India fears aftershocks from cash crackdown

Struggling with customers unable to pay on time and plummeting sales, Indian small-business owner Ravi Jain fears the government’s crackdown on cash will have a much larger impact than predicted by top policymakers. Jain’s bath taps manufacturing firm Supreme, along with many other Indian businesses, has been shaken by New Delhi’s shock decision last November to scrap 86 per cent of the cash in circulation. “Demonetisation has developed a psychology among customers to spend only on essential items,” Jain said.

“We expect the cash situation to become normal in a couple of months, but we don’t know when this psychology will change.”

Asia’s third-largest economy is tipped to slow down to a near threeyear low in the October-December period, losing the title of the world’s fastest-growing major economy to China.

The median estimate from a Reuters poll showed economists expect economic growth to slip to 6.4 per cent in the last quarter, lower than China’s 6.8 per cent in the same period and slower than a 7.3 per cent annual expansion in the September quarter.

Prime Minister Narendra Modi’s currency ban had caused huge disruption to daily life, leaving farmers, traders and firms in disarray.

Chief Economic Adviser Arvind Subramanian last month said the official GDP figures may not fully reflect the “real and significant hardships” experienced by the informal sector, in which an estimated nine out of 10 Indian workers are employed. But the pain, policymakers promised, will be short-lived. The Reserve Bank of India (RBI) has called the slowdown a transitory phenomenon and expects a sharp rebound in economic growth in the next fiscal year as cash conditions improve.

Many economists predict the aftershocks of Modi’s move will linger for months.

Consumer confidence has fallen sharply with households uncertain about their income, employment and spending capability, according to RBI’s consumer confidence survey published earlier this month.

In rural India, the situation is no better. Sales of two-wheeler vehicles fell for a third straight month in January.

“We have seen extreme volatility in the market,” Jain said about his company, whose sales have improved slightly since dropping as much as 50 per cent after Modi’s November announcement. — Reuters