India

Modi Didn"t Do His Homework

2016-11-21 10:14:18pm

Prime Minister Narendra Modi had a bright idea on how to solve India’s corruption problem quickly: get rid of the “black money,” the 500 and 1000 rupee notes.

The trouble is he didn’t do his homework to figure out how his plan could be carried out.

This was evidenced by the breaking of ATM machines and long lines outside banks, and dying up of liquidity, which brought the nation’s economy to a standstill.

Financial markets have taken notice, with India’s equities underperforming those of the immediate region. In fact iShares India 50 have lost close to 10 percent of their value in recent weeks–see table.

Index/Fund    5-day Performance    1-month Performance
Global X MSCI Pakistan (NYSE:PAK)    -1.44%    0.06%
IShares China (NYSE:FXI)    +0.39%    -5.17%
iShares S&P India 50 (NASDAQ:INDY)    -1.87%    -9.25%
Source: Yahoo. Finance 11/18/2016

To be fair, PM Modi had to keep his plan secret and act swiftly to avoid actions that would defy the purpose of his plan. He couldn’t, for instance, print new rupee notes ahead of time, and adjust the ATM machines to make sure that the new notes could get through, without alerting the public to what was coming.

Country    Corruption Index in 2015
China    83/168
Hong Kong    17
Pakistan    117
India    76
Estonia    23
USA    16
Source: Transparency International

Still, “PM Modi didn’t calculate all the costs and the benefits of the note swap,” according to LIU POST Economics Professor Udayan Roy. “Like the cost to everyday people who had to drop everything to stay on long lines. Most importantly, Modi didn’t calculate the impact the measure would have on the nation’s large informal sector.”

That cost could shave half a point from the nation’s growth, according to some estimates. “And he didn’t consider alternative ways of fighting corruption, like enforcing the rule of law, as in countries like Singapore, Japan, and the US,” continues Professor Roy.

Professor Roy is right. Lack of the rule of law is the ultimate source of corruption and cronyism in emerging markets, which prevents them from making the transition into developed economies.

Credit - Forbes