The World Bank on Tuesday slashed its forecast for India’s gross domestic product growth from 7.6% to 7% in the financial year that will end in March 2017 and cited demonetisation as the primary reason. “The immediate withdrawal of a large volume of currency in circulation and subsequent replacement with new notes announced by the government in November contributed to slowing growth in 2016,” read the report.
It argued that since cash accounted for more than 80% of transactions in India, demonetisation would continue to affect business and household economic activities in the short term. Apart from demonetisation, the international body also attributed the slump to low oil prices and poor agricultural output, which again is related to the note ban, reported PTI.
However, the bank still considers India to be a “robust” economy and added that the growth rate will touch 7.6% and 7.8% in the next two financial years. In its Global Economic Prospects 2017 report, the experts argued that India’s growth rate would accelerate once key reforms were introduced that would eventually boost productivity. “The ‘Make in India’ campaign may support India’s manufacturing sector, backed by domestic demand and further regulatory reforms. Moderate inflation and a civil service pay hike should support real incomes and consumption, assisted by bumper harvests after favourable monsoon rains,” said the bank.
Although the bank has pinned the blame for slower economic growth on demonetisation, it added that the move may offer banks liquidity expansion and thus help reduce lending rates and “lift economic activity” in the medium term.
The World Bank also positioned India ahead of China as the fastest-growing emerging market economies in the world. It added that India’s infrastructure sector would see more spending and that, in turn, would attract more investment in the near term.
Economists further added that demonetisation would have an impact on Nepal and Bhutan. “Spillovers from India to Nepal and Bhutan, through trade and remittances channels, could also negatively impact growth to these neighbouring smaller economies.” Overall, there will be a slowdown in investment in South Asia, said the bank.