AbacusRemonetisation, or the Great Indian Hope Trick
Finance Minister Arun Jaitley plans to revitalise the country’s state banks with a 2 trillion rupee injection – money he wants to raise by selling those exact same financial institutions special bonds. Will such sorcery pay off?
EVERYONE LOVES A good conjuring trick. Unfortunately, when you work out how it is done, the magic quickly wears off. Last week, India’s Finance Minister Arun Jaitley announced a financial conjuring act which, if he can pull it off, will be a worthy rival to the fabled Great Indian Rope Trick.
Jaitley is hoping to revitalise India’s shaky state banks by injecting them with some 2 trillion rupees (HK$240.39 billion) of new capital, money he plans to raise by selling special bonds to the troubled banks themselves. Alas, successfully performing such a ticklish trick may well turn out to be beyond even his abilities as a magician.
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Jaitley faces a daunting challenge. India must sustain an annual economic growth rate of about 8 per cent if it is to stand any chance of creating the 8 million new jobs it needs each year to employ its rapidly growing young workforce. Over the past 18 months, it has fallen woefully short of that target with the slowdown exacerbated by Prime Minister Narendra Modi’s demonetisation move, which last year withdrew large denomination bank notes from circulation.
As This Week In Asia warned at the time: “By throwing sand in the wheels of the informal economy, Modi’s initiative is set to cause a slowdown in growth next year.”
That slowdown has arrived. India’s growth rate in the second quarter of this year fell to just 5.7 per cent, down from 9.1 per cent as recently as the first quarter of 2016.