Pacific Money

Despite Demonetization Doldrums, India Keeps up GDP Growth Rate

Despite expectations of a slowdown, India posts a surprisingly high GDP growth rate for Q4 2016.

Despite Demonetization Doldrums, India Keeps up GDP Growth Rate
Credit: Flickr/ Global Panorama

On Tuesday, India posted its quarterly gross domestic product (GDP) growth statistics for the period of October-December 2016. Growth came in at 7.0 percent for the period, falling short of the 7.4 percent that had been observed in the third quarter of 2016. As a result of the figure, India maintains its position as the world’s fastest growing large economy.

Tuesday’s figures notably outpace many estimates for fourth quarter growth in 2016, which analysts downgraded over fears that Indian Prime Minister Narendra Modi’s radical decision to remove 86 percent of currency notes in circulation as legal tender would have negative short-term effects. The International Monetary Fund, for example, had slashed growth expectations to 6.6 percent on account of the expected negative consequences of demonetization.

In early November 2016, Modi announced that all old 500 and 1,000 rupee notes would be outlawed with little warning. The implementation of the policy caused widespread chaos as Indians scrambled to trade in their old notes for new notes. Indian equities fell by more than 6 percent in the aftermath of the announcement, but slowly recovered.

Tuesday’s GDP data vindicates the Modi government’s rationale for implementing the controversial policy. In an address on demonetization on New Year’s Eve 2016, Modi defended the policy, arguing that its stated goals of reining in so-called “black money” — untaxed or hidden wealth — and stemming the use of counterfeit cash that could be used to finance illicit activity would yield long-term benefits.

Despite the rosier-than-expected GDP growth figure, critics of demonetization still have a long list of grievances about the implementation and effects of the policy. The immediate cash shortage caused untold chaos, even leading to multiple deaths, with some in the opposition claiming that the toll nationwide had risen as high as 100.

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Economists’ forecasts were additionally taking into consideration the seemingly strong negative effect demonetization appeared to have on consumer spending, sales for small businesses, and the performance of the Indian banking sector. Moreover, India’s vast agriculture sector, which is dependent largely on cash, suffered too.