Costs outpace the benefits of Modi's 'shock therapy' cash crunch
ON Nov 8 last year, in a surprise move, Prime Minister Narendra Modi announced that the two largest currency bills, accounting for 86 per cent of currency in circulation by value, would be invalid immediately. This shock move led to a nationwide commotion and outrage.
Two months on, it appears that the costs of the cash crunch are outweighing the benefits. Some economic and political fallout of the bold move are inevitable in the short term. It should not be a surprise if Modi suffers some setbacks in state elections that are approaching.
India embarked on economic reforms in the early 1990s in response to a severe balance of payments crisis. Monetary and fiscal policies were tightened, tariffs were reduced, and the pervasive industrial licensing system was liberalised. These reforms unleashed market forces and placed the economy on a higher growth path. India's share of global GDP had also started to rise somewhat and there was talk of the emergence of a "Shining India".
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