(ft.com) - When Prime Minister Narendra Modi banned banknotes that make up 86 per cent of India’s cash in circulation last month, he described the drastic measure as a “movement for purifying our country” and vowed to “break the grip of corruption and black money” on the country. The abrupt prohibition of Rs500 and Rs1,000 notes would punish “antisocial and antinational elements” — corrupt officials, tax evaders, counterfeiters and the like — whose hidden stash of illicit cash would become, in Mr Modi’s words, “just worthless pieces of paper”. But for all the revolutionary fervour unleashed by Mr Modi’s administration, it is not hard to imagine that cash will still be king once the current crunch eases, as the government has promised it will. The long queues at banks, and searches for functioning ATM machines, suggest the smell of money is still very much on Indians’ minds.
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India’s economic growth is expected to slow dramatically in the current quarter as a result of the liquidity squeeze caused by Mr Modi’s surprise ban on using Rs500 and Rs1,000 banknotes — about 86 per cent of the cash circulating in the country. Fitch, the rating agency, on Tuesday cut its forecast for India’s economic expansion to 6.9 per cent, down from its previously predicted 7.4 per cent, the latest to warn that the cash crunch could shave up to one percentage point from Indian growth. But most estimates are peppered with provisos that the precise magnitude and duration of the slowdown will depend on how fast the Reserve Bank of India can pump money back into the economy.
