Although reduced private consumption has had an adverse impact on the Indian economy, the International Monetary Fund (IMF), in a report, states that this is only a temporary effect and has forecast a positive upswing in the coming months.
According to an IMF report on Article 4 consultation, India’s economic growth is expected to slow down to 6% in light of the recent demonetization of the Rs.500 and Rs.1,000 currency notes in the second half of the fiscal year 2016-17, but will see a gradual growth in the fiscal year 2017-18 by curbing tax evasion. The first half of the FY-2016-17 saw the Indian economy growing at 7.2%.
On the 8th November, 2016 Prime Minister Narendra Modi invalidated the Rs.500 and Rs.1,000 currency notes which made up 86% of the currency in circulation by value, in an effort to curb black money circulation in the country. In January the IMF cut its estimate for Indian economic growth by 1% to 6.6% for the FY 2016-17 and has cut its estimates for the FY 2017-18 by 40 basis points to 7.2% on account of the cash shortages arising from demonetization.
The demonetization move has weighed heavily on cash-sensitive sectors in the economy in the short-run, but Indian authorities do not expect this effect to extend beyond FY 2016-17 due to the medium-term positive effects of a more efficient payments system and greater formalization of business activities.
Even though the IMF supports India’s efforts to curb the flow of black money in the country, it has called for action to address the cash shortage the country is currently facing to avoid further disruptions in payments. It has also advised Indian authorities to monitor the potential side effects of the demonetization of the Rs.500 and Rs.1,000 currency notes. The IMF has urged India to advance its efforts in structural and economic reforms in the labour, land and power sectors to counter supply blockages increase output, ensure inclusive growth and create jobs.
The upcoming Goods and Service Tax (GST) is expected to boost India’s growth in the medium-term to over 8%, as it will enhance efficiency of production and the movement of goods and services across the country.