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Speaker 1: The stores were just deserted. Now I knew Delhi. In

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Speaker 1: all of my visits over the past twenty years, I've

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Speaker 1: never seen so many empty stores, jewelry stores, clothing stores,

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Speaker 1: even sorry emporiums which do brisk business on a regular

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Speaker 1: business day. Today, on benchmark, it's all about cash, cold,

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Speaker 1: hard cash. While it seems to be disappearing from people's

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Speaker 1: daily lives in the developed world where plastic or PayPal

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Speaker 1: or Venmo, whatever you prefer, all those are ascendant, travel

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Speaker 1: halfway around the world to India and the opposite is true.

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Speaker 1: Most Indians get paid in cash. If they want to

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Speaker 1: save it, many do it the old fashioned way. They

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Speaker 1: stuff it into boxes or mattresses. Two years ago, some

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Speaker 1: two hundred and thirty three million Indians that's almost one

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Speaker 1: fifth of the population didn't have a bank account at all.

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Speaker 1: That same number, that's almost two thirds of the population

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Speaker 1: of the United States. I'm scot landman. With me in

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Speaker 1: our Washington studio is my colleague Show Chandra, who was

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Speaker 1: born and raised in India and happened to visit the

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Speaker 1: nation in December. Were also joined remotely by Cornell professor

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Speaker 1: Eshwar Prasad, who was also a Brookings Institution fellow and

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Speaker 1: former official at the International Monetary Fund. Eshar thanks so

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Speaker 1: much for joining us today. Thanks for having me on

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Speaker 1: and show. Thanks for being with us in the studio too,

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Speaker 1: as Scott, thanks for having me to your point, Indiana's

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Speaker 1: reliance on cash isn't just an inconvenience. It also creates

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Speaker 1: opportunities for corruption and dodging taxes. That explains why Prime

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Speaker 1: Minister rain Modi suddenly announced in November that he would

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Speaker 1: invalidate almost nine of cash and circulation, making it worthless overnight.

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Speaker 1: Everyone holding five hundred and thousand group bills, which are

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Speaker 1: what about seven and fifteen dollars each year, would be

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Speaker 1: required to trade them in for brand new currency. Right,

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Speaker 1: and that move sent hundreds of millions of people rushing

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Speaker 1: to banks and waiting in crazy long lines from what

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Speaker 1: I've read, to exchange their money. It was a big

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Speaker 1: mess and the impact is starting to show. Not too

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Speaker 1: long after India had surpassed China as the world's fastest

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Speaker 1: growing major economy, it's now in danger of losing that

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Speaker 1: title to the Middle Kingdom again. So each Hre, can

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Speaker 1: you just walk us through why India would take such

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Speaker 1: a drastic action like this. The objectives were noble ones,

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Speaker 1: and I think there were multiple objectives. In fact, one

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Speaker 1: show pointed out was to try to deal with the

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Speaker 1: corruption problem. A lot of economic activity in India works

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Speaker 1: through the shadow economy, and on major transactions safe for

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Speaker 1: housing purchases, a significant part of those transactions are conducted

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Speaker 1: in cash and order to avoid the tax net. In addition,

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Speaker 1: there was a big concern about a large number of

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Speaker 1: counterfeit notes circulating in India. M estimates suggest that a

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Speaker 1: very significant proportion of the notes actually in circulation might

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Speaker 1: have been counterfeit. So this was meant as a strike

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Speaker 1: against the shadow economy, against counterfeit notes, and most importantly

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Speaker 1: against corruption. The sense was that a lot of ill

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Speaker 1: gotten gains were being held in cash, and that this

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Speaker 1: move would be a strike against corruption, and in particular,

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Speaker 1: this would be one reform where the rich, who presumably

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Speaker 1: had slightly larger cash holdings and in some cases much

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Speaker 1: larger cash holdings, and the poor would be much more

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Speaker 1: severely affected. Of course, the implementation could have been done

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Speaker 1: a little better, but then there is a question about

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Speaker 1: whether in a country like India, there is really an

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Speaker 1: effective way to implement such dramatic move that strikes said

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Speaker 1: the pocket books of the wealthy and the elites, without

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Speaker 1: doing it in a disruptive way. Um I too was

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Speaker 1: in India in December, and I got the sense that

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Speaker 1: while many lower and even middle middle income class people

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Speaker 1: did not like the implementation, they felt that finally Mr

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Speaker 1: Mody seemed to be taking a big hammer to corruption.

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Speaker 1: So they were broadly supportive with the more but certainly

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Speaker 1: incredibly been implemented better. So has it actually achieved the goals?

