The Indian economy is growing strongly and remains a bright spot in the global landscape despite temporary setback due to demonetisation, a senior IMF official has said.
In its annual country report on India, the International Monetary Fund (IMF) on Wednesday said growth is expected at 6.6 per cent in this financial year and at 7.2 per cent in the following year.
"The Indian economy is growing strongly and remains a bright spot in the global landscape," the IMF mission chief for India, Paul Cashin said.
Cashin said the halving of global oil prices that began in late 2014 boosted economic activity in India, further improved the external current account and fiscal positions, and helped lower inflation.
In addition, continued fiscal consolidation, by reducing government deficits and debt accumulation, and an anti-inflationary monetary policy stance have helped cement macroeconomic stability, he added.
Noting that the government has made significant progress on important economic reforms, which will support strong and sustainable growth going forward, Cashin said the upcoming implementation of the goods and services tax (GST) will help raise India's medium-term growth to above eight per cent.
GST will enhance the efficiency of production and movement of goods and services across Indian states, he said.
However, there is little scope for complacency.
"A key concern for us is the health of the banking system, which is still dealing with large amount of bad loans, and also heightened corporate vulnerabilities in several key sectors of the economy," he said.
Responding to a question on demonetisation, he said the strong shortage of cash has disrupted economic activities.
However, he said the Indian Government appears to have that taken measures to alleviate payment disruptions, such as temporarily allowing use of old banknotes for purchases of fuel and agricultural inputs, have helped mitigate the negative impact.
"So we expect the slowdown to be limited and relatively short-lived and the financial system to come through unscathed. Of course, potential loan repayment risks should be monitored carefully, particularly given an already elevated level of non-performing loans," Cashin said.