IMF cuts India’s growth forecast due to demonetisation

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Washington, Jan 16 (IANS) The IMF on Monday cut India’s growth forecast for the current fiscal by as much as one percentage point due mainly to the disruptions caused by demonetisation of 500 and 1,000 rupee notes.

In a similar vein, the fund also cut its forecast for the next fiscal by 0.4 percentage points.

The IMF had earlier predicted a 7.6 per cent growth for the India economy during the current fiscal ending March 31.

“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,” the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update released on Monday.

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In its first projection on India post the demonetisation of high value currency, the World Bank has also lowered the country’s GDP growth estimate for this fiscal to 7 per cent, from the 7.6 per cent estimate made in June last year. US firm Fitch Ratings has also reiterated its late November downgrading of India’s growth outlook.

“Growth in India is estimated to reach 7 per cent in financial year (FY)2017 … reflecting a modest downgrade to India’s expansion,” the multilateral lender said in its Global Economic Prospects report released here last week.

“Unexpected demonetisation — the phasing out of large denomination currency notes — weighed on growth in the third quarter of FY 2017,” it said.

“Weak industrial production and manufacturing and services purchasing managers’ indexes further suggest a setback to activity in the fourth quarter of FY 2017,” the report added.

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Earlier this month, India’s official statistician in New Delhi also lowered the country’s gross domestic product growth estimates for 2016-17 to 7.1 per cent, compared with the 7.6 per cent growth in 2015-16.

While announcing its monetary policy review last month, the Reserve Bank of India, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1 per cent from 7.6 per cent forecast earlier.

Moreover, American rating agency Fitch has also downgraded India’s growth outlook to 6.9 per cent for 2016-17, from the earlier 7.4 per cent, citing the “short-term disruptions” caused by demonetisation.

On November 8, Prime Minister Narendra Modi announced demonetisation, saying the move was aimed at eliminating black money, counterfeit currency and terror financing.

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