“In India, the growth forecast for 2017 has been trimmed by 0.4 percentage point to 7.2 per cent, primarily because of the temporary negative consumption shock induced by cash shortages and payment disruptions from the recent currency exchange initiative,” the IMF said in its latest World Economic Outlook report.
“Medium-term growth prospects are favourable, with growth forecast to rise to about eight per cent over the medium term due to the implementation of key reforms, loosening of supply-side bottlenecks, and appropriate fiscal and monetary policies,” the report said.
“Beyond the immediate challenge of replacing currency in circulation following the November 2016 currency exchange initiative, policy actions should focus on reducing labour and product market rigidities to ease firm entry and exit, expand the manufacturing base, and gainfully employ the abundant pool of labour,” it added.
In February, the Central Statistics Office (CSO) estimated that India’s GDP growth for the full fiscal 2016-17, at 7.1 per cent, which marked a sharp fall from the 7.9 per cent recorded for the fiscal 2015-16.
This appeared to fly in the face of previous private surveys documenting the disruption caused by the demonetisation of Rs 500 and Rs 1,000 rupee notes constituting 86 per cent of currency in November.
Both the Reserve Bank of India (RBI) and the IMF have earlier lowered India’s growth estimates for the previous fiscal by up to 1 per cent, citing the impact of demonetisation.
At its first monetary policy review of this fiscal on April 6, the RBI pegged the gross value added (GVA) growth forecast for 2017-18 at 7.4 per cent.
The World Economic Outlook said policy actions should also consolidate the disinflation underway since the collapse in commodity prices through agricultural sector reforms and infrastructure enhancements to ease supply bottlenecks.
Policy actions should also boost financial stability through full recognition of non-performing assets (NPAs), or bad loans, and raising capital buffers of state-run banks and securing public finances through reduction of poorly targeted subsidies and structural tax reforms, including implementation of the Goods and Services Tax, it added.
The report was released ahead of the Spring Meetings of the IMF and World Bank due to get underway here from Wednesday.