Modi’s cash clampdown poses challenge for govt

Prime Minister Narendra Modi’s unprecedented cash clampdown was initially hailed as a surgical strike against black money menace. But now it seems to be an ill-conceived economic harakiri. One month after Modi government banned the two largest bank notes, people are still struggling to get their hands on the new currency. India is largely a cash –based economy. The demonetization decision seems be the most cavalier given the fact that more than 90% of transactions are done with cash only.
It was the most stunning move. When Modi took the decision, the bills accounted for almost 86% of all cash circulation. The decision was taken in haste and for political considerations rather than economic. The right wing nationalist party is going to use as a poll plank.
Many people have died so far while standing in queue to either deposit or withdraw their own cash. Students are studying for their examinations standing outside the banks waiting to withdraw cash. Marriages have either been cancelled or postponed. Families are going without food or depending on charities.
Also 800 million people live in India’s villages. And majority of them depends on agriculture. The cash ban has made the farmers lives miserable. They are not able to buy seeds for the crops. The agriculture will suffer. It will further aggravate the farmers’ problems. The rural population has started to rebuild their earnings after back-to-back droughts destroyed crops and trade. But currency clampdown, which was aimed at hurting those with unaccounted cash, may impact these folks instead.
Also plastic is not the solution for vast majority. Small businesses, restaurants, groceries simply don’t accept debit or credit card. Moreover, around 223 million people do not have bank accounts, let alone credit or debit cards. Many ATM machines are simply not working. Even if they work, there is no cash.
As the things unfold, it is evident that the government failed to foresee fall outs. The rightwing government is now trying to mend it.
A sum of 600 billion rupees ($9 billion) in additional spending for the year through March, have been cleared. It includes a 10% rise in a rural jobs program. The growth has been slower. Inflation has slumped below the central bank’s target. Consumer prices rose 3.63 percent in November from a year earlier, which is a two-year low and below the 4 percent mid-point of the Reserve Bank of India’s inflation target.
Public spending is needed because the cash ban will hit private investment, said J Dennis Rajakumar, director of the Mumbai-based think tank EPW Research Foundation. “The employment guarantee program to some extent will help ease the rural crisis that the country is heading toward,” he said. Modi government needs to do more to cushion the economy as the rural jobs program creates fewer jobs than needed.
After the terrific performance in last Parliamentary elections, the rightwing nationalist party is trying to consolidate its votebank in states also. And so sustaining commerce in India’s cash-based hinterland is crucial for Modi. Rural India’s support is important if Modi is to win elections in agrarian states including Uttar Pradesh and Punjab next year. And the prime minister is well aware about it. He’s already pledged to double farmer incomes by 2022.
The state elections are very crucial for Modi. If BJP (Modi’s nationalist party) fares well in elections, his policy will be hailed as a success irrespective of what is happening on the ground. And if it fails to win assembly seats, the
demonetization Albatross will be around Modi’s neck.