Prime Minister Narendra Modi's shock decision to scrap most of India's currency was hailed by some as a master-stroke against endemic corruption, but signs are emerging that it may hit the economy hard. The sweeping overnight abolition of all high-value notes was supposed to bring billions in so-called "black", or undeclared, money back into the formal system.
But experts are warning the ensuing cash crunch could have a dramatic impact on growth just as the economy was beginning to take flight. India runs largely on cash, but that is still in short supply, nearly three weeks after Modi's shock announcement that 86% of its currency would be withdrawn from circulation. Many ATMs remain empty and banks have been forced to ration cash as they face huge queues. Many people have still not been able to change their old currency.
On Thursday former prime minister Manmohan Singh, a respected economist, told parliament the surprise decision would shave at least 2% points off growth and slammed the government for what he said was shoddy implementation. The rupee shake-up had been a "monumental management failure" and "a case of organised loot and legalised plunder", said Singh.
More worrying still for the prime minister, experts including former US Treasury Secretary Larry Summers have questioned whether the scheme will even achieve its core aim of cutting tax evasion. "Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits," said Summers in a blog post denouncing the move. "Corruption will continue albeit with slightly different arrangements."
An Indian protestor holds placards of banned 500 and 1000 rupee notes during a protest against demonetisation, in Mumbai on November 28, 2016 AFPPopular support
Most experts agree it is too early to say what the impact will be on India's gross domestic product, which expanded 7.1% year-on-year in the three months from April-June, outpacing Asian rival China. "The fall-out of the policy is unfolding now. So the next month will be critical to determine what people finally think of this move," political analyst Devdan Chaudhuri said.
Experts say the move was a contributing factor to the rupee hitting an all-time low of 68.8625 rupees against the dollar on Thursday, although the main reason was an expected US rate rise next month.
Modi, who won a landslide election victory in 2014 on a promise to tackle endemic corruption, has strongly defended his move, which still enjoys widespread popular support. Many poor Indians who have patiently spent hours queueing at banks say they back the decision if it forces the rich to pay their taxes. In a speech on Friday the prime minister urged ordinary Indians to stick with him, promising that the new notes will come and saying the scheme would root out corruption and tax evasion.
Indian members of the Congress Party burn an effigy of Prime Minister Narendra Modi during a protest against demonetisation in Siliguri on November 28, 2016AFP
Tens of thousands protests
Meanwhile, tens of thousands of people turned out Monday for nationwide protests against ban on high-value banknotes, which opposition party organisers say has caused a “financial emergency”.
Around 25,000 people took to the streets of the eastern city of Kolkata, whose left-wing Chief Minister Mamata Banerjee has warned of "riots and epidemics" if the ban continues. An estimated 6,000 more turned out to protest in Mumbai, police said.
"We are protesting against the undeclared financial emergency imposed by the government and the hardships people across the country are facing because of this illegal decision," said Manish Tiwari of the opposition Congress party.
Owners of the banned 500 and 1,000 rupee notes have until the end of the year to deposit them in a bank, and can only directly exchange a small number for new currency. But authorities have struggled to print enough new notes to meet demand.
Over 90% of transactions in India are conducted in cash and many of the country's poorest have no access to banking. Many have been left without enough cash to buy food or daily essentials, while farmers have been unable to buy seeds and small traders say business has fallen off a cliff.
