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Demonetisation Impact: World Bank Cuts India Growth Forecast For FY17 To 7%

Infrastructure spending should improve the business climate and attract investment in the near-term, World Bank said.
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The World Bank said withdrawal of a large volume of currency in circulation contributed to lower growth.
The World Bank said withdrawal of a large volume of currency in circulation contributed to lower growth.

Highlights

  1. World Bank decelerates India's growth for FY17 to 'still robust' 7%
  2. Withdrawal of large currency volume contributed, says multilateral lender
  3. Country would regain momentum in following years, it adds
The World Bank today downgraded India's growth estimate for 2016-17 due to demonetisation but said that the country will post a "still robust" growth of 7 per cent. In its first report after demonetisation of Rs 500 and Rs 1,000 denomination currency notes in November, the multilateral lender also said the notes ban move could "continue to disrupt business and household economic activities". It had earlier estimated India's GDP or gross domestic product growth at 7.6 per cent.

"In India, 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," the World Bank said in its latest report.

Unexpected demonetisation weighed on growth in the third quarter (October to December) of 2016-17, it said.

The World Bank noted that as cash accounts for more than 80 per cent of the number of transactions in India, in the short-term, demonetisation "could continue to disrupt business and household economic activities, weighing on growth".

The World Bank said, "Indian growth is estimated to have decelerated to a still robust 7 per cent (in fiscal 2017 ending on March 31, 2017), with continued tailwinds from low oil prices and solid agricultural output partly offset by challenges associated with the withdrawal of a large volume of currency in circulation and subsequent replacement with new notes."

Even if India maintains a 7 per cent growth rate for 2016-17, the country will still maintain the distinction of being the fastest growing major economy in the world, bypassing China. The Middle Kingdom is projected to grow at 6.5 per cent in 2016.

The World Bank also asserted that India would regain growth momentum in the subsequent years, with 7.6 and 7.8 per cent expansion, adding that "various reform initiatives are expected to unlock domestic supply bottlenecks and raise productivity".

Infrastructure spending should improve the business climate and attract investment in the near-term, the World Bank said.

"The 'Make in India' campaign may support India's manufacturing sector, backed by domestic demand and further regulatory reforms," it said.

The World Bank also noted that the benefit of 'demonetisation' in the medium term may be liquidity expansion in the banking system, which may help in lowering lending rates and lifting economic activity.

However, it cautioned that the challenges encountered in phasing out high value currency notes and replacing them with new ones may pose risks to the pace of other economic reforms such as GST (Goods and Services Tax), and labour and land reforms.

On global growth, the World Bank said that it would accelerate slightly as recovering oil and commodity prices ease pressures on emerging market commodity exporters and painful recessions in Brazil and Russia come to an end.

The multilateral lender expects global growth in 2017 to rebound to 2.7 per cent from a post-financial crisis low of 2.3 per cent last year.

"After years of disappointing global growth, we are encouraged to see stronger economic prospects on the horizon," World Bank Group President Jim Yong Kim said in a statement.

Meanwhile, Finance Minister Arun Jaitley said the country needs bold reforms to transform its economy.

He further said the goods and services tax (GST), and demonetisation will boost growth and the impact will be seen this year. "After transient impact, demonetisation will lead to cleaner and larger GDP."

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