NEW DELHI: The World Bank has pared India’s growth forecast for FY17 to 7% from 7.6% estimated earlier, attributing it partly to demonetisation of high-value currency notes.
India is still forecast to retain its position as the world’s fastest growing major economy ahead of China, which is forecast to grow 6.7% in 2016. “India’s slight growth slowdown from the preceding fiscal year reflects the shortterm impact of the unexpected exchange of most of the bank notes in circulation.
Ongoing weakness in private investment also weighed on activity,” the World Bank said in its flagship ‘Global Economic Prospects’ report released on Tuesday.
World Bank in June 2016 forecast 7.6% growth for India for FY17, which it reiterated in October, a month before the government decided to cancel the legal tender of Rs 500 and Rs 1,000 notes. “Unexpected ‘demonetisation’— the phasing out of large-denomination currency notes which were subsequently replaced with new ones — weighed on growth in the third quarter of FY2017,” World Bank said.
It expects the impact to spill over into the next quarter as well. “Weak industrial production and manufacturing and services purchasing managers’ indexes (PMI), further suggest a setback to activity in the fourth quarter of FY2017.”
“In the short-term, ‘demonetisation’ could continue to disrupt business and household economic activities, weighing on growth,” the report said pointing out that 80% of transactions were in cash.
Demonetisation could also pose a risk to other reforms such as the goods and services tax and labour and land reforms.
World Bank, however, said that over the medium term, demonetisation may lead to liquidity expansion in the banking system, helping lower lending rates and lift economic activity. India’s statistics office has forecast 7.1% growth for the current fiscal, down from 7.6% in the last fiscal, but this slowdown does not factor in the impact of demonetisation.
The Reserve Bank of India has cut its gross value added (GVA) forecast to 7.1% from 7.6% estimated earlier, attributing it largely to a poor second quarter. Indian economy expanded 7.2% in the first half of the current fiscal. Global growth is expected to slow down to its post 2008 crisis low of 2.3%, according to World Bank estimates.
India is forecast to rebound in the next fiscal in line with a pickup in global growth pegged at 2.7% in 2017.
“India is expected to regain its growth momentum to 7.6% in FY2018 as reforms loosen domestic supply bottlenecks and increase productivity,” the World Bank report said. Moderate inflation and pay commission increase will support real incomes and consumption.
“Private investment is expected to recover as firms and banks deleverage and the effects of important structural reforms such as the Goods and Services Tax and the Insolvency and Bankruptcy Code start being felt,” the report said. The report also said the global outlook is clouded by uncertainty about policy direction in major economies. “A protracted period of uncertainty could prolong the slow growth in investment that is holding back low, middle, and high income countries.”