South East Asia

India Cash Crackdown Causing Bigger Than Expected Economic Shocks

In the wake of the great demonetization, India’s small business are reporting tough times: a third of the jobs in the sector have been cut and revenues are down by half in the 34 days since Narendra Modi, the country’s prime minister, announced his plan to scrap 86 percent of the nation’s banknotes.

A report by the All India Manufacturers’ Association indicates that small services companies have not only cut 35 percent of the staff so far, but that they are likely to layoff another 25 percent before Q1 is even over.  Larger firms in infrastructure of exports are also feeling the pinch, but to a much lesser degree. According to the data, small manufacturers have seen revenues fall by a relatively modest 15 percent, and have cut just 5 percent of their workers.

This is just the latest in a run of data that indicates that the economic experiment launched by Mr Modi on November 8 will have some very costly short term consequences for an economy that had heretofore been growing at a rate of 7.6 percent a year.

Maruti Suzuki, one of the country’s biggest carmakers, noted that sales were down 4.4 percent in November when compared with the same period in 2015. According to a report in the Times of India, sales in the overall consumer durables sector fell by 37-38 percent that month.

“This is an amber light — the situation is of great concern,” noted K E Raghunathan, president of AIMO, noting that despite his organization’s support for Mr. Modi’s move, the changes and upheaval have been much more serious much faster than had been widely predicted.

But ministers within the government maintain that the concerns are a bit overblown — and that the economy is still on track to achieve growth of more than 7 percent this fiscal year.  The financial ministry also released figures yesterday (Jan 9) that direct taxes had risen 12 percent between January and December — although economists pointed out that period included both many months of uninterrupted growth and several tax rises.

And tensions run high — especially when it comes to gas, as ministers are caught in a dispute between gas station owners and banks over cashless payments, which saw the country’s petrol dealers threaten to stop taking cards even as most ATMs remain closed.

Over the weekend, banks including HDFC and Axis announced plans to reintroduce transaction fees on card payments for petrol, which were suspended to help cash-strapped consumers continue running their vehicles.  But those fees, especially for station owners, are a very big issue.

“We are operating on a very low margin in India . . . and cannot afford [this] kind of a surcharge,” noted Ajay Bansal, president of the All-India Petroleum Dealers’ Association. “We have stopped using those particular machines that have announced the changes.”

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