Will Modi’s India cash ban plan backfire?

AFP, MUMBAI:  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is still in short supply, nearly three weeks after Modi’s shock announcement that 86 percent of its currency would be withdrawn from circulation.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 “a monumental management failure” and “a case of organised loot and legalised 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.”
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 told AFP.
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.

Will Modis India cash ban plan backfire?

AFP, MUMBAI: Prime Minister Narendra Modis shock decision to scrap most of Indias 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 Modis 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 Indias 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 a monumental management failure and a case of organised loot and legalised plunder, said Singh, who belongs to the oppositionCongress 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. Most experts agree it is too early to say what the impact will be on Indias 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 told AFP. 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.