Financial institution blames recall of 1,000 and 500 rupee notes for ‘still robust’ lower rating, down 0.6% on earlier prediction

The World Bank has downgraded the Indian economy’s growth forecast as sharp falls in the country’s automobile and real estate sales flagged the short-term impact of recalling India’s two most-used bank notes.

The Washington-based financial institution predicted India’s economy would grow by a “still robust” 7% in the fiscal year to March 2017 – a 0.6% drop from its earlier forecast but still the fastest rate of any major economy in the world.

It attributes the fall to November’s decision to recall all 1,000 and 500 rupee currency bills from circulation, a surprise demonetisation move intended to weed out untaxed wealth, hasten the digitisation of India’s economy and disrupt terrorist and other criminal networks.

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“Continued tailwinds from low oil prices and solid agricultural output [were] partly offset by challenges associated with the withdrawal of a large volume of currency in circulation and subsequent replacement with new notes,” the World Bank said on Wednesday.



Demonetisation has suffocated the vast informal economy, which employs up to 80% of Indians, but the World Bank said the impact of the policy was likely to be short term. “India is expected to regain its momentum, with growth rising to 7.6% in fiscal year 2018-19 and strengthening to 7.8% in fiscal year 2019-20,” the bank said.

Automobile industry data also released on Wednesday showed the largest fall in sales in 16 years. Nearly 300,000 fewer vehicle were purchased last month than in December 2015, a drop of 19%, according to the Society of Indian Automobile Manufacturers.

Sales of two-wheelers – which require less paperwork to buy and are more popular in rural areas, so are more likely to be bought in cash – fell by 22%, the steepest rate since Siam began collecting data in 1997.

Property sales also came to a complete standstill, according to a report by property consultants Knight Frank India. Sales fell by 44% across eight major Indian cities between October and December 2016, compared with the same period in 2015, the report said.

Delhi was particularly badly hit, with sales in the capital slumping by more than 50%, and 73% fewer new residential developments being launched than in the last quarter of 2015. “The effect of demonetisation on all segments of the real estate sector across all markets has been fairly brutal to say the least,” said Shishir Baijal, the chairman of Knight Frank India.

Speaking at the Vibrant Gujarat summit on Wednesday, the Indian finance minister, Arun Jaitley, continued to defend demonetisation, linking the policy to the goods and services tax the government is aiming to introduce in April. “The combination of a more digitised economy with a more efficient tax system ... will make our economy look much cleaner and bigger,” he said.

Jaitley said the rupee recall was “a major step toward integration of [the] informal economy with the more formal economy”. He said: “This itself is going to increase the transactions which are covered within the banking system, transactions which may lead to higher [tax] revenue in the future.”