IMF Cuts India’s Growth Rate Estimate to 6.6% Due to Note Ban

India may lose ‘Fastest Growing Economy’ tag to china after note ban, says IMF forecast.

3 min read
People wait  outside ATM kiosks after Prime Minister Narendra Modi announced demonetisation  on  8 November 2016. (Photo: IANS)

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.

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 World Economic Outlook

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.

Policy Stimulus Could Push Global Growth

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.

Global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the United States or China. Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper-than-expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China.
IMF World Economic Outlook

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.

Emerging Market Vulnerabilities

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.

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