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India polls: will Narendra Modi's demonetisation gamble pay off?

Millions of Indians are preparing to vote in the biggest test of public opinion since prime minister Narendra Modi announced the demonetisation of 500 and 1,000-rupee notes three months ago – a move which has plunged the country into an unprecedented cash crisis and sent the economy into a tailspin. Over the next four weeks, starting today, a series of regional elections will be held across India amid a polarising debate on the merits of suddenly delegitimizing high-value currency that accounts for 86 per cent of the total cash in the economy.

“By withdrawing as much as 86 per cent of the currency in circulation while being able to replace the same only at a painfully slow place, the Modi government’s demonetisation experiment was a historically unprecedented expropriation of mass purchasing power.

“The result has been a collapse in demand and disruption in supply, that resulted in contraction and unemployment of a magnitude that was nowhere as visible as the large queues before empty ATMs and shuttered banks,” says C P Chandrasekhar, a professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, New Delhi.

Up to an estimated 200 million people will vote in the elections in Uttar Pradesh (UP), Punjab, Goa, Uttarakhand and Manipur (an area stretching from the foothills of the Himalayas in the north to the mountains of north-east India and the coastlines of western India), in what is widely seen as a referendum on demonetisation. The issue has become a lightning rod for other public grievances against the Modi government. A poor showing by his Bharatiya Janata Party (BJP), especially in its strongholds of UP, Punjab, Uttarakhand and Goa, could jeopardize its prospects of returning to power in the 2019 general elections.

Sensing an opportunity, an otherwise divided opposition has come together to portray demonetisation as an “anti-poor” measure, arguing that millions of ordinary people employed in the cash-driven unorganized sector have been hit the hardest. But Modi says, on the contrary, it’s intended to benefit the poor by disabling the black market economy.

“After demonetisation, the poor are enjoying a sound sleep while rich are running from pillar to post to buy sleeping pills,” he said in a radio broadcast. Privately, however, BJP workers admit that people are asking tough questions on the doorstep. One BJP candidate in Punjab, Anil Joshi, is publicly appealing to voters by saying: “Don’t punish me. I was not involved in demonetisation.”

It all began when, in a dramatic late evening television broadcast on November 8, Modi told the nation: “Notes of 500 rupees and 1,000 rupees will not be legal tender from midnight tonight and these will be just worthless piece of paper.” He described the surprise move as “a decisive war against the menace of corruption, black money and terrorism”.

As the country plunged into chaos with long queues outside empty ATMs and shuttered banks, he assured people that the crisis would be over in 50 days. “I understand your pain. Give me 50 days. After that you can give me any punishment you like,” he said.

That deadline passed on December 30, but the “pain” continues. Three months on, questions are being raised over the success of the scheme, with the government refusing to say how much black money has been seized. It has also moved the focus from eradicating corruption to transforming India into a “cashless economy”. Critics see this as an admission that the government has failed in its original objective.

“The goalpost was changed from curbing black money to cashless economy… to justify the move which had caused so much disruption,” argues political scientist Zoya Hasan.

Simmering public unrest, meanwhile, is becoming more visible. A popular slogan in many places reads “Modi ji ki hawa nikal gayee” (Modi’s balloon has been punctured). For the first time since he came to power in 2014, Modi looks vulnerable, while the man he relishes mocking for his “immaturity”, Congress Party leader  Rahul Gandhi, has emerged as the opposition’s star campaigner. He has taken to appearing at public rallies dressed in a torn “kurta” (loose Indian-style shirt) to depict the plight of the cashless common man.

Famously tongue-tied former prime minister Manmohan Singh is proving to be another unlikely draw. His description of demonetisation as a “monumental mistake” for a country where nearly 90 per cent of people earn their wages in cash, has since been echoed by others, including a former colleague of Modi and the World Bank economist Arun Shourie, who called it “the biggest blunder in economic policy in 70 years”.

Unusually, the opposition is brimming with confidence.

“What nasbandi [forced sterilisation] did to the Congress in 1977, notebandi [note ban] will do to the BJP,” says Rasheed Ahmed of the Bahujan Samaj Party, referring to Indira Gandhi’s brutal family programme during the 1975 Emergency.  She lost the 1977 elections.

That comparison may be an exaggeration but so is the BJP’s claim that people are “solidly” behind it.

“I’ve been a BJP supporter all my life but this time I’m not going to vote for it. Demonetisation has ruined my business, I’ve suffered, my family has suffered… we’re still suffering,” says Rajesh Bansal, owner of a popular patisserie in Ghaziabad, UP’s biggest industrial town and one regarded as the bellwether of the state’s voting behaviour.

According to Kamal Sekhri, a well-informed political commentator and editor of Hint newspaper, the issue will “definitely hurt” the BJP.

“People feel they’ve been duped. They have lost faith in the government,” he says.

In Sherkot, known as India’s paint-brush capital, people are livid. The town’s mainly cash-dependent economy has come to a standstill with an estimated 60 per cent of brush manufacturing units forced to close down. In Punjab, opinion polls show the BJP trailing the Congress. The picture in the three remaining states is less clear as the campaign is yet to reach momentum.

The BJP strategy is to play down demonetisation as a campaign issue, highlight its long-term benefits and portray its critics as “anti-national” and “friends” of black money hoarders.

“We don’t see the elections as a referendum. It’s a media headline. But if it is we welcome it because we’ll win”, says finance minister Arun Jaitley, echoing party president Amit Shah’s claim that “people have faith in the Modi government”. Pro-demonetisation analysts say its success should not be judged by election results.

“It might fail politically but that doesn’t change the merit of the decision,” said Sadanand Dhume, a Washington-based analyst, in a recent television debate.

Lord Meghnad Desai, professor emeritus of economics at the London School of Economics, sees it as “a multi-pronged attack on corruption”, the benefits of which will unfold over a period of time.

Nevertheless, there remains surprise that Modi chose to take such a politically-risky decision so close to the elections. He is known to play for high stakes and mostly he pulls it off, but might he have overplayed his hand this time?

“I’m not an economist but you do wonder about the timing,” says C Raja Mohan, director of Carnegie India. “He’s not your usual politician and doesn’t mind taking risks when he believes strongly in something. We’ve seen this in his approach to foreign policy.”

Modi may survive the political scare but the damage to the economy is already done. The International Monetary Fund and World Bank have lowered their previous growth forecast for the Indian economy for this year because of “negative consumption shock” caused by abrupt demonetisation. Automobile sales had the largest fall in 16 years, with 300,000 fewer vehicles sold in December, compared with the previous year, according to the Society of Indian Automobile Manufacturers.

Other sectors hit include small businesses, real estate, construction and agriculture.

“It is becoming clear that none of the stated objectives, whether combating corruption and black economy or ending currency counterfeiting, can and will be realised,” says prof Chandrasekhar.

From where Modi sits that might sound like heresy and an “anti-national” sentiment. But it’s a sentiment that’s catching on. Over to the people.

Hasan Suroor is a writer and commentator who divides his time between London and India.

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