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India Demonetization Slowing Economic Growth Dramatically



Shops temporarily drew their shutters down to support the anti-demonetization protest on November 28, 2016 in New Delhi. Saumya Khandelwal / Hindustan Times / Getty Images

Shops temporarily drew their shutters down to support the anti-demonetization protest on November 28, 2016 in New Delhi. Saumya Khandelwal/Hindustan Times/Getty Images

NEW DELHI (Diya TV) — As it has become a regular occurrence, the Indian government has revealed data that upholds its ranking as the world’s fastest-developing economy, but the South Asian nation might not be able to retain the title for long after the cash squeeze that has come as a direct result of Prime Minister Narendra Modi’s demonetization of 500 and 1,000 rupee notes.

The aftereffects of the Nov. 8 surprise announcement, according to analysts, will come face to face with the growth in the coming quarters.

India’s Gross Domestic Product for the period of July through September increased by just over 7 percent, according to the data released Wednesday. The new figure ousted last year’s improved score of 7.1 percent, and eclipsed China’s 6.7 percent growth during the same quarter. But that could be the last above-7 percent growth rating India sees for some time.

“The improved growth is no cause for cheer going forward, since consumption, the main growth driver of the economy, will likely be the biggest casualty in the months ahead as demonetization takes its toll on overall consumption, especially in rural areas,” Société Générale economist Kunal Kumar Kundu told CNBC.

Modi’s controversial plan to swap all 500 and 1,000 rupee notes in an effort to combat black money and corruption in the nation was kept entirely secret until its announcement, leaving residents, or the mint, no time to prepare for the transition. The banned notes represent 86 percent of the circulated cash in the country.

As a result, consumers are holding off from spending as cash is removed from the system, with a daily limit on the amount of old notes that can be exchanged. Private consumption accounts for a whopping 60 percent of GDP so the frugal mood can have weighty economic consequences.

Designed to target the nation’s wealthy with large stashes of illegal money, it has impacted the hundreds of millions of poor in the country immediately instead. Many of these people operate entirely on cash and lack bank accounts to exchange old notes, resulting in nation-wide protests on Monday.

“The sectors most concerning are the ones with a high reliance on cash transactions, which can range from daily foodstuffs to big-ticket items like jewelry and real-estate. So these sectors are likely to feel the crimp in demand over the near term,” Shilan Shah, India economist at Capital Economics, told CNBC.

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