Impact of India Demonetization Subsides

The International Monetary Fund on Saturday said the impact of demonetization in India had subsided and that industrial production as well as the purchasing managers’ index had recovered.

“We are seeing signs that the impact of demonetization has abated. Some estimates point to about 75% of the cash being replaced,” IMF deputy director, Asia and Pacific Department, Kenneth Kang said, PTI reported.

However, Kang said it was important to quickly replace the defunct currency in order to restore transactions and support people’s capacity to spend.

Changyong Rhee, director, IMF Asia and Pacific Department, said demonetization certainly had some negative impact on growth, but in 2017, it is expected to gradually fade away. “Thus, our growth is projected to rebound to 7.2% in 2017, and 7.7% in 2018, in fiscal-year basis,” he said.

The International Monetary Fund had in January pegged India’s growth rate for 2016 at 6.6% because of the impact of demonetization. On April 19, IMF had said India will not lose the tag of being the fastest growing economy in the world to China anytime soon.

Rhee said Asia is poised to remain the global growth leader into the future. “But as in the past, securing this leading position will require continuing policy upgrades, vigilance against risks, and reforms to boost domestic demand and address growth bottlenecks,” he said.

Noting that appropriate demand support and structural reforms are needed to reinforce growth momentum where it is weak, Rhee said monetary policy should generally remain accommodative, given that inflation is below target and there is slack in most economies.

However, some central banks should stand ready to raise the policy rate and/or tighten macroprudential settings if inflationary pressures increase or credit growth remains too high.