No one quite knows which Narendra Modi will turn up to fight for reelection in 2019: the reformist technocrat pledging to create jobs or the tub-thumping populist armed with giveaways. For most of his first term, the Indian prime minister has struck a fair balance between the two, and last month he passed his third anniversary in power with a good growth record and strong poll numbers. But his calculations appeared to change last November, when he tilted toward populism by launching demonetization, a surprise move to scrap two high-denomination banknotes. This has proved to be one of the most disruptive experiments in recent economic history, and one from which Modi’s administration now risks learning all the wrong lessons.
The fact that demonetization has been bad for short-term growth is no longer in doubt. Last week, India released GDP figures for the first quarter of 2017, the period when Modi's demonetization had its largest impact. Over those three months, hundreds of millions of Indians were forced to line up at cash machines and bank counters to replace their old 500-rupee (about $7) and 1000-rupee (about $15) notes, which made up about nine-tenths of the value of all currency in circulation. The crunch hit the poor particularly hard, and brought swaths of commercial activity in India’s cash-dependent economy—and especially in its large semi-legal gray market—to a standstill.
Sure enough, the new data bear this out. From January to March of this year, Indian growth sank to six percent, down from seven percent in the previous quarter. Although high by Western standards, these figures lost India its title as the world’s fastest-growing major economy, pushing China back into first place. They also brought growth over the last twelve months down to its lowest point for three years. Modi’s Bharatiya Janata Party (BJP) government, eager to defend demonetization, blamed other factors, such as weaker global trade performance, for the slowdown. It also pointed to the policy’s potential longer-term benefits, such as
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