Indian Economists Start Talking About Impact of Self-Inflicted Cash Crunch by Modi Government

Indian Economists Start Talking About Impact of Self-Inflicted Cash Crunch by Modi Government

Indian government announced currency demonetization in November 2016 and the failure of government and the Indian Central Bank after the move has been widely discussed in media. Indian media presented a conflicting view on the issue with many media houses supporting it and few talking against it. It was a major decision announced by Narendra Modi government and it took most of the economists by surprise. Such a move, at this big scale hasn’t been announced in any of the developed or developing economies. So, it wasn’t easy for economists to comment on the impact of this decision.

The issue wasn’t about currency being changed only, the issue was about providing the money back to the people, for spending on their important needs. Political parties in the opposition have largely failed to use the failure of currency demonetization against the current government. However, fresh economic outlook coming from different rating agencies is clearing the issue. IMF and World Bank have already reduced India’s GDP estimates.

Indian Finance Minister Arun Jaitley presented the budget with sops for small business owners and taxpayers in the lowest bracket. The small rebates announced by the Finance Minister could reduce the anger among general public to a certain extent. However, people who have lost job due to abrupt move, would find it difficult to meet their expenses. A fresh report published by Gaurav Choudhury in MoneyControl.com suggests that The Reserve Bank of India could reduce GDP estimates for India in its upcoming policy meeting.

The article suggests that the Central Bank could suggest sub-6.5 percent growth target for Indian GDP. India had a brief period of ruling International ratings as the fastest growing major economy in the world as China is facing slowdown. However, with Indian economy suffering due to bad planning of Indian government and abrupt move of currency demonetization, the country could suffer setback. Chinese government is already taking steps and improving domestic consumption and China could soon be on its growth path. This would leave India longing for ratings upgrade by International Rating agencies. Recent reports suggest that Indian officials were lobbying rating agency officials for ratings upgrade but those requests were declined.

The Reserve Bank of India Governor Urjit Patel has been facing identity crisis and he has been blamed for coming under pressure from the current government. The Central Bank is autonomous but Patel has failed to present himself as a clever economist. Earlier governor Raghuram Rajan has clearly indicated that he wouldn’t accept government’s decision to demonetize Indian currency.

Indian Prime Minister has visited many countries and has been working on promoting India as a destination for manufacturing and services sector. Those moves have done little on ground to improve investments in India. With the latest blow to Indian economy, the government would better plan its next moves.

With cash-crunch, Indian domestic consumption has declined. Also, it is a major setback for the consumer and business sentiment. India is facing elections in many states and the outcome of these elections could decide next move of the Indian government.

This report includes inputs from our correspondents in India.

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