Indian Prime Minister Narendra Modi in Mumbai, December 2016.
Shailesh Andrade / Reuters

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

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  • JAMES CRABTREE is Senior Visiting Research Fellow at the Lee Kuan Yew School of Public Policy NUS in Singapore, on sabbatical from his previous position at the Financial Times, where he was Mumbai Bureau Chief. 
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