India’s GDP Projected to Slow to 6.6% Post-Currency Ban: IMF

The International Monetary Fund (IMF) said demonetisation would have only short-term impact on the economy.

India's growth is projected to slow to 6.6 percent in 2016-17 fiscal due to the strains that have emerged in the economy as a result of "temporary disruptions" caused by demonetisation, said the International Monetary Fund (IMF) on Wednesday.

In its annual report, however, the IMF said demonetisation would have only a short-term impact on the economy and it would bounce back to its expected growth of more than eight percent in the next few years.

The cash shortages and payment disruptions caused by the currency exchange initiative of 8 November have undermined consumption and business activity, posing a new challenge to sustaining the growth momentum, the IMF said in its annual country report on India.

Growth is projected to slow to 6.6 percent in FY2016/17, then rebound to 7.2 percent in Financial Year 2017/18, due to temporary disruptions, primarily to private consumption, caused by cash shortages.

IMF

India's economy grew at 7.6 percent in 2015-16.

Tailwinds from a favourable monsoon, low oil prices, and continued progress in resolving supply-side bottlenecks, as well as robust consumer confidence, will support near-term growth as cash shortages ease, the IMF said.

The investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilisation picks up, the report said.

In their report, the IMF Directors supported the Indian efforts to clamp down on illicit financial flows, but noted "the strains that have emerged" from the currency exchange initiative.

“They called for action to quickly restore the availability of cash to avoid further payment disruptions and encouraged prudent monitoring of the potential side-effects of the initiative on financial stability and growth,” the report said.

As such, the IMF recommended continued vigilance to potential domestic and external shocks and urged the authorities to further advance economic and structural reforms to address supply bottlenecks, raise potential output, create jobs, and ensure inclusive growth.