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India: On the road in Uttar Pradesh as confidence in demonetization drive dips

Overview

Many voters appear supportive of Prime Minister Narendra Modi’s dramatic ban on 86 per cent of the currency in circulation, despite the adverse impact on every Indian, which has only been exacerbated by the inadequate planning and confused implementation of the measure. As India’s largest state of Uttar Pradesh gears up for elections in February-March – in which Modi’s party is a key contender – we took a road trip through some of the region’s urban and rural areas to gauge the political and economic fallout of the demonetization drive.

Key judgments

  • Extrapolating from the sharp drop in consumption that we saw in Uttar Pradesh (residents reported a 60-80 per cent fall in discretionary spending as well as reduced purchases of essentials), we believe the hit to GDP growth will be bigger than is currently expected by the central bank or the market consensus.
  • Although the farm economy appears to be coping relatively well, the urban economy is more severely affected: there have been factory closures and job losses, especially in the cash-dependent informal sector.
  • The 50 days that Modi requested to complete the demonetization will be over in two weeks, but if the supply of notes remains tight thereafter, we believe his popularity will begin to decline rapidly, in which case there may be a political backlash.
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