Even though the actual document itself was fairly pessimistic, headlines across the Indian media said that the Economic Survey was confident about India’s “recovery”. One newspaper even said that the “worst” was behind India. But it is not like there was a global economic downturn or a sharp rise in oil prices or a horrible monsoon, so what is the economy recovering from?

Usually the government tries to blame external factors for slower growth. But in this year’s survey, prepared by Chief Economic Adviser Arvind Subramanian, he explained that India “decoupled” from the rest of the world over 2016 and 2017. Specifically, the survey pointed out that while other countries were starting to see their growth accelerate, India was instead slowing down.

The survey offers some reasons for why this might be the case, including rising oil prices, the twin balance-sheet problem – with highly indebted companies and banks holding stressed assets – and tight monetary conditions. But the two real shocks to the economy appear to have been demonetisation and the botched roll out of the Goods and Services Tax over 2016 and 2017, affecting everything from economic output to credit growth.

As charts from the survey show, the effect of both of those initiatives was sharp, and the Indian economy is still recovering from them.

GST and demonetisation have to some extent now blurred into each other, at least in terms of effects, since both had an impact on economic activity across in India. Today it is almost impossible to untangle the effects of one from the other and to neatly point to which one was more responsible for what is happening in the economy.

GST and demonetisation

But from the other end of the discussion, in terms of how the two were envisioned, they have nothing in common. Demonetisation was a step taken unilaterally, in secret, with no sanction from Parliament or the states, and almost no genuine economic research backing the idea. As reports from the Reserve Bank of India and now the survey have shown, there has been little perceptible benefit from the move, at a huge cost.

GST, on the other hand, was taken after decades of deliberation, including the passage of a Constitutional amendment and bills in all the state assemblies, as well as much research backing its potential benefits. Although the rollout of GST has brought much pain to the economy, most still expect it to be beneficial to India in the long run.

Yet because the effects of the two have blurred into each other, they tend to be discussed also in the same breath. Indeed, Modi had to say in his interview to Zee earlier in January that he does not want to only be judged by GST and demonetisation.

From an economic standpoint, it seems impossible to pull apart the two initiatives and pinpoint blame. But from a political perspective, it might be possible to imagine what Modi’s tenure might have looked like had he not decided in November 2016 to withdraw 86% of India’s currency.

What if?

Economic signs suggest that India’s growth was already slowing down prior to Modi’s move, in part because of the persistent twin-balance sheet problem that has plagued India for some time now.

But what if the second-half of the financial year of 2016, which also came with a good monsoon, had not been spent focused on simply figuring out how to manage the terribly implemented note withdrawal? One can only wonder what else India’s top bureacrats and policymakers might have had the time to come up with – maybe more attention to how GST would be rolled out?

Indeed, there is an argument to be made that if there had been no demonetisation, and better implementation of GST, the economy might have been better suited to take advantage of the “sweet spot” Subaramanian had said India was in, in his first Economic Survey. This presumes that more effort would have been expended on solving the twin balance sheet problem, but indeed that is exactly what the chief economic adviser asks for, prodding government to deal with flow problems (which the insolvency code and GST handle) rather than stock problems (which demonetisation attacked).

In that case, one might have had the economy swimming along at a much better rate, poised to take advantage of good global conditions and even prepared to handle an increase in oil prices as it headed into an election year by 2019.

Political capital

But there is another aspect to this.

The act of demonetisation itself had at least two components: an economic and financial one, which has broadly proven to be a failure, and a political one, which is generally believed to have been a success because the Bharatiya Janata Party romped home to a massive victory in Uttar Pradesh assembly elections soon after. People seem a lot less enthusiastic about it now, possibly because the economic effects are catching up with the political ones, but it would be hard to say that it is dragging the government down as a political concept, even now.

Why? Think of what other major initiative Modi can take credit for. The insolvency bill and more credible macroeconomic conditions are hardly crowd-pleasers, even if they are to varying degrees important achievements. GST is big, but its rollout has led to more pain, with the gain only expected to kick in in the medium to long term. Agriculture is languishing, smart cities are nowhere in the picture, Make in India has been mostly meaningless and, though the government is trying to spin around it, job creation has been dismal.

In some ways, Modi spent tremendous political capital on demonetisation, but it seems to have been well spent. Even today, Modi defends the move from a moral-political standpoint – saying it brought honesty to the nation – rather than an economic one, since there is little to tout there. It serves his image of a selfless politician who was willing to sacrifice in order to improve the nation. And it blunts some of the criticism about him not having given every citizen Rs 15 lakh as was promised.

Modi was expected to do big things, but governance is broadly incremental. Considering the government has not yet gone to the extent of say, building a Ram temple, demonetisation, more than anything else accomplished in the last four years, lets Modi keep his image of a great leader heading into yet another election season. And there’s a chance that the negative effects might have ended by the time polling is around the corner.

In other words, demonetisation might end up being politically successful, at the cost of India’s GDP growth and the thousands of lives disrupted because of it. What, then, is India recovering from? Considering the long answer seems to involve saying demonetisation had little economic benefit but a large political one, the short response might be even simpler: Modi.