IMF Pegs Growth at 6.6% as Cash Short­age Dis­rupts Con­sump­tion

Says progress in re­forms & adop­tion of GST could raise medium-term GDP growth to above 8%

The Economic Times - - Economy: Macro, Micro & More - Our Bureau

New Delhi: Cash short­ages and pay­ment dis­rup­tions caused by the de­mon­eti­sa­tion have un­der­mined con­sump­tion and busi­ness ac­tiv­ity, pos­ing a new chal­lenge to sus­tain­ing the growth mo­men­tum, the In­ter­na­tional Mon­e­tary Fund (IMF) has said. The GDP growth is pro­jected to slow to 6.6% in FY17, largely due to a dis­rup­tion in pri­vate con­sump­tion from de­mon­eti­sa­tion, IMF said in its an­nual Chap­ter IV as­sess­ment of In­dia. It ex­pects growth to re­bound to 7.2% in FY18.

“Con­tin­ued progress in re­forms bodes well for a marked im­prove­ment in medium-term prospects, with the adop­tion of the Goods and Ser­vices Tax (GST) poised to raise In­dia’s medium-term GDP growth to above 8%,” IMF said.

The IMF’s ex­ec­u­tive board called on the In­dian gov­ern­ment to “quickly re­store the avail­abil­ity of cash to avoid fur­ther pay­ment dis­rup­tions, and en­cour­age pru­dent mon­i­tor­ing of the po­ten­tial side-ef­fects of the ini­tia­tive on fi­nan­cial sta­bil­ity and growth,” IMF said in its re­port re­leased on Wed­nes­day.

It said gaug­ing the near-term ad­verse eco­nomic im­pact of cash short­ages re­mains dif­fi­cult, but ad­mit­ted it may have a pos­i­tive eco­nomic im­pact in the medium term. In­dia had on Novem­ber 8 de­mon­e­tised high value old Rs 500 and Rs 1,000 notes to weed out fakes and un­earth black money.

“Tail­winds from a favourable

mon­soon, low oil prices and con­tin­ued progress in re­solv­ing sup­ply­side bot­tle­necks, as well as ro­bust con­sumer con­fi­dence, will sup­port near-term growth as cash short­ages ease,” IMF said.

IMF ex­pects in­fla­tion at about 4.75% by early 2017 while cur­rent ac­count deficit is likely to widen to 2% of the GDP.


IMF pointed out that per­sis­tently high house­hold in­fla­tion ex­pec­ta­tions and large fis­cal deficits have lim­ited the gov­ern­ment’s room for sup­port­ing growth through de­mand mea­sures.

Pri­vate in­vest­ment is likely to re- main sluggish due to ex­cess ca­pac­ity in key in­dus­trial sec­tors and strains in fi­nan­cial and cor­po­rate sec­tor bal­ance sheets.

Global fi­nan­cial mar­ket volatil­ity from US mon­e­tary pol­icy nor­mal­iza­tion or weaker-than-ex­pected global growth could weigh on In­dia.

Po­ten­tial fur­ther de­te­ri­o­ra­tion of cor­po­rate and pub­lic bank bal­ance sheets, as well as set­backs in the re­form process, in­clud­ing in GST de­sign and im­ple­men­ta­tion could also weigh on do­mes­tic de­mand-driven growth and un­der­mine in­vestor and con­sumer sen­ti­ment, IMF said.

There are a few up­sides in larger than ex­pected gains from GST and fur­ther struc­tural re­forms, which could yield sig­nif­i­cantly stronger growth. Sus­tained pe­riod of con­tin­ued low global en­ergy prices would also help.


The IMF’s ex­ec­u­tive board took note of In­dia’s ro­bust growth and ‘strong pol­icy ac­tion’ by the gov­ern­ment, which in­cluded con­tin­ued fis­cal con­sol­i­da­tion and an anti-in­fla­tion­ary mon­e­tary pol­icy, mea­sures that have un­der­pinned macroe­co­nomic sta­bil­ity. The board rec­om­mended “con­tin­ued vig­i­lance to po­ten­tial do­mes­tic and ex­ter­nal shocks, and urged the au­thor­i­ties to fur­ther ad­vance eco­nomic and struc­tural re­forms to ad­dress sup­ply bot­tle­necks, raise po­ten­tial out­put, cre­ate jobs and en­sure in­clu­sive growth”.

The board called for aug­ment­ing cap­i­tal buf­fers and con­tin­ued gover­nance re­form of state-run banks and strength­en­ing the res­o­lu­tion regime for dis­tressed bank as­sets while point­ing out the risks to banks from high NPAs and stressed cor­po­rates. The Re­serve Bank of In­dia should be ready to raise rates should in­fla­tion­ary pres­sures gather pace, the IMF said, flag­ging el­e­vated house­hold in­fla­tion ex­pec­ta­tions and food sup­ply con­straints as key risks.

More agri­cul­tural re­forms to boost food sup­plies as well as main­tain­ing fis­cal ad­just­ment to sup­port mon­e­tary pol­icy in achiev­ing low and sta­ble in­fla­tion were other sug­ges­tions. IMF also asked the gov­ern­ment to push labour re­forms at both the Cen­tre and state lev­els.

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