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‘Demonitisation will impact consumer spending in short term’

United Nations: The demonitisation undertaken in India will have a “significant impact” on consumer spending in the short term but the country’s economy will return to the about 7.6-7.7 per cent growth forecast by a flagship UN report, a senior economic official said.

The United Nations World Economic Situation and Prospects (WESP) 2017 report launched today said India’s economy is projected to grow by 7.7 per cent in fiscal year 2017 and 7.6 per cent in 2018, benefiting from strong private consumption. The report however did not take into consideration the impact of the demonization policy on the country’s economic growth.

Senior Economic Affairs Officer, Global Economic Monitoring Unit, Development Policy and Analysis Division in the UN Department of Economic and Social Affairs Dawn Holland said the report’s forecast was finalised on November 11, just a few days after the demonitisation policy was announced and so it hasn’t been revised to take into account the impact on economic growth that might be expected from withdrawal of the high-denomination currency notes by the government.

“What we do expect is that, as we have already seen the first signs, the cash shortages that have resulted from that will have significant impact on consumer spending in the short term – in the fourth quarter of 2016 and also following in the first quarter of this year,” Holland said in response to a question by PTI on what demonitisation’s impact will be on the country’s growth going forward.

Holland added that India’s economic growth rate could see a downward revision when the estimates are updated in the next few months, taking into account the demonitisation impact.

“We don’t think it should have a long term impact so we would expect the economy to return to the sort of rates of growth that we have in the current forecast but for the 2016-17 financial year we would probably be looking to revise that down somewhat,” Holland said during a briefing here to launch the report.

She added that an update of the economic report will be made in April and that will take into account the impact of demonitsation on India’s growth. Holland said she wouldn’t put a number on what India’s economic growth will be when the effects of the currency withdrawal are taken into consideration.

“We don’t expect the country to be in recession. That is not the level of impact that is expected but it certainly will slow the rate of consumption spending in the short term,” she said.