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

America loves India, America respects India: Trump

America loves India, America respects India, said US president Donald Trump as he and first lady Melania Trump began their short visit of India from Ahmedabad on Monday, welcomed by prime minister Narendra Modi. The US president was in Ahmedabad, in Modi`s home state of Gujarat, to attend th

2020 is crucial for CPSE: Arjun Ram Meghwal

"The year 2020 is going to be a significant year for India and especially for Central Public Sector Enterprises (CPSE), "said the Arjun Ram Meghwal, Minister of State for heavy industries and public enterprises on Wednesday at the 7th PSU Awards and Conference organised by Governance Now on 19th

Vice President springs surprise, speaks in 22 languages

Highlighting the importance of preserving, protecting and promoting Indian languages, the vice president of India, Shri M Venkaiah Naidu spoke in 22 languages at an event to mark International Mother Language Day in New Delhi. He urged all the citizens to take a pledge to promote mother tongue and also lea

Title Insurance: new product for old issues

Real estate is among the priciest investments around. More so for the common man who has to live with the burden of monthly EMIs. Yet, it is an art to discover the real owner of any property. Government and revenue records, which are easily accessible to the public, are not properly maintained. Individual

Aadhaar linkage with electoral roll on cards

The election commission of India (ECI) has been working on a series of electoral reforms, and the agenda includes linking Aadhaar with the electoral roll, considering paid news and false affidavit as electoral offence/corrupt practice, better monitoring the role of print media and social media intermediari

Save Panje wetland, give it Ramsar status: environmentalists

To protect the fast depleting wetlands against being used as landfill and for development activities in Mumbai metropolitan region (MMR), environmentalists have asked the centre to declare the 289-hectare Panje wetlands in Uran tehsil of Raigarh district as a ‘Ramsar site’ and preserve its ecol



Archives

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter