New Delhi, February 23:
In its annual report, however, the International Monetary Fund (IMF) said demonetisation would have the only short-term impact on the economy and it would bounce back to its expected growth of more than 8 percent in the next few years.
The post-November 8, 2016 cash shortages and payment disruptions caused by the currency exchange initiative have undermined consumption and business activity, posing a new challenge to sustaining the growth momentum, the IMF said in its annual country report on India. "Growth is projected to slow to 6.6 percent in FY2016/17, then again it will rebound to 7.2 percent in FY2017/18.
Interestingly, India's economy grew at 7.6 percent in 2015-16. However, favorable monsoon, low oil prices and continued progress will resolve the issues of cash and the growth rate will again climb up.
The investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilization picks up, the report said. In their report, the IMF Directors supported the Indian efforts to clamp down on illicit financial flows but noted "the strains that have emerged" from the currency exchange initiative. "They called for action to quickly restore the availability of cash to avoid further payment disruptions and encouraged prudent monitoring of the potential side-effects of the initiative on financial stability and growth," the report said.
Noting India's strong economic performance of the past few years, the IMF Executive Directors commended New Delhi for its strong policy actions, including continued fiscal consolidation and an anti-inflationary monetary policy, which have underpinned macroeconomic stability. As such, the IMF 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 IMF also feels that on the external side, despite the reduced imbalances and strengthened reserve buffers, the impact from global financial market volatility could be disruptive, including from US monetary policy normalization or weaker-than-expected global growth.
Importantly, in few years India has made appreciable progress on several fronts. It achieved its Millennium Development Goals of halving poverty, infant and child mortality, and maternal mortality rates. Students are now staying in school longer, as evidenced by an increase in secondary school completion rates. Moreover, significant progress has been made in enhancing financial inclusion, leveraging technology to bring more of the population into the financial system.
Background: On 8th November 2016, Prime Minister Modi suddenly announced the decision of demonetization. This step was taken primarily for curbing of corruption, black money and terrorism. After that PM Modi, Finance Minister Arun Jaitley, RBI Governor and known economists have said that the demonetization will have a short-term negative impact but a long-term positive impact.