When India’s prime minister withdrew banknotes from
circulation to wipe out counterfeit currency--without warning last year--he
must not have had any idea it would affect India’s economy so terribly. This
was seen as an alarming act by the public—since it ended up making 86% of the
currency paper in circulation worthless overnight. This “demonetization” has
actually cut back India’s GDP by 2%, according to the Financial Times.
In fact, economic growth continues to slow because of this
decision and a goods and services tax introduced last year. Because some businesses are afraid they’ll be
monitored by the government implementing this tax, they have actually taken the
extreme step of slowing business transactions. Many businesses find the new tax
so complicated that they have had to greatly increase the money they spend on
accounting fees.
Reduced business confidence following the demonetization
decision and the business tax has caused private investment growth to
slow. Many small businesses have even had
to shut down in this deteriorating economic climate.
One unusual exception is the mutual investment funds
business. Because people panicked last
year looking for a quick place to invest
their soon to be worthless cash, investments in mutual funds skyrocketed. This
also had the effect of pushing up stock market shares. In fact the Bombay Stock
Exchange has become the second best performing stock market in Asia. But
thinking about what has driven up the price of stock shares makes clear that
this could all collapse just as quickly.
https://www.bloomberg.com/news/articles/2017-11-07/year-after-cash-ban-there-s-no-sign-of-india-correction-chart
Do you think this confusion will negatively affect their net exports? The uncertainty is definitely a significant issue; a panicked economy is tough to manage. The government needs to reevaluate their system and attempt to save the economy. What advice would you give to help them rebound?
ReplyDeleteThis situation could affect exports if business confidence stays low and firms don't invest much and so don't grow. And with smaller businesses shutting down already, this could already be hitting export volumes.
DeleteAlmost the same thing happened in Venezuela late 2016, there was a large amount of the 100 Bolívares bill so Nicolas Maduro, Venezuela's current president, cut the current bill out of circulation with a week notice and replaced it with a new bill. When this happened, the exchange rate was roughly 10,000 Bolívares to 1 USD. Now it is closer to 17,000. Surely this is not all due to the withdraw of the 100 Bolívares bank note, but some of the hyperinflation could be a result from it. Intuitively, the government of Venezuela essentially reduced money supply by making all these banknotes worthless and only replacing some of the old banknotes that were exchanged for the new ones. I am curious as to how India will handle this situation and can only hope it does not run into the problems Venezuela has in the recent history.
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