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Modi turns to old tricks as cash experiment hurts India GDP

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With indicators revealing a difficult end to Prime Minister Narendra Modi's unprecedented cash clampdown, he's turning to time-tested methods to cushion India's economy.

[NEW DELHI] With indicators revealing a difficult end to Prime Minister Narendra Modi's unprecedented cash clampdown, he's turning to time-tested methods to cushion India's economy.

Lawmakers last week cleared about 600 billion rupees (S$12.6 billion) in additional spending for the year through March, which includes a 10 percent increase in a rural jobs program Mr Modi once mocked. Recent growth has been slower than estimated and data due Tuesday are expected to show that inflation slumped below the central bank's target as Mr Modi's move dents demand.

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.

Sustaining commerce in India's cash-based hinterland is crucial for Mr Modi before key state elections next year. Food prices are set to drop as his Nov 8 move to scrap 86 per cent of currency in circulation triggered distress sales of crops.

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Consumer prices probably rose 3.9 per cent in November, according to the median of 32 estimates in a Bloomberg survey of economists before data due later in New Delhi. That would be the slowest pace in 15 months and below the 4 per cent mid-point of the Reserve Bank of India's inflation target.

Governor Urjit Patel kept interest rates unchanged at a six-year-low on Dec 7 and lowered the full-year growth forecast. The Asian Development Bank on Tuesday cut its forecast for India's 2016 gross domestic product expansion to 7 per cent from 7.4 per cent citing weak investment, a slowdown in agriculture and the cash shortages.

Sales of two-wheeler vehicles fell 5.9 per cent in November, the first decline since December 2015, according to the Society of Indian Automobile Manufacturers' figures released last week.

Central among Mr Modi's concerns will be the 800 million Indians who live in villages, slowly rebuilding their earnings after back-to-back droughts destroyed crops and trade. His currency clampdown, which was aimed at hurting those with unaccounted cash, may impact these folks instead as they lack adequate access to banks or internet services.

Rural India's support is important if Mr Modi is to win elections in agrarian states including Uttar Pradesh and Punjab next year. He's already pledged to double farmer incomes by 2022 and has raised spending on the rural jobs program twice this year from the 385 billion rupees budgeted.

The latest boost includes 40 billion rupees on the world's largest public works program: the Mahatma Gandhi National Rural Employment Guarantee Act. Another 30 billion rupees will be spent on farm related activities."The government should immediately undertake more rural development programs like building toilets, houses and roads," said Bhagwat Prasad, director of the Akhil Bharatiya Samaj Sewa Sansthan, a support group for the poor in the Bundelkhand region, part of which lies in Uttar Pradesh. "No doubt MGNREGA could be the best option in providing relief to the rural people whose livelihoods have been made insecure by demonetization." 'Mr Modi needs to do more to cushion the economy as the rural jobs program creates fewer jobs than needed, said Jay Shankar, a New Delhi-based economist who's studied India's rural economy. While public spending is needed to boost demand, any new program would take about 1.5 years for implementation, he said.

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