Guest commentary by Shastri Ramachandaran 

Indian Prime Minister Narendra Modi’s biggest gamble – demonetization of high value notes – will face its severest test when a fifth of the country’s electorate goes to polls in the assembly elections slated for February and March 2017. 

The elections in five states, including India’s biggest state of Uttar Pradesh, would be the political test of a bold economic move that has affected the life of every Indian in the last two months. It was on November 8, 2016 that Modi announced the government’s decision to withdraw the 500 and 1,000 Rupee banknotes (7.40 and 15 US dollars, respectively) from circulation. At midnight on the same day, the notes became illegal. The 1000-rupee and 500-rupee notes were required to be deposited in banks to be exchanged for legal tender. The 50-day deadline for depositing the scrapped notes ended on December 30, 2016. 

Demonetization sucked out 86 percent of the country’s currency in circulation and caused untold hardship to almost every Indian. For 50 days, banks reeled under seething queues as millions thronged to exchange old notes for new, or deposit them in their accounts. The worst of this nightmare caused by currency shortage seems to be over, although restrictions remain on cash withdrawal from banks and ATMs. 

The reason given by Modi for demonetization was to fight corruption and force out unaccounted, or black, money that was holding back economic development. He exhorted people to put up with short-term pain for long-term gain. This has struck a chord, because there appears to be no dip in Modi’s popularity, especially among the poor, who were the worst hit by a measure that was ostensibly for their benefit. 

Modi’s ruling Bharatiya Janata Party (BJP) and its allies swept the local bodies elections held after November 8 in Maharashtra state, of which financial hub Mumbai – “India’s Shanghai” – is the capital, and in Gujarat, Modi’s home state. 

Regardless of whether demonetization has eroded Modi’s popularity, leading economic thinkers – such as former Prime Minister Dr. Manmohan Singh, Nobel laureates Amartya Sen and Paul Krugman and World Bank’s Chief Economist Kaushik Basu – are convinced that the gains cannot justify the inconvenience, economic loss and massive disruption caused by the measure. There is a general agreement that this would cause a slowdown, hit investments and liquidity and reduce GDP. 

The objective of demonetization – rooting out unaccounted-for money – does not appear to have been served. This is borne out by the fact that almost the entire outlawed currency has been deposited with banks – had there been sizable illegal money, a significant proportion of the currency in circulation would not have come back into the system. However, the results remain to be seen in over a year's time, at least. 

The merits of demonetization apart, the upcoming elections would be the true test of its political impact. In reality, these elections would be a referendum on demonetization and thus a test of Prime Minister Modi’s popularity at a time when he has completed half of his five-year term in office. 

A win would enhance Modi’s stature immensely at home and in the region.

(Shastri Ramachandaran is an independent journalist and global affairs commentator based in New Delhi. He worked as senior editor and writer with China Daily and Global Times and was previously senior consultant and editor of China-India Dialogue. The article reflects the author's opinion, not necessarily the view of CGTN.)