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Economy

India pays the price of demonetization

Modi's war on black money has hit India's economy. Is the price worth paying?

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A man holds placards and shouts slogans during a rally organized by India's main opposition Congress party against the government's decision to withdraw 500 and 1000 Indian rupee banknotes from circulation in Mumbai on Nov. 28.   © Reuters

One month after Indian Prime Minister Narendra Modi announced the demonetization of 500- and 1,000-rupee banknotes in his battle against black money, policymakers in New Delhi are finally starting to acknowledge that the shock move has caused immense upheavals, loss of incomes, disruption to businesses and inconvenience to millions of hapless citizens caught in the cross-hairs.

The economic fall-out from Modi's November decision has been widespread, although the government and the Reserve Bank of India insist the pain will be short-lived. The central bank surprised forecasters by leaving its benchmark interest rate unchanged when its Monetary Policy Committee met on Dec. 6-7. Although consumer price inflation dropped to 4.2% in October, and the RBI saw further disinflation as a result of demonetization in the October-December quarter, the central bank said it would stay vigilant to ensure CPI comes in at a targeted 5% by March 2017 as food and fuel prices trend upward. The RBI said its assessment was "clouded by the still unfolding effects" of demonetization and lowered its growth forecast for fiscal 2016/17 to 7.1% from 7.6%. Although gross domestic product grew by 7.3% in the July-September quarter, gross fixed capital formation has declined for three consecutive quarters. The RBI said demonetization could "transiently interrupt" industrial activity in November and December due to delays in payment of wages and purchases of inputs.

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