In November, India's government declared all high-value currency invalid and withdrew them from circulation. Starved of cash, the economy seized up.
AUDIE CORNISH, HOST:
India begins the new year with a financial crisis brought on by its own government. Back in November, the government declared all high-value currency invalid and withdrew it from circulation. Starved of cash, the Indian economy has seized up. To talk about India's prospects of getting its economy back on track in 2017 is NPR's Julie McCarthy. She joins us now from New Delhi. And Julie, since the government made this move about eight weeks ago, we've been seeing photos of people waiting in long lines outside of banks to get cash. What's it like there now?
JULIE MCCARTHY, BYLINE: These long bank lines are a lot shorter. And I was really surprised, Audie, to see shopping malls over the holidays flooded with people. So you do see that money is getting back in the hands of the Indian consumer. But that said, there's plenty of banks who still don't have even the limited amount that people are still restricted to withdrawing. And that's something in the order of $300 a week. One woman told me that the bank teller told her, oh, here's half of that. Go manage. And, you know, people do manage.
But, you know, the government didn't print enough money to replace the money it took out, so while cash shortage is easing it's hardly over. It's probably going to last another quarter. And there's certainly no five-point plan here on the part of the government to pull the country out of this mess.
CORNISH: I'm sure they didn't plan on kickstarting a financial crisis. So what was the thinking here in terms of pulling this currency out of circulation?
MCCARTHY: Right. Prime Minister Narendra Modi said he was ridding the nation of what's known in India as black money. India is thought to have billions of dollars in a parallel economy, income that sits outside the official network in the form of cash. So it was a - kind of a gotcha move to trap people who had unaccounted-for wealth to come clean and pay a big penalty for it.
CORNISH: Is there any evidence that the government's plan actually worked?
MCCARTHY: I think the jury is still out on whether this currency switch did much of anything. No one in the government is saying how much, for example, black money was unearthed. And the problem with this scheme is that, you know, undeclared money is usually very quickly converted into property, luxury cars, gold, jewelry and overseas assets. Smart money doesn't sit idle. And it makes up a very small amount of illegitimate wealth, so say the financial experts.
CORNISH: So how are people in India talking about all this?
MCCARTHY: Well, it's really interesting. You know, you have a lot of ordinary Indians who are standing in these long lines and took a lot of grief and were very inconvenienced cheering Modi on. And he's run with this as this populist kind of Robin Hood move. He's trying to redeem an old campaign promise to end financial corruption, and this looked as if he was going after the rich. You know, but a lot of economic analysts are calling this whole plan a blunder.
They say what you've really done is disproportionately hurt the poor and those who can least afford it, people like daily wage earners. You know, something in the order of 80 to 100 million of them are now without work. There was no cash to pay them. And their projects, which are mostly in the construction industry, just stopped. And there are so many knock-on effects to this cash shortage - you know, micro, small, medium industries on the verge of closing - that analysts have cut 1 to 3 percent off of India's growth rate.
CORNISH: So now you have an economy that's stalled. Do you have a government that is doing anything to get it moving?
MCCARTHY: Well, you know, they need a big jolt now. And at Modi's urging over the weekend, banks came out today and said, we're going to slash our interest rates to the lowest levels in years. And that still means about 8 percent. But whether that goes, you know, far enough fast enough to stimulate things enough is the question. And it's a troubling way for India to start the new year.
CORNISH: That's NPR's Julie McCarthy in New Delhi. Julie, thank you.
MCCARTHY: Thank you. Transcript provided by NPR, Copyright NPR.