Sputtering economy poses a huge challenge

Thirty days after the Prime Minister Narendra Modi took a drastic monetary reform of Indian currency, the economy is certainly sputtering. His scheme of removing high value denominated ₹1,000 and ₹500 notes from circulation is becoming increasingly unpopular, given the pain it has inflicted on the poor and those in informal sector.

If the government does not step in to tackle the long serpentine queues before ATMs in next few days and assuage concerns of the common man, the Modi-led government may end up squandering the political capital it currently enjoys, say economy watchers.

This is because the poor (major vote banks) and even salaried class has been worst hit by Modi’s bitter medicine of removing 86.4 per cent by value of cash in circulation at one fell sweep on November 8.

The government, however, is hopeful that it would get a windfall by expropriating cash from those black money hoarders who have now rushed to banks to deposit their unaccounted money.

While the idea was worthy, its implementation went awry given that Reserve Bank of India has to do some heavy lifting to replace the nearly ₹14 lakh crore worth of ₹500 and ₹1,000 notes that went out of circulation. Normalcy would certainly return and economy may return to recovery path, but not before next four to six months.

Although it is now certain that corporate earnings are going to take a beating (especially with interest rate cuts not coming their way) and demand taking huge knock, the Finance Ministry is quite unfazed about the negative implications of demonetisation on economic growth.

There is no clarity within Finance Ministry on the macroeconomic impact of demonetisation. The only hope that North Block is riding on is that the fourth quarter could see a bump up in agriculture output, which could offset the expected drag in manufacturing and services sectors during third and fourth quarters.

Richa Gupta, Senior Economist, Deloitte in India, noted that the overall impact on growth is difficult to call, but safe to say “that we are going to see some negative transitional impact”.

At this juncture, the speed of the recovery will crucially depend on the process of re-monetisation and speed of the process, she added.

Nimish Goel, Head of Indirect Tax Practice, International Business Advisors, said that as more and more efforts are made by the government to encourage people pay using digital currency, the tendency to keep physical cash should go down.

“In addition to removing taxes when payments are made digitally, it will also be worthwhile to keep a threshold beyond which cash payments should not be allowed. Some of the Nordic countries and countries like Canada have such measures, which shall immensely reduce dependency on cash thereby, curb black money,” he said.