MUMBAI/NEW DELHI -- The International Monetary Fund on Tuesday said that it expects India's economy to grow by 6.7% in 2017, slower than the 7.2% it had forecast in April, due to the lingering impact of the government's sudden demonetization last year and a newly introduced goods and services tax.
Until now, India was the world's fastest growing major economy. It could now be slightly outpaced by its rival China, which is expected to grow at 6.8% this year on "stronger-than-expected outturn in the first half of the year underpinned by previous policy easing and supply-side reforms," according to the World Economic Outlook released on Tuesday.
The IMF said strong government spending and data revisions in India led it to revise upward 2016 growth to 7.1%. But India's gross domestic product growth decelerated to 5.7% in the April-June quarter. The IMF now sees India growing at a slower pace in 2017 than it had initially expected, a view shared by many other international institutions.
The World Bank too scaled down India's economic growth expectations to 7% for the financial year ending March 2018, from a projection of 7.2% earlier. The Asian Development Bank has cut India's growth forecast to 7% and the Organization for Economic Cooperation and Development estimates that India's economy will grow 6.7% in 2017.
The Reserve Bank of India also slashed its forecast for real economic growth to 6.7% this fiscal year ending March, from its prediction of 7.3% in August. RBI uses gross value added growth as a measure of economic growth instead of the usual gross domestic product.
All these organizations, though, agree that India's economy will rebound in 2018, once the GST has bedded into the country's tax system.
"The move, which promises the unification of India's vast domestic market, is among several key structural reforms under implementation that are expected to help push growth above 8% in the medium term," IMF said. In fact, India's economy, as the IMF predicts, will again outpace China in 2018, expanding 7.4% against China's expected 6.5%.
The new tax bunched together a dozen levies into one unified duty. Almost all goods and services are now subject to one of four tax rates: 5%, 12%, 18% or 28%. It came seven months after Prime Minister Narendra Modi banned 500 rupee and 1,000 rupee notes in a sudden move to curb "black money," or untaxed wealth, corruption and counterfeit currency. The drastic step withdrew some 15.4 trillion rupees from the cash-dependent economy, disrupting business activity.
The question now is when the Indian economy will accelerate to its previous pace of growth. N. R. Bhanumurthy, a professor of economics at the New Delhi-based National Institute of Public Finance and Policy, said: "My take is that it is going to be a slow recovery." Bhanumurthy said he expects the economy to grow 6.9% in the current financial year and 7.4% for the next year.
Assuming that productivity remains same and investment is rekindled, GDP could expand 8-8.5% next year. "We are almost a percentage point below the potential for the next year."
But India, along with China, will remain the growth drivers for emerging and developing economies. According to the IMF, the projected aggregate growth rate of such economies is sustained by fast growth in the two largest countries whose populations account for more than 40% of the total of emerging markets and developing economies.
In the economies of ASEAN-5 -- Indonesia, Malaysia, the Philippines, Thailand and Vietnam -- growth is expected to strengthen in 2017 to 5.2% from 5% in April, partly because of stronger-than-expected external demand from China and Europe. Specifically, economic activity in 2017 is projected to expand by 5.2% in Indonesia, 5.4% in Malaysia, 6.6% in the Philippines, 3.7% in Thailand, and 6.3% in Vietnam.
Such growth is underpinned by renewed expansion in exports which in turn bolstered domestic demand in the ASEAN-5 countries.
"In the rest of emerging market and developing Asia, growth is expected to be vigorous and marginally higher than in April 2017," it said. "Among emerging market and developing economies, higher domestic demand in China and continued recovery in key emerging market economies supported growth in the first half of 2017."
Together, ASEAN-5, China and India are seen growing at 6.5% in 2017 and 2018, outpacing the aggregate growth of emerging and developing economies in the list.
Accounting firm Deloitte said in a September report that India will flex its economic muscles over the next few years: "China's rise across recent decades indeed moved the world. And there's further potential there too. The nation expected to beat China -- the one that the consensus view of forecasters sees as having an economy growing even faster than that of China over the next decade -- is India."
India's current potential workforce of 885 million will expand to 1.08 billion in two decades, the Deloitte report said.