The World Bank in latest report titled ‘Global Economic Prospects’ has cut India’s Gross Domestic Product (GDP) growth to 7 percent from its earlier estimate of 7.6 percent on the back of demonetisation of high value currency notes. It also declared that the country would regain its momentum, with growth rising to 7.6 percent in Fiscal Year (FY) 2018 and strengthening to 7.8 percent in FY 2019-20, as various reform initiatives are expected to unlock domestic supply bottlenecks and raise productivity. It has said that the immediate withdrawal of a large volume of currency in circulation and subsequent replacement with new notes announced by the government in November contributed to slowing growth in 2016.
According to the report, which pointed out that 80% of transactions were in cash, thus in the short-term, demonetisation could continue to disrupt business and household economic activities, weighing on growth. But the report also noted that in the medium-term, a benefit of demonetisation may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity. The World Bank said that the challenges encountered in phasing out large currency notes and replacing them with new ones may pose risks to the pace of other economic reforms like Goods and Services Tax, labour and land reforms.
The report added that infrastructure spending should improve the business climate and attract investment in the near-term. The World Bank said that 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 favourable monsoon rains.
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