India’s Modi faces test over cash clampdown
Impact of currency ban expected to play role in state elections
Indian Prime Minister Narendra Modi will go into 2017 watchful but unbowed.
In what will be a busy year of state elections, economists are slashing India’s growth forecasts because Modi’s unprecedented cash clampdown is denting demand.
The experiment has missed its first marker of success and the almost-daily regulatory flip-flops are enraging citizens.
Yet, analysts point to the fact that India hasn’t seen bloody riots of the kind witnessed in Venezuela, which followed Modi in banning higher-value banknotes before it reversed the move.
Perhaps most importantly, a fractured opposition hasn’t been able to capitalize on the social pain triggered by the world’s most sweeping currency policy change in decades.
“So far there has been no successful mobilization of public opinion against demonetization,” said Sanjaya Baru, New Delhi-based director at the International Institute of Strategic Studies and media adviser to Modi’s predecessor, who’s written books analyzing former administrations.
“Though we can’t say what’s going to happen in the future, at least so far it would seem like Modi is on top.”
The move tests Modi’s reputation as the master of the message. He has touted the cash ban as India’s strongest step against tax evasion and graft in a nation where rising economic inequality helped him sweep to power with the biggest electoral mandate in 30 years.
Modi on Nov. 8 banned 500- and 1,000-rupee notes, removing 86 per cent of currency in circulation. With TVs beaming pictures of serpentine queues spilling out of banks and newspapers carrying stories of rural distress, he pleaded with Indians to give him until Dec. 30 to ease the strife.
Here’s the impact: India’s economy is projected to grow 6.5 per cent October-December instead of the 7.8 per cent economists had predicted earlier.
Moody’s Investors Service says asset quality at Indian banks — reeling under a pile of bad loans — will weaken. Small businesses, the biggest creators of jobs, are estimated to forfeit transactions worth $9 billion.
International observers such as former U.S. Treasury Secretary Lawrence Summers and former World Bank Chief Economist Kaushik Basu have criticized Modi’s move.
“Even if consumption revives quickly on the back of remonetization, investment could remain muted for longer,” said Pranjul Bhandari, Mumbai-based economist at HSBC Holdings Plc.
“The output gap, that is the slack in the economy, will likely remain negative for two quarters longer than we had initially estimated, making it unattractive for investors.”
And while the potential impact on state polls due in 2017 is not yet clear, the subdued outlook hasn’t dented the performance of Modi’s party in municipal elections over the past month.
One reason could be his ability to channel his message via social media, as president-elect Donald Trump does, allowing Modi to speak directly to the public without any media filter.
“This shows the importance people attach to good governance,” Modi tweeted on Dec. 20 of the election results.