Poll will tell if Indian PM pays price for gamble
Deadline for unpopular withdrawal of old rupee notes closed yesterday
MUMBAI : A deadline for Indians to deposit invalid rupee notes at banks closed yesterday as attention turns towards the potentia ramifications of Indian Prime Minister Narendra Modi's bold currency shake-up.
Restrictions on the amount of cash that can be withdrawn from automated teller machines (ATMs) are also due to be lifted, 52 days after Mr Modi scrapped high-denomination notes in a crackdown on corruption.
His shock Nov 8 announcement rendered 86 per cent of India's currency void, giving customers until Dec 30 to swap their old 500 rupee (S$7.30) and 1,000 rupee bills for new ones.
He was widely hailed for his assault on tax evasion but long queues outside banks, a cash crunch and policy flip-flops quickly led to anger.
Mr Modi and the ruling Bharatiya Janata Party (BJP) will learn if the gamble has paid off when Uttar Pradesh (UP) state holds the first of several state elections, likely in February.
"UP elections will be the first real test to see how people have judged the policy," said political analyst Devdan Chaudhuri, predicting demonetisation will backfire for Mr Modi.
"I cannot think that this will help BJP because the pain of (the) cash crunch that is decimating the rural and the unorganised sectors. The repressed anger will come out soon. And the policy... will cost BJP dearly," he told AFP.
Mr Modi, who came to power in 2014 pledging to tackle so-called "black" or undeclared money, was forced onto the defensive as frustration grew at the slow introduction of new notes.
There has been anger in rural areas, where farmers have been unable to sell crops while small traders have reported a huge drop in earnings owing to a lack of paper currency in the system.
While many businesses have heeded Mr Modi's call to move towards a digital economy, some industries have ground to a halt and laid off staff, highlighting how dependent India is on cash.
Analysts say the cash squeeze will seriously dent India's economic growth in the short term.
A pause in business owing to a lack of cash is expected to hit both companies and their lenders, analysts say.
"The economic growth has taken a hit, business activity has been adversely impacted, so where are the customers for loans?" said Mr Sunil Kumar Sinha, principal economist at India Ratings & Research, a unit of ratings agency Fitch.
"And now, though the cost of funds for banks is going down, they may not find enough borrowers for those funds." - AFP