The Narendra Modi government’s decision to demonetise the Rs 500 and Rs 1,000 notes in circulation will have three distinct political outcomes, two of which will be advantageous for the ruling Bharatiya Janata Party (BJP).
The first, and instantly visible, impact of the late evening announcement on Nov. 08 by prime minister Modi himself is a reversal of the news cycle. Dire discussions on the polluted Delhi air and its impact on foreign investment? Gone. The unfortunate ripple effects from the army veteran’s suicide? Buried. Doubts over the BJP’s chances in the forthcoming state elections? Dismissed.
Elections to state assemblies in the first half of 2017 are crucial for the ruling party, especially since they have been smarting from the defeats in Delhi and Bihar in 2015 and West Bengal this year. The battleground states this time include Uttar Pradesh (UP) and Punjab. UP, as things stand, will see a four-cornered battle.
Demonetisation immediately changes the narrative. The BJP has been trying to stitch together a patchwork support base among the Dalits, Muslims and other disenfranchised segments of UP; their votes are crucial to winning the state. Demonetisation will, in some limited fashion, help in providing a new talking point, one that takes potshots at the privileged and mendacious classes.
Given the fact that the government and the Reserve Bank of India now plan to re-introduce the Rs 500 and Rs 1,000 notes, albeit with a new design and enhanced security features, along with the creation of a new Rs 2,000 note, the entire objective of the exercise seems to be targeted at blindsiding counterfeiters, not so much hoarders of cash. Whichever way you look at it—“surgical strikes” on either counterfeiters who aid terrorism or black-money merchants—it is a narrative ripe with opportunity for rhetoric and election sloganeering.
State elections also point to advantage no. 2. The element of surprise will probably inconvenience the other three parties. The use of cash in Indian elections is an accepted fact and some of the parties are rumoured to be large users of cash. This surprise element would have surely nixed their ground-level strategies. In short, it will be back to the drawing board for most of these parties.
It can be argued that this is a problem for even the BJP. Modi emphasised in his speech: “Secrecy was essential for this action. It is only now, as I speak to you, that various agencies like banks, our offices, railways, hospitals, and others are being informed.” But, the question remains: would he have taken such a momentous decision without consulting the BJP’s command-and-control centre, the Rashtriya Swayamsevak Sangh (RSS)? In many ways, strands of such a policy action have been appearing in the media for a while, as editorial advice or even harking back to the example of the USA which discontinued high-denomination currency notes in 1945.
The question over the consultative process gains further momentum when viewed from a political survival standpoint. The demonetisation exercise will adversely affect small traders and shopkeepers, a segment of society which has traditionally remained a strong BJP vote bank. Most businessmen in this segment depend on cash transactions and PM Modi’s move is bound to discomfit their operations. Given this bloc’s importance, there must have been some serious back-room calculations about going ahead with such a measure.
And a calculated move it is. One probable clue lies in the fresh issuance of Rs 500, 1,000 and 2,000 denominations after a brief hiatus. So, if you ignore the short term spike in chaos, inconvenience and rhetoric, the cash economy is bound to make a comeback in a couple of months, albeit in the form of newly-designed currency. That should give the traders and small shopkeepers some succour.
But, it will require the party apparatus to reach out to various trade associations and federations to communicate with them, assuage them, and address their concerns in the short term.
This will be doubly necessary given the other three-alphabet headache that’s hurtling towards small businesses at breakneck speed: GST. The new tax system envisages a complete overhaul of tax assessment, calculation and reporting. That chaos is in the not-too-distant future, it will create huge turmoil with the trading class having to register with the tax authorities, re-skilling themselves in figuring out the new tax structure, as well as chasing tax credits from authorities. As an example, shopkeepers and small businesses in Malaysia took to the streets early this year, frustrated at the complexity involved in complying with GST.
This is political issue No. 3 for the BJP and its spiritual bosses at RSS.
In the final analysis, the whole exercise seems designed to replace, rather than demonetise (which is to suck out completely and abolish), high-value notes. Counterfeiters will be hurt, middle-class families will be discommoded, and some currency hoarders will be disrupted, but the cash economy will return to a new normal in a few months. But, only after the UP elections.
This article originally appeared in Quartz on November 10, 2016, and can also be read here