World Bank lowers India growth view to 7%
After the Asian Development Bank, the Wor­ld Bank on We­dnesday cut India’s gro­wth forecast for 2016-17, citing negative impact of demoentisation, in an assessment that runs counter to the Narendra Modi government’s narrative.
World Bank has lowered India’s growth estimate for FY17 to 7 per cent from 7.6 per cent. ADB had earlier cut India’s growth projection by 0.4 per cent to 7 per cent.
The Reserve Bank of India (RBI) has slashed gross domestic product growth forecast to 7.1 per cent from 7.6 per cent earlier, which is in line with the central statistical office’s first advance estimate put out last week.
Private investment research firms have cut their growth forecasts even more sharply after the cash cull.
The opposition too has been trying to portray demo­n­etisation as a historic economic blunder, with former prime minister Manmohan Singh saying it could shave at least 2 per cent off GDP.
But the government continues to maintain that there is no negative impact of mo­n­ey recall on economic gro­wth. Finance minister Arun Jaitley recently cited robust December tax collection data to buttress the government’s narrative.
“The immediate withdrawal of a large volume of currency in circulation and subsequent replacement with new notes announced by the government in November contributed to slowing growth in 2016,” the World Bank said in its report, the first after the government junked high-value currency notes on November 8.
“Indian growth is estimated to have decelerated to 7 per cent in FY17, with continued tailwinds from low oil prices and solid farm output partly offset by challenges associated with the withdrawal of a large volume of currency in circulation,” the multilateral body said.
“Further, the challenges encountered in phasing out large currency notes and replacing them with new ones may pose risks to the pace of other economic reforms (GST, labour and land reforms),” it said.
“Spillovers from India to Nepal and Bhutan, through trade and remittances channels, could also negatively impact growth to these neig­h­bouring smaller econo­mies,” World Bank said.
Noting that in India, cash accounts for more than 80 per cent of transactions, the World Bank observed that in the short-term, ‘demonetisation’ could continue to disrupt business and household economic activities, weighing on growth.
According to World Bank, India’s growth in the first half of FY17 was underpinned by robust private and public consumption, wh­ich offset slowing fixed investment, subdued industrial activity and lethargic exports. However, it nevertheless, added the Indian economy would pick up pace in FY18 on the back of economic reforms unveiled by the government.
“India is expected to regain its momentum, with growth rising to 7.6 per cent in FY18 and strengthening to 7.8 per cent in FY20,” it said, adding various reform initiatives are expected to unlock domestic supply bottlenecks and raise productivity. Infrastructure spending should improve the business climate and attract investment in the near-term, the World Bank added.
“The ‘make in India’ campaign may support India’s manufacturing sector, backed by domestic demand and further regulatory reforms.
“Moderate inflation and a civil service pay hike should support real incomes and consumption, assisted by bumper harvests after favourable monsoon rains,” the World Bank said in its latest report on global economic prospects.
“A benefit of ‘demonetisation’ in the medium-term may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity,” the multilateral body said.