Demonetisation posed a new challenge to growth: IMF

The post-November 8, 2016 cash shortages and payment disruptions caused by the currency exchange initiative have undermined consumption and business activity

GN Bureau | February 23, 2017


#International Monetary Fund   #IMF   #Demonetisation  
Representational illustration
Representational illustration

The Indian economy has recorded strong growth in recent years, helped by a large terms of trade gain, positive policy actions including implementation of key structural reforms, a return to normal monsoon rainfall, and reduced external vulnerabilities, said the International Monetary  Fund (IMF).

Inflation has remained low after the collapse in global commodity prices, a range of supply-side measures, and a relatively tight monetary stance. Fiscal consolidation at the union government level resumed in FY2016/17, and has been complemented by measures to enhance the quality of public spending. External vulnerabilities are in check, with the current account deficit expected to remain compressed and international reserves standing at US$360 billion as of late-December 2016.

Read: Demonetisation severely imperilled India’s economy: Harvard Business Review

Persistently-high household inflation expectations and large fiscal deficits remain key macroeconomic challenges, which limit policy space for supporting growth through demand measures. Furthermore, excess capacity in key industrial sectors and strains in financial and corporate sector balance sheets remain a drag on private investment, and weak external demand continues to constrain India’s exports.

The IMF said: “The post-November 8, 2016 cash shortages and payment disruptions caused by the currency exchange initiative have undermined consumption and business activity, posing a new challenge to sustaining the growth momentum. Growth is projected to slow to 6.6 percent in FY2016/17, then rebound to 7.2 percent in FY2017/18, due to temporary disruptions, primarily to private consumption, caused by cash shortages.”

Read: Post demonetisation, deployment of funds and credit growth a big challenge

The IMF said that 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 investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilization picks up. With temporary demand disruptions and increased monsoon-driven food supplies, inflation is expected at about 4.75 percent by early 2017—in line with the

Reserve Bank of India’s inflation target of 5 percent by March 2017.

Supply-side reforms, particularly in agriculture, continued fiscal consolidation, and relieving impediments to monetary transmission are crucial to retain low inflation in the medium term. The current account deficit is expected widen to about 2 percent of GDP over the medium term as domestic demand strengthens further and commodity prices gradually rebound. The FY2016/17 Union Budget deficit target of 3.5 percent of GDP (equivalent to 3.8 percent of GDP in IMF terms) will likely be achieved. Continued progress in reforms bodes well for a marked improvement in medium-term prospects, with the adoption of the Goods and Services Tax poised to raise India’s medium-term GDP growth to above 8 percent.

Economic risks are tilted to the downside. On the external side, despite the reduced imbalances and strengthened reserve buffers, the impact from global financial market volatility could be disruptive, including from U.S. monetary policy normalization or weaker-than-expected global growth. In the absence of disruptive global financial volatility, slower growth in China, Europe and the United States would have only modest adverse spillovers to India, given weak trade linkages. A key domestic risk stems from the government’s currency exchange initiative, where the near-term adverse economic impact of accompanying cash shortages remains difficult to gauge, while it may have a positive economic impact in the medium term.

Domestic risks also flow from a potential further deterioration of corporate and public bank balance sheets, as well as setbacks in the reform process, including in GST design and implementation, which could weigh on domestic demand-driven growth and undermine investor and consumer sentiment. On the upside, larger than expected gains from GST and further structural reforms could lead to significantly stronger growth; while a sustained period of continued-low global energy prices would also be very beneficial to India, said the IMF.

Read: IMF Executive Board - 2017 Article IV Consultation with India


 

Comments

 

Other News

SRE is a mindset

In 2010, I attended a self-development program called ‘Seven Habits of Highly Effective People’.  This program deeply impacted me, and I underwent a life-changing experience. Stephen Covey writes, “The way we see the problem is the problem.” We must allow ourselves to undergo p

“But for Nehru’s non-alignment, India would’ve been where China is today”

Dark Secrets: Politics, Intrigue and Proxy Wars in Kashmir By Iqbal Chand Malhotra Bloomsbury, 277 pages With his latest work, ‘Dark Secrets’, scholar and media personality Iqbal Chand Malhotra continues the investigation he began with

Maharashtra schools to reopen on January 24

Maharashtra has announced the reopening of schools for classes 1-12 from January 24 with Covid protocols. Education minister Varsha Gaikwad said on Thursday that the government will reopen schools for classes 1-12th with Covid protocols from January 24. “We have also decided to open p

No irregularly in appointment of engineer: BMC counters BJP MLA

The BrihanMumbai municipal corporation (BMC) has rejected BJP MLA Ameet Satam’s demand in a letter to BMC commissioner Iqbal Chahal to cancel the appointment of Sunil Rathod, deputy chief engineer, building and proposal department, western suburbs, for getting caught red-handed accepting bribe by ACB

Cast your vote, not vote for caste

Once the schedule for the next assembly elections has been announced, there is a flurry of activity around building caste coalitions. This is more intense in the most populous state,  Uttar Pradesh, which is the most important state in India in any election, in view of its large population estimated a

Maharashtra cities dominate Smart Cities Mission #Streets4People Challenge

In a competition organised by the Ministry of Housing and Urban Affairs (MoHUA), Pune, Pimpri-Chinchwad, Nagpur and Aurangabad from Maharashtra are among the 11 cities selected for scaling up their pilot projects and creating permanent public infrastructure. #Streets4People Challenge was org

Visionary Talk: Farmer`s Agitation, Rakesh Tikait with Kailashnath Adhikari


Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter