Ubiquitous
Christmas of 2014 had been christened Good Governance Day by the newly-elected NDA Government. Offices had been kept open to…
When Parvathi, a domestic help in an affluent Bangalore neighbourhood first became aware of demonetisation, she was worried about meeting expenses for her family of five. After three weeks and a couple of trips to her bank, she is a firm supporter of the prime minister, whose name she is only vaguely familiar with. One of her employers had paid her the unthinkable sum of Rs 20,000 to simply change old currency for new via her bank account.
Parvathi was also witness to a police operation involving an abandoned bag of cash near where she lives. She does not know if the money was counterfeit or genuine, but she was told that the rich had been badly busted. She was also told that this powerful man in faraway Delhi will next go after owners of multiple homes, so that the likes of her can have a home of their own. The stated push against benami properties may involve no such redistribution, but Parvathi is considering voting for the BJP for the first time in her life.
It was recently reported that cash deposits in Jan Dhan accounts across India had crossed Rs 65,000 crore. The laundering of cash through these accounts involved a wholesale process of redistribution, which probably holds the key to resolving the puzzle of demonetisation. How did an operation that obviously imperiled the lives of India’s poorest citizens, survive three weeks without furore? Why was the Supreme Court’s grim prognosis of riots so utterly off the mark? Why did the urban underclass and the rural poor forsake their daily wages to stand in orderly queues without too much ado? Why did the numerous stories of tribulation coexist with palpable support for the move, even among the poor? Why did India not come to a standstill when the opposition called a Bharat Bandh on November 28?
While polls and surveys may reflect a heavy dose of sampling bias, critics ought not to underestimate the Indian underclass’s flair for adaptability. The initial shock and chaos were found to be mitigated by innovative short-term fixes such as informal credit, barter and in many cases continued circulation of the old currency. Residents of a village in Mizoram even came up with the idea of paper coupons or promissory notes to replace currency until the situation improved.
It is important to keep in mind that collective economic wisdom had demurred in the wake of demonetisation. Economists of various persuasions in India and abroad converged on demonetisation being a less than effective instrument of policy. They explained how the move represented an attack on legal tender rather than on black money, which mostly resides in assets such as real estate and gold. While long term impact on black money may not be entirely known, it would not deter laundering in the short term. More ominous would be the impact on the cash dependent informal economy, where debilitating losses and welfare shocks could massively impact GDP and agricultural productivity.
While some of the prognosis for long term impact on the economy may well pan out in the coming months, economists seem not to have accounted for a society that thrives on dense informal networks of interpersonal trust rather than on formal institutions of the state or the market. The complex workings of this dynamic and resilient system may in fact have mitigated some of the damaging repercussions, and restored a new kind of equilibrium.
This curious political economy of demonetisation has thwarted the case for a united opposition. Barring Mamata Banerjee, opposition leaders were stunned into silence for several hours after the declaration. Over the next few days, the opposition tried to get its act together, but the sheer force of the political message kept Nitish Kumar away, disabling a unified front.
In the three weeks since demonetisation, the BJP has already secured impressive electoral victories in Maharashtra and Gujarat. The bypoll results in Assam and Madhya Pradesh indicated reduced vote-share for the BJP, but anything short of outright defeat, especially in the immediate aftermath of the move, ought not to be good news for the opposition. Its failure to deliver a clear and coherent message within the next two years could lead to comfortable victory for Modi in 2019.
From all that we have seen and heard, it appears that Narendra Modi went out on a limb with demonetisation, without solid economic backing. Suffering loss of faith for failed promises, lack of reforms and disruptive nationalism, the prime minister’s intent was to reclaim the narrative and secure the elections of 2019. To this extent, he held an entire country to ransom to score a political point. While it sets a worrying precedent for the country’s political and economic administration, a complete disaster may well have been averted in this instance due to the dense networks of interpersonal trust in Indian society.
Pitched alongside personal stories and longer term economic consequences, redistributive money laundering may or may not be the sole mover of the BJP’s electoral fortunes. However it does appear far from likely that demonetisation will prove to be a stumbling block in a second term for Narendra Modi, come 2019.
The writer is a political scientist.
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