Bold reform weighs on India’s short term prospects

The IMF has downgraded India’s growth forecast from 7.6% to 6.6% in the 2016-2017 fiscal year following the government’s decision in November to remove 86% of the currency in circulation. The Modi government aimed to get more of the population into the formal economy to raise tax revenues and progress the digitising of the economy. Economic data released for November and December suggests the strongest pillars of growth—consumption and services—were the most affected because of their high cash intensity. While this is likely to continue in the short term, a recovery is expected post-remonetisation. The policy has not yet had a discernible impact on Australian exports—receipts from India were up over 60% y/y in December and 25% in November.