Demonetisation: Modi government shoots itself in the foot

(Editors: This is part of a series to mark a year of the demonetisation announced on November 8, 2016).

By Amulya Ganguli
Much of the efforts of the Bharatiya Janata Party (BJP) leaders to explain away the current economic slowdown as the result of “technical” glitches, as party president Amit Shah tried to do, or as teething troubles of demonetisation and the Goods and Services Tax (GST), are likely to be seen as instances of whistling in the dark to keep up the party’s spirits ahead of a series of state assembly elections.

Even International Monetary Fund chief Christine Lagarde’s certificate about the “solid track” of the Indian economy refers to the future rather than to the disturbing present.

For the time being, therefore, the BJP’s problems relate to both the absence of jobs and the economic stagnation, which indicate that the employment situation will not look up any time soon.

For bringing the party to this sad juncture after its rousing victory three years ago, the BJP has itself to blame if only because the political and electoral scene has been bereft of any challengers since 2014. It can be said to be guilty, therefore, of scoring self-goals.

If the BJP’s political dominance is under threat, the reason is that the party has shot itself in the foot by both the controversial measures — demonetisation and GST.

Interestingly, neither of the two was seen as life-threatening at the time when they came into force. Instead, they were thought to be “life-changing”, to quote the supposedly autonomous University Grants Commission’s (UGC) adulatory phrase about Narendra Modi’s speeches.

Demonetisation, for instance, was hailed by the hoi polloi as a dramatic step against the parallel economy. At one stroke, it was said to have wiped out all the accumulated wealth which the holders of black money had kept under their mattresses.

The argument that currency notes constituted a minuscule percentage of hidden treasures was ignored. The subsequent disclosure by the Reserve Bank that 99 per cent of the scrapped notes had been returned underlined the correctness of this assessment.

But even as account-holders stood for hours in queues outside banks to deposit their suddenly useless notes and get new ones — 100 of them dying during the ordeal — as many as 1.5 million jobs were lost in the informal sector all over the country.

While the human cost of this crippling blow to the small and medium businesses will never be fully known, it has brought the BJP to its present pass. If any party can be said to have wilfully undermined its own prospects, it is the BJP.

The party enacted the same folly with the GST. Initially, it was thought to be a reform whose time had come. The fact that it was first proposed by the Manmohan Singh government and was then taken up by the BJP despite its earlier opposition suggested that its good points were undeniable.

After all, who doesn’t like the idea of one country, one tax? Like the uniform civil code, GST was expected to bring in an element of simplicity and evenness in the tax structure.

But just as the civil code has been hanging fire because of the difficulties of dispensing with age-old adherence to personal laws, the complexities of the GST have stumped small and medium businesses which are unused to hiring the expensive services of chartered accountants to prepare their balance sheets.

The woes of demonetisation and GST have, therefore, proved to be a bonanza for the BJP’s opponents. They are now able to show up the party as incompetent. This perception is particularly true of demonetisation. What was expected by the BJP to be a political masterstroke, which enabled it to claim that it has made the black money hoarders run for cover, has proved to be a fiasco of the first order.

Little wonder the BJP quickly changed its line on demonetisation from being an act against the parallel economy to being a pro-digitalisation initiative. “Note bandi” was to make the paper legal tender disappear altogether in favour of plastic money, but the process is still under way.

If the Modi government did not want to believe that cash was the life blood of the economy, especially at the rural and semi-urban areas, it was presumably because the decision of sucking out 85 per cent of the notes from the system was taken by only a few.

Hubris was behind this “bold” decision which was to prove to be fatal. Modi was riding high towards the end of 2016 with the opposition nowhere in sight and the chants of “Modi, Modi” during his foreign tours ringing in his ears.

His party, too, was completely under his thumb. If there was anyone in it who thought that demonetisation was risky, he or she did not have the guts to say it. If a noted economist like Manmohan Singh said that the move was a monumental misjudgment, he was dismissed as a carping critic who was saying what he did because of being in the opposition.

Arguably, if Raghuram Rajan was not hounded out of the Reserve Bank by the saffron maverick Subramanian Swamy, he might have given sage advice.

Rajan says in his autobiography that he told the government in February last year — demonetisation took place nine months later — that its “short-term economic costs” would outweigh the long-term benefits.

This is exactly what has happened. While the immediate economic consequences of demonetisation have been little short of disastrous, there is no certainty when its favourable impact will be felt.

Meanwhile, as the government grapples, ineffectually, with various problems — unemployment, farmers’ distress, and the antics of saffron vigilantes — the Congress is showing signs of revival.

(Amulya Ganguli is a writer on current affairs. The views expressed are personal. He can be reached at amulyaganguli@gmail.com)

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