World Bank has cut India’s growth forecast for the current financial year 2016-17 to 7% from 7.6% earlier, partly as the economy is weighed down by the recent demonetisation of high-value currency notes, but added that the exercise will help lift the economic activity in the medium term.India will still remain the world’s fastest growing major economy, ahead of China, which is expected to have grown at 6.7% in the year 2016. The lender said the demonetisation may lead to the liquidity in the system expanding, further leading to lower lending rates.
Further, it expects Indian economy to rebound in the next financial year 2017-18 to 7.6% expansion, while the global economy will likely grow at 2.7% in the year 2017.
“India is expected to regain its growth momentum to 7.6% in FY2018 as reforms loosen domestic supply bottlenecks and increase productivity,” it said in ‘Global Economic Prospects’ report.
Prime Minister Narendra Modi in a surprise move on November 8 demonetised Rs-1,000 and Rs-500 currency notes, wiping off 86% of all currency in circulation in the country. A slew of growth forecast cuts followed, all projecting a major blow to the economy in the wake of unavailability of cash to carry out any economic activity.
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“India’s slight growth slowdown from the preceding fiscal year reflects the short-term impact of the unexpected exchange of most of the bank notes in circulation. Ongoing weakness in private investment also weighed on activity,” World Bank said in its report.
It expects the impact of demonetisation to continue in the current Jan-Mar quarter as well. “Weak industrial production and manufacturing and services purchasing managers’ indexes (PMI), further suggest a setback to activity in the fourth quarter of FY2017,” it said.
However, India’s infrastructure spending, Make in India campaign and various other reform initiatives will help the economy.
Earlier, Fitch cut India’s 2016-17 growth forecast to 6.9% from 7.4%, and 2017-18 projection to 7.7% from 8%, citing the impact of demonetisation.