Why demonetization did not hurt Modi politically
Demonetization harmed the economy but was a winning move for the BJP, politically speaking. For many citizens, it set off the discourse that the move was at once a fight against black money, an act of reckless bravery and strength, an attack on the rich and a rejection of the jargon-using intellectual elite.
Exactly three years ago, a sudden announcement by Prime Minister Narendra Modi and its impact – economic and political – offered a peek into how politics in India was shaping up.
At 8 pm on November 8, 2016, Modi announced the demonetization of Rs. 500 and Rs. 1000 currency notes. They would no longer be legal tender at the stroke of midnight, he said, adding that citizens could return the old notes in banks within a specified time limit.
The coming 50 days were unprecedented in terms of the hardship that citizens faced. But many saw it as a moment of discipline rather than a hardship.
Serpentine queues awaited people outside banks – it took me six hours to withdraw Rs. 6000 in Delhi – and ATMs ran dry for weeks on end. Moreover, new notes of Rs. 500 and Rs. 2000 took weeks to print. And ATMs had to be recalibrated for people to withdraw these.
The ordeal lasted for weeks on end. In villages, people got by using that uniquely Indian technique of business: goodwill. The shopkeeper would give them what they required on the understanding that they would pay him when they were in a position to.
PayTM made a killing, as many shifted to it for buying items of daily use.
The opposition stalled Parliament for days on end, when it met for its winter session. Opposition leaders cited reports of the deaths of about 100 people in bank queues. Former Prime Minister Manmohan Singh tore into the government in a brief but powerful speech, asking it to name one country in the world where the government denied people access to their own money.
Economists also critiqued the policy. The government on its part maintained that this was a “surgical strike” against black money, or unaccounted wealth, which, it believed, lay hidden in chunks of cash. It also said that those who had amassed black money would not bring it back to the banks for fear of being pursued by tax agencies. This, it was added, would lead to the RBI’s liability being extinguished to an extent, which would, in turn, generate fiscal space for much-needed welfare spending.
JNU economist Prabhat Patnaik wrote a day after demonetization that the government’s sense of what black money means was fundamentally flawed: he underlined that it was a “flow” rather than a “stock”. He predicted that most of the money would return to banks, in smaller chunks, as those who sat on copious amounts of currency notes would engage their servants and employees, or even agents willing to deposit notes for an amount, to ensure that their old currency notes were returned to banks.
Professor Patnaik was proved right. More than 99-% of the cash currency returned and the expected fiscal space for welfare spending wasn’t generated. The move, however, did bring about a reduction in the GDP growth rate. Many people – mostly informal sector labourers – lost their jobs. And the real estate sector took a beating.
As the effects of the move were getting known, the government said that it was a move towards a digital economy: people would move from less cash to going cashless, taking to cleaner digital transactions. However, the cash currency in circulation picked up again after the crisis was over. And this promise also did not seem to come true.
Politics after demonetization
However, while many thought the BJP would suffer as a result of the anger of common people for the pain demonetization brought in its wake, the Uttar Pradesh election results came as a surprise soon afterwards.
The BJP swept India’s most populous state, decimating its rival political parties. I covered the UP assembly elections as a journalist, visiting several villages and towns in eastern UP. And my travels did suggest that demonetization was not having an adverse political impact despite businesses being down.
“One has to undergo some pain for a clean-up operation,” said a person in Varanasi. “This pain was required for a brighter future.”
“Hurting the rich”
There was yet another common claim: demonetization had hurt the rich and would eventually bring more money to the poor. And even if it did not, there was a sense of glee that the rich had also lost their sleep, for a change. This meant, for many, a kind of poetic justice. The rich had been given sleepless nights, even if the poor may not end up being benefitted. A strange sense of justice, a kind of socialism of poverty, informed the responses of those who supported the BJP.
By and large, the only critics of demonetization I encountered in UP were Muslims and Yadavs – two groups that supported parties other than the BJP. I sensed that rather than demonetization hardships being an issue, people were interpreting the move as per their prior political beliefs.
Yet, for BJP supporters or those who were traditionally not necessarily anti-BJP, demonetization was a sign of Modi’s “resolve”. “Could anyone except him have done this?” people would ask. It was as if a “bold” decision was its own justification, irrespective of the outcome.
Demonetization did bolster Modi’s image as a “strong” leader who did not care about criticism. And for people who were under the impression that India had been a “soft state”, the idea of a strong leader proved seductive.
The awe that demonetization generated got the better of the hardship. To be made to stand in queues for hours was proof that the power of the leader reached each citizen. And since the move came with the promise that it would clean up the economy – just two years after 2014 had seen a vote against “UPA corruption” – the act of standing in queues appeared to many as an act of nationalism, aided by WhatsApp forwards likening it to the hardihood of a BSF jawan guarding the border in defiance of the blazing sun.
Yet, long before the UP election, I had sensed that people were supporting demonetization despite hardship and the adverse opinion of many leading economists. A month after demonetization, I was at a Christmas party thrown by a school friend. There I met many of his friends I did not know. The discussion veered around to demonetization, and I told them that many leading economists had criticized the move.
My citing of the economists – and my being a JNU alumnus – led to an adverse reaction. “These economists just talk in the air. They don’t have a view of how things are done on the ground. You support them because you come from JNU, which teaches its students to talk in the air,” said an agitated member of the gathering.
Demonetization had, thus, achieved another thing. The defiance a Prime Minister coming from a humble background – and not having fancy degrees to show – had shown vis-à-vis top economists was seen as a sign of a common man taking on the elite. In a country where most higher educational institutions are dysfunctional, this was a moment of pride. A common man had taken on the intellectual elite – which went to Harvard, Oxford or even JNU or St Stephens College – and shown them their place.
PM Modi had himself sent out this message loud and clear when he said, taking a dig at Nobel Laureate Amartya Sen for criticizing demonetization, that hard work and “Harvard” were two different things.
Demonetization was a moment in our political history that had a seductive charm even as it led to pain. For many citizens, it was at once a fight against black money, an act of reckless bravery and strength, an attack on the rich and a rejection of the jargon-using intellectual elite.
It was India’s “anti-Lutyens’ elite” moment. And while it did harm the economy, it was a winner for Modi in political terms.