The shortage of cash that followed the government’s decision to withdraw Rs 500 and Rs 1,000 currency notes from circulation may have cost India the title of the fastest growing major economy in the world.
Forecasts released by the International Monetary Fund (IMF) on Monday show that the Indian economy is expected to grow by 6.6 percent in fiscal 2017 – a one percentage point cut compared to the previous estimate of 7.6 percent. During the next financial year, the Indian economy is seen growing by 7.2 percent.
The cut in growth projections is a consequence of the currency crunch which has hit consumption, said the IMF.
The cut means that the rate of economic growth in India may fall marginally below that of China in the current year. The IMF expects the Chinese economy to grow 6.7 percent in 2016 and 6.5 percent in 2017. Near-term growth prospects were revised up for China due to expected policy stimulus, said the IMF.
Growth projections for India are for financial year 2016-17 while those for China are for calendar year 2016.
Globally, output growth is expected to remain on course with the IMF keeping its forecast for world output growth steady at 3.1 percent for 2016 and 3.4 percent for 2017.
“Economic activity is projected to pick up pace in 2017 and 2018, especially in emerging markets and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming US administration and its global ramifications,” said the IMF while adding that the April edition of the World Economic Outlook report may provide a clearer picture of global growth.
While the balance of risks is viewed as being to the downside, there are also upside risks to near-term growth, the report said.
The agency added that recent political developments highlight a “fraying consensus about the benefits of cross-border economic integration”. This, together with the potential for widening global imbalances and coupled with sharp exchange-rate movements, could intensify protectionist measures, said the IMF.
It also noted the recent increase in commodity prices which has pushed up headline inflation across major economies. Oil prices have increased reflecting an agreement between producers to limit supply, while the prospect of fiscal stimulus in China and the US has pushed up metal prices.
In addition to global risks, the agency also reiterated risks to emerging market economies from corporate debt.
“High corporate debt, declining profitability, weak bank balance sheets, and thin policy buffers imply that these economies are still exposed to tighter global financial conditions, capital flow reversals, and the balance sheet implications of sharp depreciations,” said the IMF.
These concerns may take centrestage if developed market central banks like the US Federal Reserve raise rates further in 2017, which could push up the cost of raising finance in the overseas market.
Global financing conditions have already tightened.
As of 3 January, nominal yields on the 10-year US Treasury bonds have increased by close to one percentage point since August and 60 basis points since the US election, noted the IMF.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)