NOVEMBER 8, 2016, will be a night few Indian will forget in a hurry. In a late evening broadcast, Prime Minister Narendra Modi startled the nation by announcing that the two big currency notes – Rs 500 and Rs 1000 – were going to be pulled out of circulation from that midnight. That night the nation barely slept dogged by the de/re-monetisation nightmare. The nightmare soon gave way to a daily struggle for cash and carry. There was no cash and nothing to carry. Work, markets, trading, agriculture all came to a grinding halt. After all, India is a cashdriven economy and without cash, nothing would move. Then why did a politically astute person like Modi suddenly impose such a decision on the nation? Was it the politics of business or the business of politics?
Barbara Harriss-White, an Emeritus Professor at the University of Oxford, with decades of experience studying India’s vast informal economy, says that it was this part of the economy that was most hit by the decision to demonetise.
She is firm of the view that in this case, politics was put before economics because this demonetisation never emerged from an economics textbook.
She points out that for decades, the cost of fighting elections in large constituencies exceeded the official ceiling for election expenses so that India’s democracy is well known to be underpinned by untraceable funds. And over 75% of funds officially recorded as received by Indian political parties between 2004 and 2011 were from unknown sources.
After elections, the untraceable borrowing is repaid through a range of democratic malpractices and black market activity. A respectable academic paper has shown how this can be tracked in official data on the cement industry – vital for black real-estate – as the demand for cement dips regularly before elections when its funding is diverted to politics.
Barbara’s reading suggests that while notebandi may have threatened the cash reserves of opposition parties, for the BJP it was business as usual. The sudden announcement did not seem to have surprised the ruling party. The media reported unexpected large-scale land purchases outside future Smart Cities in advance of November 8 by ruling party members, and the use of co-ops – at least in Gujarat – to receive suspiciously huge deposits.
While the PM admits the need to reform political funding, the Bill to do this has languished before Parliament for two decades, thanks to permanent cross-party reluctance to discuss it. There’s no attempt to make party funding transparent. Political parties depositing non-legal currency notes in their accounts are exempt from income tax provided individual donations are below Rs 20,000.
Reports suggest that deposits of less than Rs 2.5 lakhs in political party accounts will “not necessarily be chased by the Income Tax”. India will have to wait for reform until the BJP feels secure in its funding. Well-discussed and obvious steps forward include tighter, un-corrupt audit, exemplary punishment for offences, and digitisation so there is the same trail for politics as for the economy.
As for the electorate, most of which earns between Rs 3,500 and Rs 7,500 per month, its conditions of political acquiescence and powerlessness and of economic hardship are well-established. It’s persistently reported to support the sharp increase caused by notebandi to its own routine distresses on the grounds that their dishonestly wealthy exploiters are said to be being exposed and hammered too.
Recent victories by the BJP in local and by-elections in Chandigarh, Maharashtra and Gujarat are used to support this proposition. While opposition party disunity is against the national interest, opposition to notebandi is branded antinationalist: in the PM’s words “political pujaris of black money and corruption”.
In a society as unequal, socially stratified and politically fractious as India’s, it is genuinely difficult to co-ordinate opposition to a policy that keeps constantly shifting its parameters and for alternatives when these are being closed-off as the policy develops. There have, however, been protests of outrage (for instance, the Salt Corporation women), grumbling by BJPvoting banias in Old Delhi (who may have things to hide), edgy mass responses at BJP political meetings in UP and a million strong protest the length of Kerala.
Looking at motivation, we must first be clear about the stated objectives. On November 8, the sudden illegalising of tender was officially said to be aimed at destroying corruption, black money, counterfeiting, and terrorism. On December 27, the PM declared mission accomplished.
However, this objective does not stand scrutiny – either in theory or in practice.
In the end, the politics of demonetisation will trump its economics. If Modi is able to convince the electorate that he has imposed this enormous burden on ordinary Indians in the interests of the country he will have won the political argument. On the other hand, if the political mood goes against the government, no amount of economic logic can save it.
There is one political gain that Modi has already secured from his monetary move. He has embedded himself firmly in the consciousness of almost every Indian across the length and breadth of the country. No other policy intervention since Independence has touched every citizen in the way this one has.
One can think of many politicoeconomic decisions that have had a wide social impact, like Indira Gandhi’s nationalisation of banks and P.V. Narasimha Rao’s termination of the licence-permit-quota raj. But even these major economic policy interventions did not have the kind of widespread social impact as Modi’s de/re-monetisation drive. Overnight, the name of the Prime Minister has become a household name across India.
In terms of branding and name recognition, this is a coup that every marketing manager dreams of. Hate him or love him, you cannot ignore him. Having lodged himself in the mind of every voter, Modi has to now make sure that the voter will prefer him to someone else the next time at the hustings.