On November 8 last year, in a televised address, Prime Minister Narendra Modi announced that the two highest denomination notes in India at that time – Rs 1,000 and Rs 500 – would be scrapped. The move was a shock to the country’s economic system as around 86% of India’s currency by value was sucked out with this sudden announcement.

As could be expected, the move was sharply criticised by experts, who argued that it would put the economy through massive strain for little gain. While demonetisation was targeted at black money hoarders, this aim seems to have failed, with media reports indicating that nearly 97% of the scrapped Rs 500 and Rs 1,000 notes found their way back into the system. However, there is no way to know the accuracy of this number because after December 12, the Reserve Bank of India abruptly stopped releasing data on the demonetised notes deposited in banks.

Yet, till now the Modi government has faced little pressure for its eccentric move. This was principally because demonetisation was – till now – a political success. Many Indians saw it as a moral mission to reduce black money – a Sisyphean constant in Indian politics since Independence. Reports from around the country showed that while people were undergoing difficulties due to the cash shortage, they also felt that the sacrifice was needed for a larger cause. In March, four months after demonetisation was announced, the Bharatiya Janata Part won a landslide victory in India’s most populous state, Uttar Pradesh. Taking a dig at Amartya Sen, a professor at Harvard University in the United States and sharp critic of demonetisation, Modi said at an Uttar Pradesh election rally, “In fact, hard work is much more powerful than Harvard”.

Home to roost

Unfortunately, it seems Modi’s cockiness might have been a bit premature. Now, seven months after India’s high denomination notes were scrapped, the full effect of the arbitrary move is being felt in India, as the economy grinds to a halt and agriculture, India’s largest employer, is in full-blown crisis mode.

The first indication of the devastage demonetisation had caused came from the fourth quarter, 2016-’17 GDP numbers. The growth during that quarter was only 6.1% with sectors such as manufacturing and construction slowing down. And, as this DNA article points out, the private economy, leaving out government and agriculture, grew by a mere 3.8% in Q4, 2016-’17. For the same quarter last year, it had grown by 10.7% – showing just how incredible the effect of demonetisation had been.

This slowdown might only be the beginning. In a message to its investors, the country’s largest bank, the State Bank of India, warned that demonetisation would continue to pull back the economy for some time to come.

Slamming rural India

SBI’s apprehensions are well founded: bank credit has been hit hard. As on September 30, 2016, the annual rate of growth of bank credit was 12.1%. That number fell sharply to 5.4% by March 31, 2017, according to this report in Mint. In this slowdown, the rural banking sector was hit much harder than the urban sector. Growth in rural loans in the second half of 2016-’17 (October-March) was 2.5% as compared to 12.9% during the same period in 2015-‘16.

Rural India was further hit as prices for crops crashed. With cash sucked out of the system by the sudden, unplanned demonetisation on November 8, the entire trade in agri-commodities shrunk, and prices of the crops crashed, as this Indian Express article explains. With this collapse, farmer anger burst out in places such as Maharashtra and Madhya Pradesh.

In Madhya Pradesh, the state police shot dead five agitating farmers as the movement spiralled into violence. In Maharashtra, panicked at the large scale of the agitation, the BJP government announced a blanket loan waiver on Sunday – a move that is expected to cost the state Rs 30,000 crore. Yet, even after spending this large quantum of money, the loan waiver, experts argue, will only further depress the agriculture sector.

No silver lining

As bad as the loan waiver is for Maharashtra, attracted by its short-term benefits, many other states are now clamouring for one too. India’s already burgeoning government deficit seems ready to enter a dangerous zone if the politics of loan waivers goes on as it is now.

As if all this wasn’t bad enough, the one small benefit of demonetisation, it seems, was also falsely sold by the Union government. An article in Equity Master points out that far from spurring digital transactions, it seems demonetisation actually pulled back the sector’s growth. The overall slow down in the economy due to demonetisation was so great, it might have slowed down digital transactions rather than spur them on.