IMF cuts India's 2016 growth forecast, unseating it as year's fastest growing economy

The International Monetary Fund on Monday cut India's growth estimate for the current fiscal year by one percent to 6.6 percent unseating the nation as the world's fastest growing economy for 2016.

A senior IMF official, Maurice Obstfeld, said on Monday that, however, "this is likely to be temporary factor" and that he expected a full bounce back after the 2017 fiscal year.

The IMF's World Economic Outlook Update released here on Monday said the cut was "primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative".

The earlier Outlook report released in October, projected India's growth at 7.6 percent for both 2016 and 2017 fiscal years. The Update trims the 2017 projection to 7.2 percent.

Obstfeld, who is the Economic Counsellor and Director of Research, backed the aim of the demonetisation measures. "We agree with the general goal that motivated this, which is reducing the extent of illicit transactions," he said.

For getting growth back on track, he said that the government can help "by ensuring that cash supplies are adequate for the transactions the economy needs to carry out".

Although India falls by a tiny 0.1 percent for 2016 behind China, whose economic growth is estimated at 6.7 percent, India is back at the top for 2017 projections with a 7.2 percent to China's 6.5, and for 2018 at 7.7 percent to 6 percent.

India's performance is pulled down by the fourth quarter projection for 2016, which is estimated at 6.2 percent.

Overall, the world economy was expected to grow by 3.4 percent in 2017 and 3.6 percent in 2018. For 2016, the estimate was 3.1 percent.

The IMF's estimates are lower than that of the World Bank, which cut the projection for the current fiscal year by only 0.6 percent to 7 percent, while US firm Fitch Ratings has also reiterated its late November downgrading of India's growth outlook.

"Growth in India is estimated to reach 7 per cent in financial year (FY)2017 ... reflecting a modest downgrade to India's expansion," the multilateral lender said in its Global Economic Prospects report released in Washington last week.

"Unexpected demonetisation -- the phasing out of large denomination currency notes -- weighed on growth in the third quarter of FY 2017," it said.

"Weak industrial production and manufacturing and services purchasing managers' indexes further suggest a setback to activity in the fourth quarter of FY 2017," the report added.

Earlier this month, India's official statistician in New Delhi also lowered the country's gross domestic product growth estimates for 2016-17 to 7.1 per cent, compared with the 7.6 per cent growth in 2015-16.

While announcing its monetary policy review last month, the Reserve Bank of India, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1 per cent from 7.6 per cent forecast earlier.

A bright spot in the IMF Update is the US, whose economy was expected to grow by 2.3 percent in 2017, up 0.1 percent from earlier report, and 2.5 percent in 2018, up 0.4 percent.

These projections were based on President-elect Donald Trump's stimulus plans that call tax cuts and infrastructure spending.

(Arul Louis can reached at arul.l@ians.in)

--IANS

al/vd