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Speaker 1: Even if whether or not people are in favor of it,

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Speaker 1: is it is it something that you can judge it

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Speaker 1: or is it too soon? It's hard to say. Um.

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Speaker 1: There was a sense that if a significant proportion of

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Speaker 1: the currency didn't come back, that would imply that these

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Speaker 1: had in fact been ill gotten gains that the corrupt

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Speaker 1: would not want to sort of bring out into the

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Speaker 1: open um. There was a tax amnesty put in place,

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Speaker 1: the idea being that if there was money being held

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Speaker 1: without taxes having been paid on on the income that

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Speaker 1: created it, um that you could put the money back

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Speaker 1: in the bank at new currency notes and pay um

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Speaker 1: a slightly higher tax than normal, but escape punitive measures

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Speaker 1: based on all those indications. I think there is a

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Speaker 1: sense of the amount of money that was brought back

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Speaker 1: into the system was not as large as expected, but

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Speaker 1: certainly it has put the fear of God into those

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Speaker 1: who may have been using cash for corrupt transactions. Um

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Speaker 1: and I think it's had a positive effect at least

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Speaker 1: in terms of giving Mr Modi some credibility if you

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Speaker 1: were to use it to push forward more economic reforms

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Speaker 1: and if you were to put in place more measures

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Speaker 1: to tackle corruption. There's been some movement on that front,

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Speaker 1: but not as much as I had hoped for. So

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Speaker 1: we'll have to wait and see. Each way you talked

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Speaker 1: about implementation, is there a better way to tackle the

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Speaker 1: goal that Prime Minister Modi had in mind? There was

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Speaker 1: a shock value to it. Understandably it couldn't have been

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Speaker 1: announced ahead, But is there really something more that could

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Speaker 1: have been done to captackle corruption, strinth AP, parallel economy

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Speaker 1: and what else is being done in India right now? So? First,

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Speaker 1: could there have been a less disruptive way to do this?

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Speaker 1: That's that would have been difficult, And this is where

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Speaker 1: the difficulty lies, because it turns out that, as you

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Speaker 1: pointed out earlier, India is an economy UM that runs

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Speaker 1: largely on cash, and the value of the currency notes

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Speaker 1: taken out of circulation by this move of taking out

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Speaker 1: the five thousand rupee notes amounted to about eight six

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Speaker 1: percent of the value of notes and circulation, and in

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Speaker 1: India there there are some estimates at about two thirds

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Speaker 1: of all the cash and circulation is actually used for

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Speaker 1: day to day transactions. So that was a large hit

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Speaker 1: on the economy. But the significant thing in that number

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Speaker 1: again is that about one third of the cash that

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Speaker 1: was out in circulation was not really circulating. It was

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Speaker 1: held as well. So that's where the hope was that

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Speaker 1: there would be a hit in terms of corruption UM.

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Speaker 1: So I don't think there was a much better way

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Speaker 1: to implement this, but certainly they could have acted faster

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Speaker 1: once the Act was put in place, recalibrating the A T.

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Speaker 1: M machines, getting new notes out into circulation UM, that

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Speaker 1: perhaps could have been done faster. But my sense again

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Speaker 1: is that the Reserve Bank of India and the government,

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Speaker 1: we're doing all they could to print notes quickly and

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Speaker 1: get them out into circulation. What one was hoping Mr.

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Speaker 1: No They would follow by was additional measures to deal

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Speaker 1: with the corruption issue. In particular bringing uh financing of

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Speaker 1: political campaigns more into the open. In the budget, there

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Speaker 1: was a modest measure taken towards this end um, but

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Speaker 1: I think a lot more needs to be done to

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Speaker 1: deal with the root problem of corruption, including changing incentives

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Speaker 1: for public officials to engage in corruption, which in turn

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Speaker 1: would require reducing the intrusiveness of the government in the

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Speaker 1: overall economy. On those fronts, a lot more remains to

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Speaker 1: be done. So have they have they gotten through all

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Speaker 1: these implementation issues yet if things returned to normal yet

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Speaker 1: in the country or they still got a ways to

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Speaker 1: go so um. Speaking from personal experience, I was in Mumbai,

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Speaker 1: the largest commercial capital in India, and mid December and

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Speaker 1: virtually none of the ATMs, even in the commercial area

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Speaker 1: had any money in them. By the end of December,

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Speaker 1: which is about forty five days after the move had

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Speaker 1: been announced, many if not most of the ATMs, at

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Speaker 1: least around the central area did have money and there

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Speaker 1: weren't long lines. But the urban areas are not that representative.

