India Pays the Price of Demonetization by Stratfor
The first phase of India’s radical demonetization experiment is over. Indian Prime Minister Narendra Modi made waves in November with his surprise announcement that the country’s 500- and 1,000-rupee notes — 86 percent of the cash in circulation — would be discontinued overnight. Dec. 30 marked the end of the 50-day period in which Indians could turn in the now-worthless bills in exchange for new ones. During that time, the Indian government collected 97 percent of the outstanding notes. But the apparent success of Modi’s demonetization scheme has come at a cost for the country’s economy.
Now that Modi’s initiative has weathered the social upheaval it created, forcing disgruntled citizens to wait in long lines to exchange their bills, its economic consequences are coming to light. Between November and December, India’s manufacturing purchasing manager’s index — a key benchmark for tracking manufacturing orders — fell nearly three points, suggesting a slight contraction in orders for the first time in 2016. This may bode ill for Modi’s “Make in India” campaign, an effort to expand his country’s manufacturing sector to absorb its vast semi-skilled labor force and fuel economic growth. India’s formidable services sector has also taken a hit. The Nikkei India Services Purchasing Managers’ Index stayed below 50 in November and December, indicating a decline in service orders, particularly in restaurants and hotels.
More troubling for the prime minister, India’s most important economic indicator — its gross domestic product growth rate — is projected to fall for the current fiscal year, which ends March 31. While the rest of the global economy still struggled to pull out of its slump in 2016, Modi touted India as the world’s fastest-growing major economy. But demonetization will challenge that status. The Indian government projected in a forecast released Jan. 6 that the country’s growth rate will be 7.1 percent for the 2016-17 fiscal year. Though the figure is nothing to scoff at, it falls 0.5 percent short of India’s growth rate for the previous fiscal year. (Even so, it exceeds that of the Chinese economy, the second-fastest growing economy of 2015-16.)