Crucial state polls a litmus test for Modi’s cash ban

India’s note ban saga continues. And so the common man’s sufferings. Indian Prime Narendra Modi’s shock note ban sparked cash chaos. And it is only obvious in a country where 90% transactions are done in cash. Modi said that the suffering of his compatriot is for the better cause. He asked citizens to give him 50 days to make things better for them.
Modi promised moon to his countrymen. But what the people have suffered in the last two months seems to have eclipsed that moon. Modi’s December 30 deadline has passed, leaving the country still in pain, chaos and confusion.
What unfolded after the cash ban shines harsh light on the government planning. It was done in the most cavalier manner without the least understanding of the ground reality. Now the government is changing its tack. Modi is steering the entire cash ban narrative towards achieving some lofty goals. Now he talks about cashless economy.
Demonetization has hurt all sectors of the country. Measured by the purchasing managers’ index (PMI), Indian manufacturing actually began to contract last month for the first time in all of 2016. Dominant services sector, which makes up about 60 percent of the economy, has also countered downturn. This can’t be blamed on sluggish global demand. Indian firms are suffering from supply-chain disruptions and customers with no cash in their wallets.
Automobile sales fell 19% to 1.2 million units in December, the biggest drop since the same month in 2000. Passenger vehicles sales dropped 1.4 percent while scooters and motorcycles—a key indicator of rural demand—fell 22 percent, the biggest monthly contraction on record.
The drop in auto sales is yet another indication that Modi’s move to suck out 86 percent of the currency in circulation is slowing Asia’s third-largest economy. The industry will miss its 12 percent sales-growth target if Modi’s budget doesn’t include sops for the industry. Gross domestic product is expected to expand 6.8 percent this fiscal year. That’s slower than the 7.7 percent expansion predicted before Modi’s November 8 move.
And there are developments that suggest job losses in India’s vast informal sector that employs more than 90 percent of Indian workers. The cash crunch has hit consumption badly. Consumer sentiment has dipped since mid-December. Presently the mind frame of the consumer is to hold the purchases. The sluggish consumer demand will add pressure on the Modi government to implement measures in the federal budget to help kick-start growth.
Also, the loan growth has hit two-decade low. This has led to The Reserve Bank of India’s announcement to lower the main policy rate to 6 percent from 6.25 percent. The RBI last month lowered its growth forecasts but kept interest rates unchanged and said more data needs to be analyzed to assess the impact of the currency ban.
Despite two months after the note ban, the cash crunch continues across the country. People in non-metros, small cities and remote villages are struggling to make ends meet. There is a paucity of lower denomination notes. ATMs and bank branches are still running dry. This is despite the claims by government and the RBI that there is enough cash to cater to all customers. But the facts on the ground negate all these claims and assurances.
Modi will need at least until May to replace the cancelled bank notes. It is too long a time to calm the nerves of voters and investors. The government is due to present its budget for the next fiscal year on February 1. And states elections are beginning from February 4. It will be a litmus test for Modi. And the results will be worth waiting for.