India Development Update: Unlocking Women’s Potential.

Abstract

A favorable monsoon generated tailwinds to India’s domestically-driven expansion. The Gross Domestic Product (GDP) expanded by 7.9 percent in FY16, the fastest pace in 5 years, supported by investment and urban consumption. The normal monsoon in FY17 boosted agriculture and rural consumption, while urban consumption remained robust. Despite renewed weakness in private investment and limited lift from external demand, India was poised to continue growing robustly in FY17 until “demonetization” dented growth, albeit moderately, causing immediate cash crunch, and affecting activity in cash reliant sectors. The cash crunch affected activity in cash reliant sectors and GDP growth slowed to 7.0 percent y/y during Q3 FY17, from 7.3 percent during H1 FY17. Such a modest slowdown can be explained by: (i) coping mechanisms (e.g. informal credit); (ii) higher rural wages and public consumption; and (iii) higher reported sales to legitimize holdings of old currency and use of formal-sector indicators to measure informal activity, which exacerbated measured growth.