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Business News/ Politics / Policy/  Narendra Modi turns to old tricks as demonetisation hurts India’s growth
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Narendra Modi turns to old tricks as demonetisation hurts India’s growth

Sustaining commerce in India's cash-based rural areas is crucial for PM Narendra Modi before key state elections next year

Rural India’s support is important if PM Narendra Modi is to win elections in agrarian states including Uttar Pradesh and Punjab next year. Photo: Vipin Kumar/HTPremium
Rural India’s support is important if PM Narendra Modi is to win elections in agrarian states including Uttar Pradesh and Punjab next year. Photo: Vipin Kumar/HT

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 Rs60,000 crore in additional spending for the year through March, which includes a 10% increase in a rural jobs program 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 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 Modi before key state elections next year. Food prices are set to drop as his 8 November move to scrap 86% of currency in circulation triggered distress sales of crops.

Consumer prices probably rose 3.9% in November, according to the median of 32 estimates in a Bloomberg survey of economists before data due at 5:30pm in New Delhi. That would be the slowest pace in 15 months and below the 4% mid-point of the Reserve Bank of India’s inflation target.

Governor Urjit Patel kept interest rates unchanged at a six-year-low on 7 December and lowered the full-year growth forecast. Private economists also slashed their estimates for gross domestic product—imperiling India’s status as the world’s fastest-growing big economy—as the Nikkei purchasing managers’ index signalled a contraction in the key services sector.

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

Hurting the hinterland

Central among 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 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 Rs4,000 crore on the world’s largest public works program: the Mahatma Gandhi National Rural Employment Guarantee Act. Another Rs3,000 crore 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 demonetisation."

‘Stay cautious’

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.

The Nifty Fast Moving Consumer Goods index has fallen 7.2% since Modi’s 8 November announcement, steeper than the 4.4% decline in the broader gauge.

Recovery in rural demand will be delayed until October-March 2018 and companies selling goods such as soaps and cookies could report profit declines through January-March 2017, analysts at Religare Securities Ltd., including Varun Lohchab, wrote in a report on Monday.

“Market is underestimating the sharp slowdown in earnings growth," they said. “Stay cautious." Bloomberg

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Published: 13 Dec 2016, 08:43 AM IST
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