The Asian Development Bank (ADB) has trimmed its growth estimates for India to 7 percent in 2016 from its earlier forecast of 7.4 percent on the back of government's recent move on demonetisation, weak investment climate along with low agricultural growth.
In a report titled 'Asian Development Outlook Supplement,' the regional development bank said India's surprise demonetisation of large banknotes is likely to interrupt GDP expansion in the second half of this year.
"Government's decision to demonetise and replace high-denomination banknotes—temporarily erasing 86 percent of the value of cash in circulation—will defer consumption to FY2017 for lack of cash to pay for it," the report said.
The report also flagged up concerns relating to weak investment scene impacting the GDP growth rates. "Growth in agriculture has also slowed down," it said.
It, however, added that growth figures would bounce bank in 2017 with easing of cash crunch coupled with a likely lower interest rate regime. "While some disruption may persist until the first quarter of 2017, growth is likely to benefit as higher bank deposits should force down lending rates and thereby boost investment," it said.
The development bank also said higher tax collections post banning of high value currencies is likely to boost capital expenditure, pushing growth figures. "In sum, the Indian economy is expected to grow by 7.8 percent in FY2017, in line with the earlier forecast," the ADB report said.
In a surprise move, Indian government banned high value currencies like Rs 500 and Rs 1,000 notes last month to check flow of black money in the system. This, however, has slowed down consumption demand in the economy owing to ongoing cash crunch.
Meanwhile, the development bank has reduced its growth forecast for developing Asia - a group of 45 nations in the Asia-Pacific region- to 5.6 percent from 5.7 percent earlier.
"Asian economies continue their robust expansion in the face of global economic uncertainties," a Reuters report quoted ADB deputy chief economist, Juzhong Zhuang as saying.