Cash out:The IMF urged the Centre to continue supply of new currency notes.AFP
India’s demonetisation led to huge cash shortages that have “adversely affected” consumption and like a “vacuum cleaner” it sucked in cash and then was slowly replacing the currency, a senior IMF official has said.
“You’ve heard about so-called ‘helicopter drops’ of money with unconventional monetary policies, so one way to characterise this demonetisation initiative is as a vacuum cleaner,” Paul A Cashin, Assistant Director in the IMF’s Asia and Pacific Department, and mission chief of India, told PTI.
“It’s sucking in cash, withdrawing it from the economy, and then the vacuum cleaner is going in reverse, slowly replacing cash but as I said, at a fairly modest pace. That’s led to a lot of cash shortages that have adversely affected consumption,” Mr. Cashin said in response to a question as the IMF released its annual country-report on India.
Given the shortage of cash in the market, IMF in its report urged the Indian government to continue to enhance the supply of new banknotes, and if needed consider extending or expanding targeted temporary exemptions, including on use of old banknotes, particularly for rural and remote areas.
“While the financial system is expected to weather the currency exchange-induced temporary growth slowdown, the authorities should remain vigilant given the potential further build-up of NPAs and elevated corporate sector vulnerabilities, and ensure prudent support to the economic sectors affected by the currency exchange initiative,” the IMF said.
IMF said the repercussions from India’s currency exchange initiative will likely persist through the first quarter of 2017.
Real GDP growth is projected to slow to 6.6% in FY2016/17 and then rebound to 7.2% in FY2017/18, due to temporary disruptions (primarily to private consumption) caused by cash shortages accompanying the currency exchange initiative. “These effects are expected to gradually dissipate by March 2017 as cash shortages ease,” it said.