Demonetisation effect – India’s growth rate cut by IMF


Even as the country battles a shortage of cash, the International Monetary Fund has gone ahead and lowered India’s growth rate to 6.6% for the current fiscal year. This is a massive drop of 1% over the previous estimate of 7.6% for the year. The main reason for this move, according to the IMF is the “temporary negative consumption shock” felt in India after Prime Minister Narendra Modi’s move to demonetise currency of Rs.500 and Rs.1,000 denominations. This new rating pegs India behind China, which has an estimated growth rate of 6.7% for the year.

About IMF and importance of these ratings

Headquartered in Washington DC, the International Monetary Fund aims to aid international monetary relationships, hoping to achieve international economic growth and contribute to the development of member nations. It releases periodic reports based on current economic factors, helping nations identify where they stand. These ratings also act as indicators to other nations about the current state of an entity, ensuring that there is transparency in dealings.

India’s growth forecast

The IMF predicts the growth forecast of a nation depending on multiple factors. According to their latest report, India’s growth forecast has dropped, both for the current and next fiscal year. The table below highlights the changes.

Previous growth forecast 2016 Current growth forecast 2016 Previous growth forecast 2017 Current growth forecast 2017
India 7.6% 6.6% 7.6% 7.2%
China 6.6% 6.7% 6.2% 6.5%
Global 3.1% 3.1% 3.4% 3.4%

According to the IMF, India’s economy will grow stronger in the coming years, with the growth rate pegged at 7.7% in 2018.
Demonetisation has played a crucial role in the country’s economy, with the World Bank too cutting India’s GDP growth from 7.6% to 7% for the FY 2016-2017. The economy could grow on the back of investor friendly reforms, as the country aims to attract new investors. The country, however, continues to see more investments, with Warburg Pincus set to invest around $8 billion in Indian companies over the next decade.

On the global front, the report pegs world growth at 3.1% and 3.4% for the FYs 2016 and 2017 respectively, with India expected to perform much better than average.

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