Demonetisation effect: IMF cuts India FY17 GDP forecast to 6.6%

A full percentage point downgrade against earlier estimate of 7.6%; FY18 outlook slashed to 7.2%

Banking sources said they have told the government to reduce the number of free ATM withdrawals enjoyed by users. As of now, many banks allow their customers up to five free ATM transactions every month ‘TEMPORARY NEGATIVE CONSUMPTION SHOCK’

THE RESERVE Bank of India on Monday more than doubled the daily withdrawal limit from automated teller machines (ATMS) to Rs 10,000 but retained the weekly ceiling at Rs 24,000 with the supply of more five hundred notes.

However, with demonetisation exercise reportedly hitting close to 70 per cent of businesses in manufacturing hubs, including Mumbai and Pune, the RBI has increased the limit on withdrawal from current accounts from the existing limit of Rs 50,000 per week to Rs 1,00,000 per week. This hike will be applicable to overdraft and cash credit accounts, the RBI said.

“The limit on withdrawals from ATMS has been enhanced from the current limit of Rs 4,500 to Rs 10,000 per day per card. It will be operative within the existing overall weekly limit of Rs 24,000,” the RBI said in a notification.

However, banking sources said they have told the government to reduce the number of free ATM withdrawals enjoyed by bank customers. As of now, many banks allow their customers up to five free ATM transactions every month after which the customer has to pay a fee of Rs 20 per transaction and service tax. For non-customers, banks offer three free transactions in six metros — Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad — and five free transactions in the remaining cities.

The State Bank of India had suggested that the government should take measures to disincentivise cash transactions.

After the demonetisation period ended on December 30, the RBI had raised the daily limit of withdrawal from ATMS from Rs 2,500 to Rs 4,500 per day for each debit card.

Currency supply to the banking system will be closer to normal by February-end as opposed to predictions of the currency swap exercise-linked crisis lasting longer, according to SBI officials. Bankers had said they were in favour of retaining the restrictions on cash withdrawals till there is adequate supply of notes.

SBI had said that as on December-end only 44 per cent of the banned currency was been replaced as against the earlier estimate of 53 per cent. One possible reason for this could be that RBI is also printing notes of smaller denominations apart from Rs 500 bills and hence the total value getting replaced is lower than projections, though the number of pieces may not, according to an SBI Research report.

“If we assume that the RBI continues to print as it is doing as of now, then by Januaryend, only about 67 per cent of the currency should get replaced (vis-à-vis earlier estimate at 75 per cent).” By February, at this rate, the RBI could thus print as much as 89 per cent of the total currency, it said. It, however, said if the apex bank decides to shift its printing more towards smaller denomination, this number could be close to 80 per cent.

The RBI had slapped curbs on cash withdrawals and set a daily withdrawal limit of Rs 2,500 from the ATMS and Rs 24,000 from bank accounts per day from November 10. As on November 8, the day the government announced the withdrawal of high value notes, there were 1,716.50 crore pieces of Rs 500 and 685.80 crore Rs 1,000 notes in circulation. The notes withdrawn from the system accounted for 86 per cent of the cash in circulation.

The government had allowed people to deposit of exchange these notes at bank and RBI branches till December 30.

The facility of exchange of old notes was stopped at the bank counters on November 24. In order to prevent people from using others’ bank accounts to convert their black money, the Lok Sabha has passed amendments to the Income Tax Act enabling the government to impose a higher penalty and tax rate on assessees of unexplained deposits, totalling up to 85 per cent. THE INTERNATIONAL Monetary Fund (IMF) on Monday downgraded India’s growth forecast for the year by a full percentage point to 6.6 per cent on the back of the disruption caused by government’s move to demonetise high-value currencies.

In its update to the World Economic Outlook (WEO) released in October, the IMF said India is likely to grow at 6.6 per cent in 2016-17 against its earlier estimate of 7.6 per cent on account of the “temporary negative consumption shock” caused by the currency withdrawal. China’s growth rate during the same period has been revised upwards to 6.7 per cent from the 6.5 per cent projected in October due to “expected policy stimulus”.

The downward revision is in line with the pruning of growth estimates done by India’s department of statistics earlier this month to 7.1 per cent in 2016-17 from 7.6 per cent the previous year.

The IMF, in its update outlook, has also projected India’s growth rate in 2017-18 to slow to 7.2 per cent against its earlier estimate of 7.6 per cent. For most economies, the IMF makes forecasts based on the calendar year while for India it follows the fiscal year.

“In India, the growth forecast for the current (2016-17) 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,” IMF said in its WEO Update.

Andreas Bauer, senior resident representative of IMF in India said the downgrade for 2016-17 is because growth in the first half of the fiscal year was slower than the Fund’s expectation as well as demonetisation . “We expect the impact of demonetisation will gradually dissipate in 2017-18 and there will be a recovery in economic growth,” he added.

Global rating agency Moody’s had on Monday said after a temporary dampening effect on consumption and investment in the medium term, demonetisation will likely strengthen India’s institutional frameworkby reducing tax avoidance and corruptionand should support efficiency gains.