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India's Cash Crunch
Modi Faces Backlash After Cash Crackdown

Indian Prime Minister Narendra Modi’s abrupt demonetization drive has proven politically costly of late, as allies in Modi’s own party begin to distance themselves from the controversial policy. Reuters:

A leading political ally of Narendra Modi has abruptly distanced himself from the Indian prime minister’s move to scrap high-value banknotes, as broad initial support for the radical monetary reform showed signs of crumbling.

The shift by N. Chandrababu Naidu, chief minister of the southern state Andhra Pradesh, came six weeks after Modi announced to a stunned nation that he would scrap 86 percent of the cash in circulation.

While Modi remains by far India’s most popular politician, any crack in his authority could have negative implications in state elections next year that will set the tone for his expected bid for a second term in 2019.

Naidu’s regional party is allied to Modi’s nationalists and he heads a federal committee set up to find ways to soften the impact on ordinary people of the crackdown against tax evaders, racketeers and bribe takers who rely on so-called “black cash”.

“I am breaking my head daily but we are unable to find a solution to this problem,” Naidu told party workers on Tuesday in the city of Vijayawada.

Modi’s sudden ban of the 500 and 1,000 rupee notes—ostensibly to crack down on untaxed “black money”—has caused major disruptions to the daily lives of most lower- and middle-class Indians. The policy has left many Indians without the means to cover daily expenses, and public patience is beginning to wear thin.

The cash crisis has also become a major focal point in India’s local elections. In the last three weeks, Modi’s Bharatiya Janata Party won several local elections in north and western India, which party spokesmen are spinning as a sign of approval of Modi’s policy. But an upcoming election in the northern state of Uttar Pradesh, where angry mobs recently attacked banks in protest, is increasingly being seen as a referendum on demonetization. And the decision of a prominent ally like Naidu to complain about Modi’s policy suggests widespread discontent.

The demonetization controversy is a reminder of the growing pains that will occur as India continues its economic transformation and attempts to root out systemic corruption. India has made remarkable progress so far, but its path will not always be smooth or painless: in the case of demonetization, Modi appears to have pushed for more rapid change than his population was prepared for. The policy is also ushering in a growth slowdown that could cost Modi politically. The challenge for Modi, who remains a broadly popular figure for now, will be to stabilize the situation and prove that the gains from demonetization are worth the pain.

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