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Speaker 1: In fact, in the rural area, as I understand that,

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Speaker 1: there was much more disruption because that's a more cash

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Speaker 1: lity economy. The interesting thing however, is that I, of course,

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Speaker 1: as an economist, could not resist asking every taxi driver,

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Speaker 1: every Uber driver that I encountered how they felt about

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Speaker 1: the move. And there was broad support for the intentions

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Speaker 1: behind and behind Mr Modi's move. But as I started

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Speaker 1: investigating further, certainly they were concerned that there was disruption

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Speaker 1: in the rural and urban areas caused by this move,

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Speaker 1: and people wish they had been less disruption. So my

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Speaker 1: senses that those problems I've been dealt. It was to

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Speaker 1: a significant extent. But really the issue now is whether

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Speaker 1: Mr Moudy has followed through in terms of the broader

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Speaker 1: corruption problem. So what about your experience did you have?

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Speaker 1: Did you have similar impressions to what you sure I

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Speaker 1: was talking about when you were there a couple of

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Speaker 1: months ago, similar and different as well. I visited New

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Speaker 1: Delhi more than a month after the announcement, so this

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Speaker 1: was around mid December. Delhi, of course is the capital

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Speaker 1: of the country. You could see that the shock was over,

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Speaker 1: but the pain was still rampant, and I felt too.

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Speaker 1: For one thing, the long lines each were touched on

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Speaker 1: what was happening at the banks. I personally visited the

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Speaker 1: bank I had some old notes lying around the line,

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Speaker 1: stretched out the door around the block. Customers were getting impatient,

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Speaker 1: the bank officials were harried, and everybody had to just

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Speaker 1: wait in long lines um to see how much bank

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Speaker 1: currency would be available. And then the bank officials would

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Speaker 1: decide how much they were going to give you each day.

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Speaker 1: If you wanted more, you had to come back the

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Speaker 1: next day and stand in line all over again. In contrast,

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Speaker 1: there was another very powerful visual which spoke to what's

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Speaker 1: happening um the impact on businesses and on the economy.

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Speaker 1: The stores were just deserted. Now in New Delhi, in

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Speaker 1: all of my visits over the past twenty years, I've

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Speaker 1: never seen so many empty stores, jewelry stores, clothing stores,

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Speaker 1: even sorry emporiums which to brisk business on a regular

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Speaker 1: business day. They just had people sitting around that The

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Speaker 1: staff was, you know, just waiting for customers to walk in.

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Speaker 1: Grocery stores the same thing. So business seemed to have

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Speaker 1: come almost to a standstill, uh because people didn't have

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Speaker 1: the money to pay and the storekeepers didn't have any

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Speaker 1: other means of accepting payment. And then finally, apart from

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Speaker 1: these visuals, there was this feeling of fear of what's

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Speaker 1: coming next. You'd have fresh rumors every day about what

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Speaker 1: was going to happen. People were picking up the newspapers,

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Speaker 1: listening to the radio and television. The rules were being

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Speaker 1: made up as things unfolded. And UH, to give the

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Speaker 1: government it's some credit when they realized things were not

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Speaker 1: going the right way, they were trying to adjust things

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Speaker 1: to to make it easier. But of course there was

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Speaker 1: a lot of confusion and people felt the pay so

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Speaker 1: so clearly this was a disruptive event. Uh. The government

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Speaker 1: just gave its budget presentation a few days ago where

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Speaker 1: I think they made some projections for the deficit and

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Speaker 1: the economy. What would have to be done or what

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Speaker 1: kind of facts would have on the economy. Is this

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Speaker 1: a short term disruption that will depress growth this year,

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Speaker 1: is sure? Or is this something that that the ripple

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Speaker 1: effects could be felt for some years to come. There

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Speaker 1: are two ways of thinking about It's got. One is

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Speaker 1: that this has created a lot of uncertainty in the

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Speaker 1: business climate, and as show pointed out, in terms of consumption,

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Speaker 1: which is some an important driver of growth in India,

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Speaker 1: and that's not good for growth. On the other hand,

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Speaker 1: if this is seen as one of many reforms that

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Speaker 1: have been instituted in upcoming and signals that Mr Modi

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Speaker 1: is finally getting serious about the big reforms that are

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Speaker 1: necessary to get growth going, that could stimulate more investment,

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Speaker 1: that could stimulate more foreign capital inflows and have a

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Speaker 1: positive effect on long term growth. And they should be

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Speaker 1: seen in the context of some things that have been

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Speaker 1: accomplished over the last year. UM. The implementation of the

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Speaker 1: Goods and Services tax is now on track. UM, It's

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Speaker 1: gotten through parliament, although the implementation is still being delayed

