New Delhi: Days after RBI lowered the GDP forecast by half a per cent to 7.1, multilateral funding agency ADB too lowered it to 7 per cent for the current fiscal due to the impact of demonetisation on economic activities.
ADB said however that the impact of demonetisation would be temporary and retained growth projection at 7.8 per cent for the next fiscal.
Reserve Bank of India last week cut the GDP growth forecast to 7.1 per cent, from 7.6 per cent earlier, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.
“India’s tempered growth projection to 7 per cent from the previously forecast 7.4 per cent in 2016 is due to weak investments, a slowdown in the country’s agriculture sector, and the lack of available cash due to the government’s decision to ban high-denomination banknotes,” ADB said in a supplement to its Asian Development Outlook 2016 Update.
The Indian economy expanded by 7.1 per cent and 7.3 per cent in the first and second quarters of 2016-17.
Asian Development Bank (ADB) further said that this will likely affect largely cash-based sectors in the country including small-and medium-scale businesses.
“The effects of the transition are expected to be short-lived and the Indian economy is expected to grow at 7.8 per cent in 2017,” it said.
According to RBI there could be travel through short-run disruptions in economic activity in cash-intensive sectors such as retail trade, hotels and in the unorganised sector and demand compression associated with adverse wealth effects.
“Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks,” the RBI said.
Trimming of India’s growth forecast has bearing on the Asian economy. Economic growth in developing Asia remains broadly stable, but a slight slowdown in India has trimmed the region’s growth outlook for 2016.
ADB has downgraded 2016 growth to 5.6 per cent, below its previous projection of 5.7 per cent. However, growth remains unchanged at 5.7 per cent for 2017.
Asian economies continue their robust expansion in the face of global economic uncertainties, said ADB Deputy Chief Economist Juzhong Zhuang.
“Structural reforms to boost productivity, improve investment climate, and support domestic demand can help maintain growth momentum into the future,” he said.