Demonetisation Fallout: IMF cuts India’s FY17 growth forecast

currency ban

United Nations/Washington, January 16: India is no longer the world’s fastest growing economy for 2016 as International Monetary Fund on Monday cut India’s growth estimate for the current fiscal year by one percent to 6.6 percent.

Citing demonetisation as the factor behind the fall, IMF official, Maurice Obstfeld, said he expects a bounce back after the 2017 fiscal year.

The IMF’s World Economic Outlook Update released was on Monday said the cut was “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”.

Earlier, October outlook report projected India’s growth at 7.6 percent for both 2016 and 2017 fiscal years. The update that was released yesterday cut the 2017 projection to 7.2 percent and the 2016 projection to 6.6 per cent. Crushed by cashban, India’s performance is mainly pulled down by the fourth quarter projection for 2016, which is estimated at 6.2 percent.

Crushed by cashban, India’s performance is mainly pulled down by the fourth quarter projection for 2016, which is estimated at 6.2 percent.

The Economic Counsellor and Director of Research Obstfeld said, Indian government needs to ensure that cash supplies are adequate for the transactions the economy needs to carry out so as to get growth back on track.


Overall, the world economy was expected to grow by 3.4 percent in 2017 and 3.6 percent in 2018. For 2016, the estimate was 3.1 percent.

It should be noted here that just a few days ago World Bank also cut the projection for the current fiscal year by 0.6 percent to 7 percent, while US firm Fitch Ratings has also reiterated its late November downgrading of India’s growth outlook.

Growth in India is estimated to reach 7 per cent in financial year (FY)2017 … reflecting a modest downgrade to India’s expansion,” the multilateral lender said in its Global Economic Prospects report released in Washington last week.

“Unexpected demonetisation — the phasing out of large denomination currency notes — weighed on growth in the third quarter of FY 2017,” it said.

“Weak industrial production and manufacturing and services purchasing managers’ indexes further suggest a setback to activity in the fourth quarter of FY 2017,” the report added.

Earlier this month, India’s official statistician in New Delhi also lowered the country’s gross domestic product growth estimates for 2016-17 to 7.1 per cent, compared with the 7.6 per cent growth in 2015-16.

While announcing its monetary policy review last month, the Reserve Bank of India, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1 per cent from 7.6 per cent forecast earlier.

A bright spot in the IMF Update is the US, whose economy was expected to grow by 2.3 percent in 2017, up 0.1 percent from earlier report, and 2.5 percent in 2018, up 0.4 percent.

These projections were based on President-elect Donald Trump’s stimulus plans that call tax cuts and infrastructure spending.

Wefornews Bureau (with IANS inputs)

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