POLITICS

The Debate Over PM Modi's Demonetisation Move Is No Longer About Economic Reform

It's about the perception, stupid.

30/11/2016 12:37 PM IST | Updated 30/11/2016 1:11 PM IST
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Prime Minister Narendra Modi leaves after the Bharatiya Janata Party parliamentary party meeting to attend the Winter Session at Parliament on November 29, 2016 in New Delhi, India. ( Photo by Sonu Mehta/Hindustan Times via Getty Images)

It's only to be expected that the BJP would tout its success in municipal elections in Gujarat as a referendum on demonetisation.

"The writing on the wall is clear after the Maharashtra and Gujarat elections. It's a clear yes for Modi's policies and a rejection of the Congress' and the Opposition's tactics," said parliamentary affairs minister Ananth Kumar. "The Opposition should allow the House to discuss (demonetisation)."

The reaction is predictable. If the BJP had suffered a setback, it would have been spun as a local election about local issues which had nothing to do with demonetisation.

Meanwhile economists have been offering a decidedly mixed view on demonetisation. Arun Kumar, author of The Black Economy in India, says, "Black money is only one percent of your black wealth. So suppose you are completely successful in eliminating three lakh crore, you are only eliminating 1 percent of your black wealth and three percent of your black income."

It's not about whether it will root out black money or end terrorist financing. Neither of those are deliverables that can really be checked and verified by ordinary people.

Kaushik Basu, chief economist to the World Bank from 2012-16 and former chief economic advisor to the Indian government, writes "Demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy." Even worse, he says, while it will capture some illicit cash, it will hurt those it does not intend to, for example poor women who stash away cash beyond their husbands' reach.

Bibek Debroy, member of Niti Ayog disagrees, saying "There is a short-term disruption in production but the gains are long term and helps cash lying around people's houses back into the system."

Some pessimistic economic forecasts say growth could plunge from 6.8% to 3.5% in the year ending March 2017. Others say the disruption will be short-lived and not more than a 1% decline in GDP. Economist Jean Drèze says it's like shooting the tires of a racing car, while Ajit Ranade of the Aditya Birla Group says it's "more like deflating the tire pressure somewhat".

Pawan Kumar / Reuters
People wait in queues to deposit and withdraw money at a post office in Lucknow, India, November 10, 2016. REUTERS/Pawan Kumar

But this not really about economics right now. It's not about whether it will root out black money or end terrorist financing. Neither of those are deliverables that can really be checked and verified by ordinary people. It's a battle about perceptions and that was clear when it was introduced as a "surgical strike", a term bursting with patriotic bravado. Narendra Modi wants to seize the pro-poor mantle. That is more important for the BJP than whether the demonetisation ploy will deliver its stated objectives in the long run. Modi had promised to bring back black money stashed overseas. This will not achieve that purpose, but it does not matter as long as the perception is that the prime minister is taking a drastic measure against black money on behalf of India's poor.

"The political ideology is that I will be the hero of the poor, that I have eliminated the black economy that was affecting the poor," says economist Arun Kumar. Not long ago the prime minister had exhorted the rich and the middle-class to give up LPG subsidies for the sake of the poor. Now demonetisation is being spun as the next step in a nation-building exercise, imbued with a patina of morality. "This single step had countered the charge that the Modi government was for the rich," a party leader tells The Week.

The perception that some corrupt bureaucrat with a stash of notes received as bribes hidden away in his home is now sweating is wonderful to imagine.

Of course, there is nothing to indicate that the truly rich are panicking. As has been pointed out over and over again, most of the black money is not parked in ₹500 and ₹1,000 notes anyway. But again, the perception that some corrupt bureaucrat with a stash of notes received as bribes hidden away in his home is now sweating is wonderful to imagine. As long as that perception sticks, it's advantage Modi.

Thus to argue about its economic efficacy, shooting tires or deflating tires, somewhat misses the point. It does not matter because, in the long run, as Manmohan Singh reminded us, we are all dead anyway. Narendra Modi built his prime ministerial campaign around the story of personal sacrifice. It's no coincidence that in his emotional speech about demonetisation he evoked the chaiwallah narrative again. A gird-your-loins, tighten-your-belt austerity measure would have been much harder for silver-spoon-in-the-mouth scion like Rahul Gandhi to sell than a Narendra Modi -- and Modi knows this. He is cleverly using his personal life-story, his reputation, to sell economic demonetisation.

Only the most naïve imagine that any major political party in India has clean hands when it comes to black money. Only the very foolish would balloon their own accounts and draw attention to themselves.

Now, in the latest salvo in this battle of perceptions, Modi has declared that BJP MPs and MLAs need to give their bank transaction details post 8 November to Amit Shah. That's fairly meaningless, since money could be parked in the accounts of proxies and family members. There are stories of politicians (and not necessarily BJP politicians) asking businessmen and industrialists to hold on to some of their money for awhile. Only the most naïve imagine that any major political party in India has clean hands when it comes to black money. Only the very foolish would balloon their own accounts and draw attention to themselves. But again, this is about creating the perception that for the BJP the battle for corruption starts at home, that it is setting its own house in order.

In that battle, Narendra Modi still has the upper hand. During Bill Clinton's successful 1992 campaign, his slogan was "The economy, stupid". In India nowadays we think demonetisation is about the economy. But it's really about the perception, stupid.

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