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

Govt considers fixing driving hrs of commercial vehicles

Union Minister of Road Transport and Highways Nitin Gadkari has emphasised deciding driving hours for truck drivers of commercial vehicles, similar to pilots, to reduce fatigue-induced road accidents. In a Na

Telecom department simplifies KYC processes for mobile users

In a step towards Telecom Reforms which aim to provide internet and tele connectivity for the marginalised section, the Department of Telecommunications, Ministry of Communica

Mumbai think tank calls for climate action

Raising concerns over rising seawater levels and climate change, Mumbai First, a 25-year-old public-private partnership policy think tank, has written letters to Maharashtra chief minister Uddhav Thackeray, minister for environment and climate change, tourism and protocol, Aditya Thackeray and Mumbai munic

Creation of ‘good bank’ as important as ‘bad bank’ for NPA management

After the recent announcement of the government guarantee for Security Receipts (SRs) to be issued by a public sector-owned National Asset Reconstruction Company Ltd (NARCL), there is a surge of interest around this desi version of a super bad bank. The entity will acquire around ₹2 trillion bad debts fr

V shape recovery an exaggeration: Gurcharan Das

The notion of a V-shape economic recovery is an exaggeration, and the informal economy and the poor have been terribly hurt during the Covid-19 period, says Gurcharan Das, author, commentator and public intellectual. “A V-shape recovery is an exaggeration. The informal economy and the

Covid-19 antibodies found in 86.64% Mumbai citizens

As many as 86.64% citizens of the city of Greater Mumbai have antibodies, according to the fifth sero-prevalence survey. Among the people who are fully or partially vaccinated, the antibodies were found in 90.26%, while among the unvaccinated citizens, 79.86% had antibodies. The Municipal C

Visionary Talk: Gurcharan Das, Author, Commentator & Public Intellectual on key governance issues


Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter