Will Modi’s India cash ban plan backfire?
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 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still in short supply, nearly three weeks after Mr Modi’s shock announcement that 86 percent of its currency would be withdrawn from circulation.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.
Former prime minister Manmohan Singh, a respected economist, told parliament the decision would shave at least 2 percentage points off growth and slammed the government for what he said was shoddy implementation.
The rupee shake-up had been a “a monumental management failure” and “a case of organised loot and legalised plunder”, said Mr Singh, who belongs to the opposition Congress party.
Most experts agree it is too early to say what the impact will be on India’s gross domestic product, which expanded 7.1pc year-on-year in the three months from April-June, outpacing Asian rival China.
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.
Experts say the move was a contributing factor to the rupee hitting an all-time low of 68.8625 rupees against the dollar last week, although the main reason was an expected US rate rise next month.
The uncertainty has led to huge outflows of foreign capital from India, although NS Venkatesh, a currency specialist at IDBI Bank, said this could reverse in time.
“Foreign investors are waiting to see how the demonetisation drive will play out in the near term. If it stabilises, all the cash could come back to the economy,” he said. –