Indian economy hit by cash shortages, demonetisation to pull down GDP growth rate to 6.6%

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The government has made significant progress on important economic reforms, which will support strong and sustainable growth going forward.


International Monetary Fund (IMF) sees India GDP growth rate slowing to about 6.6 percent for fiscal year 2016-17 and to 7.2 percent in 2017-18 after completing its annual assessment of the Indian economy.

The Indian economy is growing strongly and remains a bright spot in the global landscape. The halving of global oil prices that began in late 2014 boosted economic activity in India, further improved the external current account and fiscal positions, and helped lower inflation.

In addition, continued fiscal consolidation, by reducing government deficits and debt accumulation, and an anti-inflationary monetary policy stance have helped cement macroeconomic stability.

And, over the past few months, the economy has been hit by cash shortages, and accordingly reduced the growth forecasts to average 6.6 percent for fiscal year 2016-17 and to 7.2 percent in 2017-18.

The government has made significant progress on important economic reforms, which will support strong and sustainable growth going forward. In particular, the upcoming implementation of the goods and services tax, which has been in the making for over a decade, will help raise India’s medium-term growth to above 8 percent, as it will enhance the efficiency of production and movement of goods and services across Indian states.

Challenges remain, however, and there is little scope for complacency. A key concern is the health of the banking system, which is still dealing with a large amount of bad loans, and also heightened corporate vulnerabilities in several key sectors of the economy.

IMF, in a report on so-called Article 4 consultation under which it holds annual discussions on policy matters with member-countries, said India’s economic growth is expected to slow to about 6% in the second half (October-March) of fiscal 2016-17, before gradually rebounding in the course of 2017-18. In the first half (April-September) of FY2016-17, the economy grew at 7.2%.

The writer is a member of the Diplomatist Editorial Board

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