. Omicron’s effects are yet to fully play out, as the ongoing wave, while milder than last year’s, is yet to subside. We have had lighter restrictions this time, but the virus has dug in its claws hard enough to disrupt parts of the economy, travel and tourism being a prime example. We cannot shrug-off an adverse shift in global conditions either. An enlarged oil-import bill looks like a distinct possibility, and even more so, a reversal of easy money by the US, which could cause capital outflows and weaken the rupee. Our foreign exchange reserves offer a cushion, but there could still be trade-offs we haven’t had to contend with in recent years. All said, we mustn’t take rapid growth for granted. LiveMint