NEW DELHI - The World Bank has lowered India's growth forecast for the financial year ending March to a "still robust" 7% from an earlier estimate of 7.6%, citing the demonetization program launched in November as one of the factors.
This was the World Bank's first projection on India since Prime Minister Narendra Modi's sudden cancellation of 500-rupee ($7.3) and 1000-rupee banknotes from midnight on Nov. 8, aimed at cracking down on untaxed wealth, corruption, and counterfeit currency.
The Modi government's move sucked some 15.4 trillion rupees out of the economy. Cash transactions account for about two-thirds of India's gross domestic product, or 90 trillion rupees.
"In India, 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," the World Bank said on Wednesday in its January 2017 Global Economic Prospects report.
India, it said, "is expected to regain its momentum, with growth rising to 7.6% in FY [financial year ending March] 2018 and strengthening to 7.8% in FY2019-20."
Various reform initiatives are likely to unlock domestic supply bottlenecks and raise productivity, the World Bank said, adding that infrastructure spending should improve the business climate and attract investment in the short term. Modi's ambitious Make-in-India campaign may support the country's manufacturing sector, backed by domestic demand and further regulatory reforms.
A medium-term benefit of demonetization, it said, may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity.
Noting that cash accounts for more than 80% of transactions, it said demonetization in the short term could continue to disrupt business and household economic activity, weighing on growth.
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 in India, such as a goods and services tax, and labor and land reforms, the report said.
For the financial year ending March 2017, Indian growth is estimated to have decelerated to 7%, "with continued tailwinds from low oil prices and solid agricultural output partly offset by challenges associated" with demonetization, it continued.