Will Modi’s In­dia cash ban plan back­fire?

Signs emerge cash crunch could hit In­dian econ­omy hard

Kuwait Times - - FRONT PAGE -

Prime Min­is­ter Naren­dra Modi’s shock de­ci­sion to scrap most of In­dia’s cur­rency was hailed by some as a mas­ter­stroke against en­demic cor­rup­tion, but signs are emerging that it may hit the econ­omy hard. The sweep­ing overnight abo­li­tion of all high-value notes was sup­posed to bring bil­lions in so-called “black”, or un­de­clared, money back into the for­mal sys­tem.

But ex­perts are warning the en­su­ing cash crunch could have a dra­matic im­pact on growth just as the econ­omy was be­gin­ning to take flight. In­dia runs largely on cash, but that is still in short sup­ply, nearly three weeks af­ter Modi’s shock an­nounce­ment that 86 per­cent of its cur­rency would be with­drawn from cir­cu­la­tion.

Many ATMs re­main empty and banks have been forced to ra­tion cash as they face huge queues. Many peo­ple have still not been able to change their old cur­rency.

That has left farm­ers un­able to sow their crops and pro­duce mar­kets all but empty, while small traders like the tea sell­ers that dot In­dia’s streets say busi­ness has fallen off a cliff.

On Thurs­day for­mer prime min­is­ter Man­mo­han Singh, a re­spected econ­o­mist, told par­lia­ment the surprise de­ci­sion would shave at least two per­cent­age points off growth and slammed the gov­ern­ment for what he said was shoddy im­ple­men­ta­tion.

The ru­pee shake-up had been “a mon­u­men­tal man­age­ment fail­ure” and “a case of or­ga­nized loot and le­gal­ized plun­der”, said Singh, who be­longs to the op­po­si­tion Congress party.

More wor­ry­ing still for the prime min­is­ter, ex­perts in­clud­ing for­mer US Trea­sury Sec­re­tary Larry Summers have ques­tioned whether the scheme will even achieve its core aim of cut­ting tax eva­sion. “With­out new mea­sures to com­bat cor­rup­tion, we doubt that this cur­rency re­form will have last­ing ben­e­fits,” said Summers in a blog post de­nounc­ing the move.

“Cor­rup­tion will con­tinue al­beit with slightly dif­fer­ent ar­range­ments.”

Pop­u­lar sup­port

Most ex­perts agree it is too early to say what the im­pact will be on In­dia’s gross do­mes­tic prod­uct, which ex­panded 7.1 per­cent year-on-year in the three months from April-June, out­pac­ing Asian ri­val China. “The fall-out of the pol­icy is un­fold­ing now. So the next month will be crit­i­cal to de­ter­mine what peo­ple fi­nally think of this move,” po­lit­i­cal an­a­lyst Dev­dan Chaud­huri said.

But rat­ings agency Fitch has al­ready said it is re­vis­ing down its In­dia growth forecast for the fourth quar­ter of the cal­en­dar year, say­ing it would “al­most cer­tainly” be weak. Yes Bank chief econ­o­mist Shub­hada Rao said it would take un­til the mid­dle of next year for growth to re­cover.

“We are see­ing dis­rup­tion to growth in the near term, but once liq­uid­ity is re­stored, de­mand will re­turn. By the sec­ond quar­ter of the next fi­nan­cial year, GDP will re­turn to nor­malcy,” he told AFP.

Ex­perts say the move was a con­tribut­ing fac­tor to the ru­pee hit­ting an all-time low of 68.8625 ru­pees against the dol­lar on Thurs­day, al­though the main rea­son was an ex­pected US rate rise next month. The un­cer­tainty has con­trib­uted to huge out­flows of for­eign cap­i­tal from In­dia, al­though N S Venkatesh, a cur­rency spe­cial­ist at IDBI Bank, told AFP this could re­verse in time.

“For­eign in­vestors are wait­ing to see how the de­mon­e­ti­za­tion drive will play out in the near term. If it sta­bi­lizes, all the cash could come back to the In­dian econ­omy,” he said. Modi, who won a land­slide elec­tion vic­tory in 2014 on a prom­ise to tackle en­demic cor­rup­tion, has strongly de­fended his move, which still en­joys wide­spread pop­u­lar sup­port.

Many poor In­di­ans who have pa­tiently spent hours queue­ing at banks say they back the de­ci­sion if it forces the rich to pay their taxes. Only six peo­ple earn­ing over 500 mil­lion ru­pees ($7.3 mil­lion) filed tax re­turns in 2012-2013, even though an es­ti­mated 2,100 In­di­ans have a net worth that ex­ceeds $50 mil­lion.

In a speech on Fri­day the prime min­is­ter urged or­di­nary In­di­ans to stick with him, promis­ing that “the new notes will come” and say­ing the scheme would root out cor­rup­tion and tax eva­sion. “This black trade is eating away our coun­try like ter­mites,” he said, com­par­ing tax eva­sion to the “ex­ploita­tion of the poor”. — AFP

CHENNAI: An In­dian woman holds INR 2000 notes as she has her fin­ger marked with in­deli­ble ink af­ter ex­chang­ing 500 and 1000 ban­knotes at a bank in Chennai. — AFP

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