Junked Cash Sends India Economy in Tailspin

Sunitha Natti, a senior business journalist, is a non-resident Fellow for The India Center in the College of Sciences at the University of Central Florida. Below, Natti provides an update on India’s economy:

Nov. 8 was a historic day for the world in general, and for the United States and India in particular. If president-elect Donald Trump’s unexpected victory hogged headlines, India’s Prime Minister Narendra Modi shocked the nation with his audacious move to junk two high-value currency notes overnight. The denominations – Rs 500 and Rs 1,000 (approximately $7.50 and $15.00, respectively) – comprise 86 percent of the country’s total currency in circulation, and their withdrawal instantly sucked out liquidity, choking businesses and everyday life.

The target was to unearth black money (an estimated one-third of the GDP is said to be in India’s parallel economy), boost taxable income, reduce corruption, weed out counterfeit currency and cut funding to terror outfits. But the suddenness of the move caused panic and an economic morass.

For now, the nation’s 1.3 billion population is pledging support to withstand a temporary cash crunch, but if inconvenience and uncertainty are prolonged, there will be immense economic distress, which could cost Modi his political career. Initial estimates peg a nominal slowdown in the world’s fastest growing economy over the next two quarters. But economists believe the government’s frontal attack on black money, which is unprecedented in scale, will produce short-term disruptions that far outweigh its benefits. For one, real estate, known for its huge cash deals, is undergoing a remarkable correction. The financial services landscape is also evolving, as the country’s roughly 15 million merchants brace up for cashless transactions, raising the bar for accountability and transparency.