The first phase of India’s radical demonetization experiment was over in December. 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 2016-2017 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 2015-2016.)





These fluctuations in India’s economy, however disconcerting, still fall within the margin of error. It is too early to say whether they suggest a more enduring trend. Modi’s long-term economic aim is to fundamentally change the structure of India’s financial transactions, which rely overwhelmingly on cash. By focusing on demonetization in the short term, Modi hopes to position himself as an anti-corruption candidate and boost his Bharatiya Janata Party (BJP) ahead of this year’s legislative elections. A poor performance by the ruling party in these votes — and especially in the upcoming elections in Uttar Pradesh, India’s largest state — could signal trouble to come for Modi in the 2019 general elections.

The BJP has already seized on Modi’s demonetization scheme in its campaigning. During the party’s recent national convention, BJP President Amit Shah lauded the initiative in an effort to galvanize party workers and win votes. The tactic appears to have paid off: Last week, on Jan. 9, Shah announced that the BJP won 30 of 40 seats in local elections in Faridabad, a large city that borders the Indian capital of New Delhi. Of course, the vote in Faridabad is just one of many more to come. Nonetheless, the BJP’s victory there will help Shah build his case that for all the turmoil and economic trouble that the demonetization endeavor has caused, it has not cost the party politically. In fact, the program has yet to cause a major backlash against Modi, notwithstanding the grumbling over the long lines and logistical headaches it entailed. The more states Modi brings under the BJP’s influence, the greater his chances of implementing demonetization at the state level will become.

Regardless of how many seats the BJP wins in this year’s state elections, however, Modi’s demonetization plan will face a hard road ahead. Some local branches of the ruling party, including the BJP chapter in Goa, have expressed doubt about Modi’s efforts to end the reign of cash in India. If the signs of decline in the country’s economy persist, the dissent will likely increase.