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Speaker 1: for some technical reasons. There was a bankruptcy law put

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Speaker 1: in place last year, there have been a few other

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Speaker 1: reforms so in scene. In that light, it seems that

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Speaker 1: Mr Modi is finally using his political mandate to start

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Speaker 1: rolling out some bigger reforms, even while maintaining some discipline

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Speaker 1: on the fiscal side. The latest budget that you mentioned

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Speaker 1: does allow for a little bit of slippage on the

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Speaker 1: phisical targets, but I think overall it's gone down quite

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Speaker 1: well in terms of UH, not too many populous measures

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Speaker 1: and overall a reasonable amount of fiscal discipline. So if

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Speaker 1: the government can maintain discipline on the fiscal front with

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Speaker 1: inflation seeming to be under reasonable control um and if

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Speaker 1: Mr Mody starts rolling out some big ticket reforms, that

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Speaker 1: could be enough to solidify confidence at the economies on

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Speaker 1: the right track that Mr Mody is serious about economic

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Speaker 1: reforms and that could have a positive effect on growth.

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Speaker 1: But if all this disruption turns out to be for

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Speaker 1: not in terms of Mr Mody not using the additional

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Speaker 1: support he has gained right now to push over big

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Speaker 1: economic reforms, that could be a damper on growth, both

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Speaker 1: in the short term as well as in the long term.

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Speaker 1: So what's the bottom line here? Putting aside the questions

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Speaker 1: of whether the GDP numbers in India and in China

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Speaker 1: are credible or not, as as you're very familiar with

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Speaker 1: US issues, will India continue to grow at a faster

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Speaker 1: pace than China or is China going to take that back? Well,

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Speaker 1: India has all the potential to grow much faster. And

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Speaker 1: if you think about the relative sizes of the economy,

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Speaker 1: is China is now an eleven and a half trillion

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Speaker 1: dollar economy, India has barely to trillion dollars. So India

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Speaker 1: could certainly grow much much faster given that it has

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Speaker 1: a much lower base to again with but in India

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Speaker 1: growth does remain fragile to some extent because of the

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Speaker 1: age old problems making it hard for the manufacturing sector

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Speaker 1: to gain traction, although it has done somewhat better in

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Speaker 1: recent months. The services sector again has been doing reasonably well,

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Speaker 1: although there are concerns about whether it has enough momentum um.

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Speaker 1: But I think getting beyond the short term issues unless

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Speaker 1: India can tackle the big long term problems that where

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Speaker 1: the list has not changed over time, having to deal

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Speaker 1: with infrastructure, improving the banking system, getting the labor market fixed.

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Speaker 1: Unless those big changes are made, I think India's growth,

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Speaker 1: even if it does pick up a little about China's growth,

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Speaker 1: is going to remain fragile for a while. Could there

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Speaker 1: be any consequences in India besides the economic impact of

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Speaker 1: this move? There are some important state elections coming up

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Speaker 1: in the next few weeks or a few months um

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Speaker 1: and how Mr Modi's party does in those legs could

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Speaker 1: um end up determining whether he starts taking a more

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Speaker 1: populous turn or rides the wave of some support that

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Speaker 1: he has received from this reason to move and pushes

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Speaker 1: forward using the political capitalism he has gained to get

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Speaker 1: some economic reforms under way and that will have a

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Speaker 1: big impact on India's growth again, both in the shot

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Speaker 1: and long terms. All right, well, char thank you so

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Speaker 1: much for being with us today. This is a really

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Speaker 1: fascinating conversation. My pleasure, Scott, thanks for having me on

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Speaker 1: and good talking to you to show and show. Thank

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Speaker 1: you too. Thanks. Alright, well, Benchmark will be back next

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Speaker 1: week and until then you can find us on the

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Speaker 1: Bloomberg terminal and Bloomberg dot Com are newly revamped Bloomberg app,

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Speaker 1: as well as on iTunes, pocket casts, and Stitcher. While

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Speaker 1: you're there, take a minute to rate and review the

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Speaker 1: show so more listeners can find us and let us

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Speaker 1: know what you thought of the show. You can find

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Speaker 1: me on Twitter at at Scott Landman is at at

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Speaker 1: E s W A R S P R A s

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Speaker 1: A D and show is at at show s H

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Speaker 1: O Chandra c h A N D R A and Eshwar.

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Speaker 1: Your recent book on China's Redmond B is called Gaining

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Speaker 1: Curtency that I said that in min B. Benchmark is

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Speaker 1: produced by Sarah Patterson. The head of Bloomberg Podcast is

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Speaker 1: Alec McCabe. Thanks for listening. See you next time