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World Bank cuts India’s FY17 growth forecast to 7%

World Bank cuts India’s FY17 growth forecast to 7%

  • The World Bank has lowered its growth forecast for India to 7 per cent from 7.6 per cent in 2016-17, citing a slowdown in consumption and manufacturing due to demonetisation and an ongoing decline in private investment and credit constraints due to impaired bank balance sheets.
  • The World Bank’s Global Economic Prospects January 2017 report added that the Indian economy is subsequently set to recover its growth momentum, with growth rising to 7.6 % in FY18 and further strengthening to 7.8 % in FY20.
  • “Unexpected ‘demonetization’— the phasing out of large-denomination currency notes which were subsequently replaced with new ones—weighed on growth in the third quarter of FY2017.
  • Weak industrial production & manufacturing, services purchasing managers’ indexes (PMI), further suggest a setback to activity in 4th quarter of FY2017.
  • A retrenchment of private investment, reflecting excess capacity, corporate deleveraging, and credit constraints due to impaired commercial banks’ balance sheets, also had an adverse effect on activity.
  • The report, however, noted that four key reforms in India in 2016 could help growth rebound.
    • Passage of the bankruptcy and insolvency code
    • Liberalisation of FDI norms across sectors
    • Passage of the Goods and Services Tax (GST) Amendment Bill
    • Agreement between the government and the Reserve Bank of India on a monetary policy framework that includes setting up a monetary policy committee and agreeing on a flexible inflation target
  • Infrastructure spending should improve the business climate and attract investment in the near-term.
  • The ‘Make in India’ campaign may support India’s manufacturing sector, backed by domestic demand and further regulatory reforms.
  • Moderate inflation and a civil service pay hike should support real incomes and consumption, assisted by bumper harvests after favorable monsoon rains.
  • A benefit of ‘demonetization’ in the medium term may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity.
  • Report added that demonetisation effect on trade and remittance channels could also affect growth rates in smaller economies such as Nepal and Bhutan.

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