Will Modi’s In­dia cash ban plan back­fire?

The Myanmar Times - - International Business -

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. –

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