NEW DELHI:India’s growth is projected to rebound to 7.2 per cent in 2017-18, up from the projected 6.6 per cent in FY17, according to the International Monetary Fund’s Article IV consultations report, released on Wednesday in Washington.
The report says that cash shortages and payment disruptions in the wake of note ban undermined consumption and business activity, posing a challenge to sustaining the growth momentum for India.
The report says that favourable factors such as a good monsoon, low oil prices and progress in resolving supply-side bottlenecks will support near-term growth as cash shortages ease. However, the investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilisation picks up. The Fund believes that RBI should raise the policy rate if inflationary pressures gather pace.
With temporary demand disruptions and increased monsoon-driven food supplies, inflation is expected at 4.75 per cent by early 2017 — in line with the Reserve Bank of India’s inflation target of five per cent by March 2017.
Persistently -high household inflation expectations and large fiscal deficits remain key macroeconomic challenges, which limit policy space for supporting growth through demand measures, the IMF added. The strains in financial and corporate sector balance sheets remain a drag on private investment, and weak external demand constrains India’s exports, states the report.
“The government’s currency exchange initiative, where the near-term adverse economic impact of accompanying cash shortages remains difficult to gauge, while it may have a positive economic impact in the medium term,” it adds. The report warns of further deterioration of corporate and public bank balance sheets. It suggests that India continue governance reform of stressed banks.