NEW DELHI • Prime Minister Narendra Modi's ban on high-value currency was hailed initially as a game-changer to check corruption and tax evasion in India. But as anger on the streets increases over a prolonged scramble for cash, he is facing the risk of economic slowdown and political backlash.
Mr Modi's startling and sudden move to withdraw 500-rupee and 1,000-rupee notes a week ago has left India with about one-seventh of its currency in circulation.
India's main opposition Congress party yesterday made an attack on Mr Modi's government for causing inconvenience to the people. Speaking during a debate on the currency ban in Parliament on the first day of the winter session, Congress leader Anand Sharma urged the government not to tarnish the nation's image by banning currency notes of higher denominations under the guise of curbing black money.
"They have said, if we had announced earlier, it would have helped terrorists, counterfeiters and those with black money," he said in the Upper House (Rajya Sabha).
"It is a fact that our economy runs on agriculture. Does the farmer, who puts food on our table, bring home black money? It's a strange logic. You have brought financial anarchy to the country."
The government, however, defended the demonetisation move, saying it would help root out black money. "The entire country has welcomed the move. Only a few got pinched by the move and they are criticising the government," minister Piyush Goyal said.
Small businesses, real estate, gold and the informal sectors - which see a high component of cash transactions - have been affected as hundreds of thousands of people spend time in long queues to exchange currency rather than working.
The situation is unlikely to change soon.
Finance Minister Arun Jaitley has said it will take about three weeks to replace the old notes. Over the weekend, Mr Modi made an impassioned plea to the nation to give him 50 days to weed out ill-gotten wealth in the country.
In a sign that the government is struggling to deal with the public's reaction to the week-long cash shortage, it has already increased withdrawal and exchange limits and extended the deadline for accepting old currency at key utilities.
The actions have done little to quell mounting concern among those who cannot access cash.
More than 90 per cent of Indian workers are in what the government describes as informal sectors, including agriculture, construction and home-based activities such as pickling and tailoring.
Analysts say that across the country, productivity in agriculture, small factories, shops and restaurants is falling, as is consumption, since these are areas that depend on cash.
"At the moment the focus has been on just the last point of sale, which is retail sale," said Mr Pronab Sen, India's former chief statistician and country director of the International Growth Centre. "The problems are going to start at the upstream levels where production and distribution actually take place. So things can choke up and that will have a multiplier effect."
Weak consumption "could shave off 50 basis points from growth in the October-December quarter", analysts Kaushik Das and Taimur Baig at Deutsche Bank wrote in a report.
India's gross domestic product, which grew 7.6 per cent in the last financial year, dropped to 7.1 per cent in the quarter ended June this year. Growth data for the last quarter is due on Nov 30.
Mr Modi is also facing political risk. The move could upset his Bharatiya Janata Party's key support base - small traders - as transactions have slowed down. Their support is essential over the next six months as India holds elections in five states, including the most populous, Uttar Pradesh.
Winning the polls in Uttar Pradesh and the northern state of Punjab is crucial. It would add momentum to Mr Modi's plan to push difficult agendas such as labour law reform, and help give him a majority in the Upper House of Parliament to approve legislative measures.
Meanwhile, the banks will use indelible ink to prevent people from exchanging old notes more than once.
BLOOMBERG, XINHUA, AGENCE FRANCE-PRESSE