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Uncertain outlook for the Indian economy post demonetisation

The recent reduction in the projected growth rate of India by the International Monetary Fund (IMF) has also highlighted the possible negative fallout of demonetisation on the Indian economy.

Devika Singh        Last Updated: June 7, 2017  | 15:11 IST
Uncertain outlook for the Indian economy post demonetisation

Devika Singh, Business Today
Nobody seems certain about the impact of demonetisation on the economy.

The recent reduction in the projected growth rate of India by the International Monetary Fund (IMF) has also highlighted the possible negative fallout of demonetisation on the Indian economy.

The International Monetary Fund (IMF) has reduced its projections for India's growth rate to 6.6 per cent from its previous estimate of 7.6 per cent. "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", the IMF said in its latest World Economic Outlook (WEO) update.

The World Bank, too, recently, revised its earlier projection of 7.6 per cent GDP growth in FY17 to 7 per cent and 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."

Both the international agencies, though, expect the growth to stabilise in the next financial year. According to IMF, Indian economy is likely to revive to go back to its previously estimated growth rate of 7.7 per cent in 2018.

And World Bank estimates that the country would regain momentum in the following years with 7.6 per cent and 7.8 per cent growth. However, some other experts expect a bigger blow to the economy. According to the Centre for Monitoring Indian Economy  (CMIE)-which has given an estimate of 6 per cent growth in FY17-the long-term damage on the economy will be greater than the damage caused to growth during 2016/17.

"We now expect this growth trajectory to shift down to about 6 per cent per annum for the next five years. The economy is unlikely to achieve a growth of 7 per cent any time during the coming five years," CMIE has said in its report. Economist Arun Kumar and Abhijit Sen have also predicted that the impact would be over the long term, with Kumar saying that we may be staring at a recession if the cash flow doesn't improve in next two-three months.

The different projection from different experts have added to the confusion about the likely impact of demonetisation. The sectors that will take the longest to bounce back post demonetisation are real estate, cement, gems, luxury goods but no one is sure about how long it will take for them to recover. It remains to be seen if the Economic Survey data, to be released later in the month, brings some clarity.

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