NEW DELHI - Indian Prime Minister Narendra Modi has strongly defended his radical ban on high currency notes as the right step, at the right time, that will deliver a cleaner economy.
Critics lambasted the currency ban, questioning why Modi took the action at a time when the country had outpaced China to become the world’s fastest growing economy. According to various estimates, the ban will pull down growth by one percent, displacing India from the top position.
Speaking for the first time in parliament since the ban was imposed on high denomination notes in November, Modi said that having the economy in good shape meant that was the right time to take the tough step. Comparing it with surgery, he told lawmakers, “If you are ill and need an operation, the doctor asks you to control parameters such as diabetes until the body is healthy. This was the right time for demonetization because the economy was doing well.”
Economists remain divided as to whether there will be any long-term benefits from the decision, which created huge currency shortages, led to hardship for hundreds of thousands of poor people who scrambled to exchange old notes, and slowed down the informal sector that employs nearly 90 percent of the workforce.
Modi, however called it a “pro-poor move” that will deliver a “clean India.” Warning that the government will press ahead with more measures to curb corruption, he said, “It does not matter how big you are, you will have to give back what belongs to the poor. I will not turn back from this path.”
The currency ban was meant to flush out illicit cash on which taxes have not been paid – a widespread problem in India where tax compliance is extremely low.
Several economists, however, say the world’s most sweeping currency change move in decades has done little to dent corrupt practices that create what is known in India as “black money.” While the old stocks of black money may have been targeted, they point out that demonetization cannot stop the generation of illicit cash.
Economist N. Bhanumurthy, with New Delhi’s National Institute of Public Finance and Policy, is among those who believe that the cash ban was a step in the right direction. “It is not going to completely remove the black money generation in future, but at least it would have some kind of impact.” He says significant public policy measures to curb the flow of illegal cash are in the works.
While economists will continue to debate the benefits of the measure for a long time, for the Indian prime minister the key test lies in how much ordinary people back his decision. That will be reflected in how Indians cast votes in four states where elections are currently being held. A good showing for Modi’s Bharatiya Janata Party will mean that his move has paid political dividends, while a poor showing will be interpreted as a rebuff by people who suffered due to the cash crunch.
Modi said he was aware of the risks he had taken. “I am not concerned about the elections,” he said. "I am concerned about my country."