The DeMo effect: IMF slashes India’s growth forecast to 6.6% from 7.6%

The International Monetary Fund (IMF) has lowered its growth forecast for India for fiscal 2016-17, in its update to the World Economic Outlook issued in October 2016.

According to the IMF, the impact of demonetisation has seen it lower its growth outlook for India for 2016-17 to 6.6% from the earlier forecast of 7.6%. It forecasts growth to pick up, albeit slowly in 2017-18, but at 7.2% compared to its October 2016 projection of 7.6%. 

It may be recollected that the cash crunch across the country since November 9, when high-denomination currency notes of Rs 500 and Rs 1,000 were demonetized, has badly impacted the automotive industry along with other sectors. Auto sales in December 2016, the first full month of vehicle sales since demonetisation, saw overall numbers slide 18%, its lowest in 16 years. 

Commenting on the shifting global economic landscape, the IMF says, “After a lacklustre outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications. The assumptions underpinning the forecast should be more specific by the time of the April 2017 World Economic Outlook, as more clarity emerges on U.S. policies and their implications for the global economy.

“With these caveats, aggregate growth estimates and projections for 2016–18 remain unchanged relative to the October 2016 World Economic Outlook. The outlook for advanced economies has improved for 2017–18, reflecting somewhat stronger activity in the second half of 2016 as well as a projected fiscal stimulus in the United States. Growth prospects have marginally worsened for emerging market and developing economies, where financial conditions have generally tightened. Near-term growth prospects were revised up for China, due to expected policy stimulus, but were revised down for a number of other large economies—most notably India, Brazil, and Mexico.”

India down, China up

So, it looks more than likely that India, which has since the past couple of years been billed as the fastest growing economy, is set to lose the title to China, whose growth IMF has revised upwards. Commenting on India, the IMF report says, “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.”

| “Notably, the growth forecast for 2017 was revised up for China (to 6.5 percent, 0.3 percentage point above the October forecast) on expectations of continued policy support. However, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment. These risks can be exacerbated by capital outflow pressures, especially in a more unsettled external environment,” says the IMF.