Demonetisation: Understanding the politics behind what PM sees as a game changer | columns | Hindustan Times
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Demonetisation: Understanding the politics behind what PM sees as a game changer

columns Updated: Nov 14, 2016 21:05 IST
Rajesh Mahapatra
demonetisation

A bank employee checks stacks of new 2000 rupee notes in Ahmedabad.(AFP Photo)

Economists would argue that demonetisation does little to curb black money , especially the reasons and practices that lead to its creation and accumulation. At best, it could help destroy a very small part of the black economy that is managed through cash. The fear of scrutiny may keep such people as real estate and construction contractors, traders and retailers, who hold a large part of their illegal wealth in cash, from turning over their dodgy holdings to banks. They will be forced to destroy a good part of it, a loss that will hurt them for a long time.

Given that these groups of people — the hardest hit by the surprise ban on 1,000- and 500-rupee notes — have been the ruling BJP’s loyal voters for decades, many analysts wonder if Prime Minister Narendra Modi just committed a political blunder . Known to be a meticulous planner, Modi rarely makes a decision that is not well-thought-out. It is unlikely that he wouldn’t have factored in the fallout — especially the risk of alienating the BJP’s traditional support base.

What then explains his gamble?

To see the political rationale behind Modi’s demonetisation move, we need to understand the social re-engineering of the BJP in recent times. Once known as an upper-caste, Brahmin-Bania party, Modi’s BJP today is socially much diversified and nurtures ambitions of being a national party with credible influence across all social groups, especially those dominating the electoral arithmetic. This means there will be times when its actions will counter the interests of its traditional supporters, but the party will have to forge ahead. In opting for demonetisation, Modi has done just that.

And this is not the first time Modi has ignored the interests of BJP’s core support base. The levy of 1% excise duty on non-silver jewellery in this year’s budget, relaxing FDI rules for multi-brand retailing and, above all, the push for a unified goods and services tax (GST) that would tighten the noose around the traders are examples of how Modi’s actions are no longer bound by the compulsions that once guided Advani’s BJP. With big business and the super-rich firmly on his side, Modi does not need funds from traders and contractors to run his party. And to win elections, the BJP knows by now that its traditional vote base is not good enough. The 2015 assembly elections in Delhi, a city-state run by Brahmins and Banias, showed how the underclass can turn the tables. The BJP’s electoral wins elsewhere bear this out. They have come on the back of a social realignment that now makes the BJP the party with the biggest representation of backward castes (OBCs) — a change that reflects in both the changing power equations within the party and the composition of BJP-ruled governments. One out of three in Modi’s council of ministers is an OBC and four of BJP state units saw their Brahmin presidents go this year, making way for new leaders from lower castes.

One could still ask how demonetisation helps the underclass. Well, it doesn’t, not in the immediate context. On the contrary, the possible value destruction in the cash-driven informal sectors of the economy and a consequent contraction in demand will result in slowing growth and shrinking incomes, mostly for those at the bottom of the economic ladder. The move adds to the woes of labour intensive industries and services such as construction and retail trade. A clear winner from this will be the government. Any currency held by public is a liability on the books of the Reserve Bank of India. Hence, when any cash in circulation is destroyed and cannot be claimed, it helps cut RBI’s liability, add to its profit and, therefore, also add to the government exchequer. The RBI can print new notes in place of those destroyed and these can be brought into circulation without any inflationary impact. To that extent these would help soften interest rates and push up demand, but that will happen only in the longer term. In the short term, however, liquidity will be hit, so will be demand, especially in sectors that generate most jobs for the poor and marginalised.

Yet, the have-nots appear to have endorsed the PM’s decision . The cash hoarded by their immediate employers and exploiters is the most familiar imagery of black money for them. Hence, when that dodgy cash is destroyed they feel empowered. That is why they are cheering demonetisation, although they stand to benefit little from it.

There have also been suggestions that the chaos and hardship following the ban of 1,000- and 500-rupee notes, which account for 86% of the money in circulation, might undo the popular response that Modi’s decision got. In a country where citizens go without water and electricity for days, where standing in long queues is a daily routine for many, it would be naive to say the transitory inconvenience will have a political bearing.

For now, Modi’s play of optics seems to have worked.

The author is Chief Content Officer, Hindustan Times.

Follow the author @rajeshmahapatra