Government may understate demonetisation effect

The International Monetary Fund’s regional outlook for May has projected a slowdown in India due to a cash crunch caused by demonetisation even as economic growth is expected to remain robust in the Asia and Pacific region compared to the levels projected in the last forecast in October.

The National Accounts Statistics may understate the economic impact of the cash crunch, at least in the near-term, according to the report.

“The recent growth momentum in the largest economies in the region remains particularly strong, reflecting policy stimulus in China and Japan, which in turn is benefitting other economies in Asia,” The IMF’s May 2017 Regional Economic Outlook for Asia and the Pacific said. “More broadly across the region, forward-looking indicators such as the Purchasing Managers’ Index suggest continued strength in activity into early 2017.

Currency initiative

“Growth is revised downward in India due to temporary effects from the currency exchange initiative and in Korea owing to political uncertainty,” it stated.

It added that an analysis by IMF’s staff suggests that, compared to the October 2016 forecasts, cash shortages are likely to slow growth in the financial year 2016-17 by about 4/5ths of a percentage point and financial year 2017-18 growth by about half a percentage point.

“It is likely, however, that National Accounts Statistics, at least in the near-term, may understate the economic impact of the cash crunch,” the report stated.

“Specifically, the impact on the informal economy and cash-based sectors, which are relatively large and have been affected the most by the cash crunch, is likely to be understated because these sectors are either not covered in the official statistics or are proxied by the formal sector activity indicators.”