Note ban and the allure of authoritarian populism

Modi believes that demonetisation will confiscate ill-gotten wealth and distribute it to the poor

India’s demonetisation has the surreal quality of the post-truth world. The worry is that it may be working just as intended, damaging India’s democracy and supporting institutions in fundamental ways that will prove hard to reverse. 

Amid the hardship of long, daily queues outside banks for often desperately needed cash and reports of more than 100 deaths due to suicides or sheer exhaustion from waiting, there has been no popular revolt in the country. Nearly 86 per cent of cash held by businesses and households was abruptly pulled out of circulation on November 8 and, despite the endless missteps, Prime Minister Narendra Modi believes he will emerge with greater political strength, “with the people and the government… on the same side”, as he asserted on New Year’s Eve.

Demonetisation is at best very costly and at worst largely ineffective in reducing black money or promoting cashless transactions. The short-run costs are all too evident. While macroeconomic effects are hard to predict, even on optimistic estimates it will be several months before a semblance of normalcy is restored. A (net) liquidity shock of several percentage points of gross domestic product for half a year will likely lead to a sharp reduction in overall growth. Many sectors have suffered dramatic absolute declines in economic activity, including most small and medium enterprises, construction, diamonds and rural value chains. 

Most important, the costs incurred by poor and vulnerable groups have already been catastrophic. People have lost precious income from lack of work, their consumption has been sharply curtailed, and they have cut back on health services for which they have no cash to pay. The government has belatedly understood these burdens, yet it is unlikely the proposed expansion of the MGNREGA or the raft of specific measures Modi announced on New Year’s Eve will bring much short-term relief. 

It is clear that Modi had so insulated himself that he had no clue of the economic havoc this “surprise” initiative would wreak. So what were his political calculations? An early speculation was that he believed that demonetisation would paralyse his opponents in Uttar Pradesh and other states where elections are due early in 2017; these states are critical to the Bharatiya Janata Party’s (BJP) consolidation of power. There may be some truth to this. While the bulk of black money is in land, gold or other non-cash assets, political finance needs cash. Demonetising political opponents with electoral war chests looks like a winning tactic. But Modi’s opponents are not political novices either. They, too, have adapted. Any advantage that Modi and the BJP have gained may be small.

The more likely factor driving Modi is the attraction of an authoritarian populism of the type espoused by his friend, the US President-elect Donald Trump. Like Trump, Modi communicates via Twitter. Like Trump, Modi believes he speaks directly to the people. The seductive combination of direct democracy through social media, till recently a weapon of popular political protest, has been turned on its head. Now, Trump and Modi talk directly to the “people” and offer them charmed promises of a better future.

JUST PIECES OF PAPER- A man looks at old Rs 500 notes withdrawn from an ATM in Bhopal. Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes on November 8. (PHOTO: PTI file)

As Trump has done, Modi has brought senior leaders and officials into his ambit. At the centre of India’s demonetisation drive is the Reserve Bank of India (RBI), which has become directly associated with a disastrous economic policy and will be damaged, perhaps for many years, by the utterances of its governor and senior officials. The RBI has not only proven to be incompetent, but has also joined the post-truth world. In trotting out nostrums of “all will be well”, the 

RBI has undermined the only real currency it has — its credibility.

Modi seems to believe that demonetisation will burnish his Robin Hood image, confiscating the ill-gotten wealth of the rich and distributing it to the poor and needy. In this post-truth world, this is based on a narrative that his attack on the rich is an expression of solidarity with the poor and middle class whose short-term pain will translate into long-term gain. He is the visionary leader coming to the rescue. 

It may be futile to fight such post-truth narratives but, make no mistake, once again the economics is based on slogans and half-truths, and the politics is corrosive. For one thing, many of the rich and powerfully connected have obviously been granted special favours in converting their cash. And if some of the gains to the government from more taxes and unclaimed cash are distributed to the poor and vulnerable, the amounts will be small, one-time grants.

For the long term, the latest spin is that demonetisation will promote direct digital transfers to the poor. The claim stretches credulity. The machinery for digital transfers has existed for long and did not need a disastrous demonetisation. Moreover, direct transfers have been oversold. Other things equal, getting more money into the hands of the poor is of course of great value. But direct transfers are no panacea even from a narrow poverty reduction perspective — they would still require bureaucratic mechanisms for targeting both the long-term poor (via below poverty line or other means) and those suffering shocks. 

The most serious long-term worry is that Modi will subvert Indian democracy with a new brand of clientelism. Clientelism is the exchange of favours for votes. This, again, has parallels with Trump’s promises. But if India goes in that direction, traditional methods of democratic voice and protest will be marginalised, and in its place will emerge a legitimised culture of buying votes. Instead of evolving into a more vibrant modern, 21st century polity, India will regress to a culture of patronage in the garb of democracy.

History will tell if demonetisation proves to be the thin edge of the wedge that sets back India’s institutions, creates a brotherhood of elite “experts”, who feel compelled to validate post-truth policies, and which bypass the citizen while pretending to minister to his or her true needs.

Mody teaches at Princeton University and Walton at Harvard University