IMF Slashes India’s Growth Rate Due to Demonetization Impact

The Indian government’s decision to demonetize high denomination currency notes in November 2016 has resulted in the country losing its position of being the world’s fastest growing large economy.

The International Monetary Fund (IMF) in its latest update to its World Economic Outlook report cut its earlier growth rate forecast of 7.6 percent for India bringing it to 6.6 percent for the fiscal year 2016-17. The lowering of growth rate by one percentage point has been attributed to the drop in consumption expected as a result of widespread cash shortage brought about by the demonetization. China has now taken the top spot with a growth rate of 6.7 percent.

In a statement the IMF said,

In India, the growth forecasts for the current (2016–17) and next (2017-18) financial years were trimmed by one percentage point and 0.4 percentage points, respectively, primarily because of the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative.

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India’s Prime Minister Narendra Modi made a surprise announcement on Nov 8 last year that high value currency notes of Rs. 500 and Rs. 1000 would no longer be legal tender with immediate effect, a move that sucked out 86 percent of cash from the economy. The stated aim of the measure was to curb black money and crackdown on corruption.

The World Bank has also lowered its growth estimates for India in its recent update. The decrease of 0.6 percentage points left the forecast for the country at seven percent for the year. This put the growth rate estimate just marginally lower than the Advanced Estimates of 7.1 per cent released by the Indian government’s Central Statistics Office.

IMF has also cut the country’s gross domestic product (GDP) forecast for 2017-18, bringing it down by 0.4 percentage point to 7.2 percent. According to World Bank the GDP growth would be at 7.6 per cent, a percentage point lower than previous forecast.

The government’s Advanced Estimate of 7.1 percent growth doesn’t take into account the impact of demonetization. It is expected that the CSO will be releasing its revised estimates by the end of February.

Overall the IMF has retained its forecasts for global growth, estimated to be 3.1 percent in the year 2016, 3.4 per cent in 2017, and finally 3.6 per cent in 2018. It has stated that after poor growth in 2016, emerging markets and developing economies are likely to see a strong uptick in performance in the coming two years.

Chad Simmons

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