IMF cuts India’s growth rate to 6.6% due to note ban

Source: The Economic Times, Jan 17, 2017

NEW DELHI: The International Monetary Fund (IMF) has cut India’s growth forecast for the current fiscal by one percentage point, citing demonetisation woes. It sees India ceding the tag of the world’s fastest growing major economy to China in FY17.

In an update of its flagship publication the World Economic Outlook, the IMF said India is likely to grow by 6.6 per cent only in FY17, down from 7.6 per cent estimated earlier and marginally behind China that is pegged to grow at 6.7 per cent in 2016. “In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative,” the IMF said in its report.

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India on November 8, 2016 cancelled the legal tender of Rs 500 and Rs 1,000 notes, invalidating in one stroke over 86 per cent of the cash in circulation. The shortage of currency has according to anecdotal evidence caused a slump in demand and widespread job losses, though official data released so far shows economy has done better than feared. Industrial production was up 5.7 per cent in November 2016, exports touched their highest since March 2015 in December 2016 and tax collections have been robust.

Last week, the World Bank also reduced India’s FY17 growth forecast to 7 per cent from 7.6 per cent. The IMF report sees the impact of note exchange lasting in the next fiscal year as well. The forecast for FY18 has been trimmed by 0.4 percentage points to 7.2 per cent. The forecast for FY19 is unchanged at 7.7 per cent.

The forecasts for FY18 and FY19 show India wresting back the fastest-growing economy status from China, whose growth is forecast to slow further to 6.5 per cent in 2017 and 6 per cent in 2018.

 

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