Following a drastic decline in his small business after India scrapped 86 percent of its currency in November, fruit hawker Khubi Ram switched to selling vegetables, which are more of an essential household purchase. 

“My two helpers headed back to their villages, they had no money. I had to somehow eke out a living,” he said as he waited for customers in a crowded market near New Delhi.

Such reports of businesses, from small vendors to big consumer goods firms, taking a hit because of the cash squeeze following Prime Minister Narendra Modi’s drastic currency ban prompted forecasts that India’s economy would see a sharp slowdown in recent months.

But the latest data indicates the Indian economy slowed down only marginally in the last quarter, surprising many economists.

Slowdown appears small

According to official data, India’s economy grew at a rate of 7 percent in the three months from October to December, slower than the 7.4 percent growth it was experiencing before, but much stronger than had been widely expected.

The numbers gave a huge boost to the government, which has faced a barrage of criticism from several economists and opposition leaders for the currency ban.

The drastic policy measure, which pulled 86 percent of the cash out of the economy overnight, aimed at fighting tax evasion, corruption and forgery.

“Despite demonetization, we continued to stay the world’s fastest growing economy,” said Finance Minister Arun Jaitley. India takes pride in having surpassed the growth rate in China since 2015.

In a reference to reports of widespread distress in rural areas because of the cash squeeze, the minister said “the data clarifies that the farm sector has also shown healthy growth.”

Too soon to celebrate?

However financial experts in India cautioned that it may be too soon to celebrate.

Economists N. Bhanumurthy from the National Institute of Public Finance and Policy, a think tank in New Delhi, said that when the final data is tabulated for the entire year, “we may have to put less weight on these numbers.”

Economists say the data may not have fully captured the impact on the country’s vast informal sector, which bore the brunt of the currency squeeze because it operates almost completely on cash.

The informal sector includes small traders, businesses and factories as well as millions of migrant workers in cities who drive rickshaws, hawk fruits and vegetables and are engaged in a variety of other trades. This sector contributes almost 50 percent of the gross domestic product and provides employment to 80 percent of the workers.

Bhanumurthy points out that official data shows consumer spending did not slow.

“That is a real surprise for us. They are showing no change in final consumption expenditure,” he said.

Dip in profits across the board

Besides small traders, even large companies reported a dip in profits as people held back on all but essential household purchases in the weeks after the currency ban. Auto firms said car and motorcycle sales slowed, while goods such as televisions and refrigerators and even beverages were slow to move off the shelves.

While it may take more time to assess the full impact of demonetization, there is widespread agreement that with the end of the cash shortage, the economy is rebounding. 

Official data projects growth at 7.1 percent this year, and minister Jaitley said he expects the economy to gather pace quickly. 

“Today money is in the market, demand is also increasing, economic activity is picking up,” he said.

The latest numbers also gave a boost to Prime Minister Modi, who had received widespread criticism for spearheading the drastic move.

In an apparent reference to economist Amartya Sen, who teaches at Harvard, and India’s Harvard-educated former finance minister, P Chidambaram, who were among his strongest critics, Modi told a campaign rally in Uttar Pradesh “Hard work is more important than Harvard.”

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