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%
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.
STRONG POLICY ACTION
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.