The International Monetary Fund (IMF) on Monday downgraded India’s growth forecast for the year by a full percentage point to 6.6 per cent on the back of the disruption caused by government’s move to demonetise high-value currencies.
In its update to the World Economic Outlook (WEO) released in October, the IMF said India is likely to grow at 6.6 per cent in 2016-17 against its earlier estimate of 7.6 per cent on account of the “temporary negative consumption shock” caused by the currency withdrawal.
China’s growth rate during the same period has been revised upwards to 6.7 per cent from the 6.5 per cent projected in October due to “expected policy stimulus”.
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The downward revision is in line with the pruning of growth estimates done by India’s department of statistics earlier this month to 7.1 per cent in 2016-17 from 7.6 per cent the previous year.
The IMF, in its update outlook, has also projected India’s growth rate in 2017-18 to slow to 7.2 per cent against its earlier estimate of 7.6 per cent. For most economies, the IMF makes forecasts based on the calendar year while for India it follows the fiscal year.
“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,” IMF said in its WEO Update.
Andreas Bauer, senior resident representative of IMF in India said the downgrade for 2016-17 is because growth in the first half of the fiscal year was slower than the Fund’s expectation as well as demonetisation . “We expect the impact of demonetisation will gradually dissipate in 2017-18 and there will be a recovery in economic growth,” he added.
Global rating agency Moody’s had on Monday said after a temporary dampening effect on consumption and investment in the medium term, demonetisation will likely strengthen India’s institutional framework-by reducing tax avoidance and corruption-and should support efficiency gains.