IMF Cuts India GDP Growth Target After Currency Demonetization

IMF Cuts India GDP Growth Target After Currency Demonetization

The International Monetary Fund has cut India’s GDP growth estimate to 6.6 percent from its earlier estimate of 7.6 percent growth. India could suffer major shock to its economy as majority of people queued outside banks to withdraw money. Indian government announced currency demonetization which took many economists by surprise. The government wasn’t well prepared to take up this massive exercise. As the government wasn’t able to deal with high demand for cash, people had to queue outside banks to withdraw money. This led to temporary reduction in consumption.

Indian government’s steps have been termed as ill-planned by economists. Latest media reports from India suggest that majority of cash has come back in banks. The central bank in India has not been able to meet the demand for cash. The banks have imposed limits on cash withdrawals.

Considering short term issues for economy, majority of financial institutions have reduced GDP growth targets for India. Before the move was announced, India was the fastest growing economy among major economies. The current move by Indian Prime Minister Narendra Modi has been termed as a major gamble by his opponents while his supporters talk about it as a bold move.

The impact of this major action will only be seen once the numbers are announced the government agencies. For the moment, the official statements issued by Indian authorities have not given any clear indication of the impact of demonetization on Indian economy.

The International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update informed, "In India, the growth forecast for the current (201617) 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 worrying sign for India could be lowering of growth forecast for next fiscal year. The IMF report has reduced growth target for next year from 7.6 percent to 7.2 percent. The World Bank also reduced its growth target for India from 7.6 percent to 7 percent. However, India could lag behind China marginally as the economy faces challenges in year ending in March 2017.

Indian government is presenting budget on February 1, 2017 and economists are expecting the government to offer incentives and tax cuts to drive growth. The tax cuts could also be announced to keep voters happy after they have been pushed to suffer during the last two months.

A recently published report in New York Times has termed the move as a major disruption which went wrong. The NY Times opinion piece has said that the government has failed to meet the demand for cash.

This report includes inputs from our correspondents in India.

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