In its first projection on India post the demonetisation of high value currency, the World Bank has lowered the country's GDP growth estimate for this fiscal to 7 per cent, from the 7.6 per cent estimate made in June last year. US firm Fitch Ratings has also reiterated its late November downgrading of India's growth outlook.
"Growth in India is estimated to reach 7 per cent in financial year (FY)2017 ... reflecting a modest downgrade to India's expansion," the multilateral lender said in its Global Economic Prospects report released here on Tuesday.
"Unexpected demonetisation -- the phasing out of large denomination currency notes -- weighed on growth in the third quarter of FY 2017," it said.
"Weak industrial production and manufacturing and services purchasing managers' indexes further suggest a setback to activity in the fourth quarter of FY 2017," the report added.
Last week, India's official statistician in New Delhi also lowered the country's gross domestic product growth estimates for 2016-17 to 7.1 per cent, compared with the 7.6 per cent growth in 2015-16.
While announcing its monetary policy review last month, the Reserve Bank of India acknowledged the demonetisation factor and lowered its gross value added (GVA) growth estimates for the current fiscal to 7.1 per cent from 7.6 per cent forecast earlier.
On November 8, Prime Minister Narendra Modi announced the demonetisation of Rs 1,000 and Rs 500 notes, saying the move was aimed at eliminating black money, counterfeit currency and terror financing.
As cash accounts for more than 80 per cent of the number of transactions in India, demonetisation "could continue to disrupt business and household economic activities, weighing on growth", the World Bank said.
According to the report, even with a 7 per cent growth rate for 2016-17, India will still be the fastest growing major economy in the world, bypassing China, which is projected to grow at 6.5 per cent in 2016.
China's planning body the National Development and Reform Commission on Tuesday estimated the economy to have grown about 6.7 per cent in 2016. The world's second largest economy registered the same growth rate in the first, second and third quarters last year, it said.
The World Bank said the challenges encountered in implementing demonetisation may pose risks to the pace of other economic reforms such as the Goods and Services Tax (GST) and labour and land reforms.
Following eight meetings of the GST Council in New Delhi and the vocal opposition of some states to demonetisation, it is all but certain that the Centre will be unable to keep to its targeted deadline of rolling out GST by April 1, 2017.
The World Bank expects global growth in 2017 to rebound to 2.7 per cent from a post-financial crisis low of 2.3 per cent last year.
"After years of disappointing global growth, we are encouraged to see stronger economic prospects on the horizon," World Bank President Jim Yong Kim said in a statement.
American rating agency Fitch on Tuesday downgraded India's growth outlook to 6.9 per cent for 2016-17, from the earlier 7.4 per cent, citing the "short-term disruptions" caused by demonetisation.
"The demonetisation of large denomination bank notes has caused short-term disruption in India's economy and led us to downgrade our growth forecasts for 2017," Fitch Ratings said in its latest bi-monthly newsletter released on Tuesday.