An Economic Blunder? Yes. A Political Blunder? Most Likely.

On November 8, 2016, Prime Minister Narendra Modi announced an immediate on two of the most predominantly circulated currency notes – 500 and 1000.[i] People were given until the end of the year to exchange their “stashes” with the newly minted 500 and 2000 currency notes. Along with the pain of exchanging cash by standing in long queues in the winters came the stigma of “if you exchange, then you must have black money” / “if you protest, you must have black money”.

In the present post, I intend on focusing on what has been aptly described as a ‘mammoth tragedy’[ii] and discuss the possible political ramifications of the same. I am reserving the unconstitutionality of the move for a later post.


Anyone who heard the Prime Minister talk on November 8, 2016 would have noticed that the issue was ‘black money’.[iii] The action was demonetisation. The Prime Minister had fought an election on the platform of eradicating ‘black money’ and it seemed he was going after it. Of course, since November 8, 2016, we have heard a lot of other post-facto reasons for why the move was necessary – curbing fake money; fighting terrorism; recapitalising banks; and making India digital and so on and so forth. Let us not even discuss the flip-flop-flip-flop of withdrawal rules and exemptions which even the staunchest supporters of the Prime Minister agree have damaged his reputation. What really bothers me is the challenge of ascertaining the actual purpose of a given action when unintended post-facto consequences are routinely declared as intended goals. The continuous addition of ‘intended’ goals, daily change of rules, and the misery of standing in lines for what is legitimately yours worsened by poor execution, make demonetisation a mammoth tragedy.


On the economic side, there is little doubt that the Prime Minister has very little understanding of economics and his advisors are perhaps just as ignorant or extremely servile. When an Oxbridge educated economist who has had the unique distinction of serving as Chief Economic Adviser, Secretary in the Ministry of Finance, Governor of the Reserve Bank of India, Finance Minister, and two-term Prime Minister of India, called the move a “mammoth tragedy”, the Prime Minister’s ‘troll army of bhakts’ labelled it as political opposition coming from a weak former Prime Minister and harked back to 2G and Coalgate. As expected, there was no active engagement with the economic foundation of the critique by anyone inside the Government.

But the Government must take stock when it is criticised by hugely eminent people with an expertise in the area. First of the block, I believe, was former Chief Economist of the World Bank and former Secretary of Treasury of the United States, Lawrence Summers. Soon after, former Chief Economic Adviser and former Chief Economist of the World Bank, Kaushik Basu called demonetisation “a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy”. Harsher views were expressed by one of the world’s tallest welfare economists, Dr. Amartya Sen, who incidentally happens to be a Nobel laureate and a Bharat Ratna. In this laundry list of critics are some other big names as well – Meera Sanyal (Former, Raghuram Rajan, Arun Shourie, Jean Dreze, and Duncan Innes.

Per contra, the big names supporting the Government’s move include Amitabh Bachan, Ajay Devgn, Anupam Kher, Baba Ramdev, Virendra Sehwag, Sri Sri Ravi Shankar, and Virat Kohli. It does not take a rocket scientist to do the math – their combined knowledge of economics and monetary policy falls miserably short of any of the people in the previous paragraph. What these people are great at is rallying the masses. If the battle is one of public perception, and it unfortunately is, then Amitabh Bachan rishtey main toh Manmohan Singh ke baap lagtey hain and Virat Kohli can knock Amartya Sen out of any park. But does the Government really think people would not eventually see through the façade.


The criticism aside, let us turn to the actual impact of the move on the Indian economy. There is little doubt that the past year (even though I personally label it as the worst year of my still young life) had seen decent rural demand owing to a good monsoon and the 7th Pay Commission had served as the icing on the cake. That said trade numbers have been low, industrial production has been tanking, and very little job creation has been taking place. Yet we had demand rising, people had cash for discretionary spending, and the economy seemed on track for 8% growth. Demonetisation has cut those tracks out – demand has fallen, discretionary spending has come down, supply chains have been disrupted, production has fallen, confidence in currency has been shaken, and people are standing in lines to get access, sometimes not even that, to their own money. To my mind, a 5-6% growth would be a lucky break. Weirdly enough, the move was timed to coincide with both sowing season and peak-tourism season. Both, needless, to say, rely heavily on cash, and the scarcity thereof has forced both of them to take a hit.

Worst hit, however, is the informal sector. 90% or so of India’s workforce still receives their wages in cash. Many on a daily basis. This is your agriculture worker or a construction worker. While some may have bank accounts, most do not. Naturally they do not have debit or credit cards to go digital. PayTM karo? How do they add money on their PayTM accounts which they cannot access even otherwise on their often non-smart phones assuming they have them. Tragically their suffering is worse than the actual black money hoarders, most of whom have since times immemorial kept their ill-gotten wealth in land, gold, or foreign exchange not to mention often outside India. Ironically if somebody was tempted to keep their black money in cash, the Government has made it easier with the smaller-in-size higher-in-value 2000 rupee note.


Elections loom in key states for BJP. There is Uttar Pradesh where the BJP did phenomenally well in the 2014 elections and would be hoping to come back to power after 15 years. There is Punjab where the BJP has been in power with the Akali Dal for the past 10 years and despite setbacks such as Arun Jaitley losing from Amritsar and Navjot Singh Sidhu defecting, the BJP would be hoping to retain power riding on the coattails of the Akali Dal. There is Uttarakhand where the BJP tried and very publicly failed to usurp the constitutionally elected government of Harish Rawat. And there is Goa where the BJP has claimed to be the true choice of the people and from where Defence Minister Parrikar hails. Manipur too goes to polls, but the BJP would probably be okay with the Congress retaining power there considering the Congress has all three MPs from the state and even in the legislative assembly BJP only has six MLAs. Will the BJP suffer in these states owing to its move? I think so.

Uttar Pradesh and Punjab are largely agrarian states. Even the ardent supporters of the move, have now started moving away from the Government’s narrative on account of long lines, daily policy changes, and the sheer frustration of there not being enough cash in the banks even when you reach the end of the line. That coupled with the lack of a state leader to justify the BJP-led Government’s move, could be quite fatal to the BJP. In Punjab, they have an ally. But the ally has not sprung to the BJP’s defence too readily.

Goa seems to be a typical case where in do biliyon ki ladai, bandar… walks away with the prize. I recently came back from Goa and Arvind Kejriwal is more ubiquitous on the long winding roads of Goa than he was on the radio with his “main Arvind Kejriwal…”. Both the Congress and the BJP have had their fare share of controversies and Kejriwal could really be a party pooper.

Uttarakhand and Manipur could go either way. While demonetisation has surely affected people in the two states, some amount of anti-incumbency may neutralise the effect.

All in all, the real test is Uttar Pradesh. If after winning 70 of the 80 seats in the General Elections in 2014 (from 10 out of 80 in 2009), the BJP does not atleast quintuple its present tally of 41 MLAs and thereby secure a majority in the Vidhan Sabha, the Modi-led BJP will struggle to put a positive spin on demonetisation and continue to promote Prime Minister Modi as the best thing to happen to India.

[i] According to figures, 86.4% of the currency in circulation in India which translates to Rs. 14.18 Lakh Crores.

[ii] The term is borrowed from former Prime Minister Manmohan Singh’s speech in the Rajya Sabha and his op-ed piece in The Hindu

[iii] The Prime Minister actually mentioned “black money” 18 times.