The International Monetary Fund (IMF) has said that India's projected growth will be around 6.6 per cent in fiscal 2016-17 due to what it called "temporary disruptions" caused by demonetisation.
Releasing its annual country report here, the IMF, however, said the negative impact of demonetisation on the Indian economy would not last for long, and that the country has the potential to enjoy growth of more than eight per cent within the next few years.
It also said that demonetisation has affected both consumption patterns and business activity, this creating a new challenge for the Narendra Modi-led government to sustain growth momentum.
"Growth is projected to slow to 6.6 per cent in FY2016/17, then rebound to 7.2 per cent in FY2017/18, due to temporary disruptions, primarily to private consumption, caused by cash shortages," the IMF says in the report.
In fiscal 2015-16, the Indian economy grew at 7.6 per cent.
The IMF annual report also predicts that investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilization picks up.
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IMF Directors supported the Indian efforts to clamp down on illicit financial flows, but noted "the strains that have emerged" from the currency exchange initiative.
"They called for action to quickly restore the availability of cash to avoid further payment disruptions and encouraged prudent monitoring of the potential side-effects of the initiative on financial stability and growth," the report said.
Noting India's strong economic performance of the past few years, the IMF Executive Directors commended New Delhi for its strong policy actions, including continued fiscal consolidation and an anti-inflationary monetary policy, which have underpinned macroeconomic stability.
As such, the IMF recommended continued vigilance to potential domestic and external shocks and urged the authorities to further advance economic and structural reforms to address supply bottlenecks, raise potential output, create jobs, and ensure inclusive growth.