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5 years of demonetisation: Understanding the political impact of note ban

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Can economic pain bring political rewards? In standard political analysis in a democracy, that would be a laughable proposition. After all, making a citizen’s life easier, if not enjoyable, is the best way to gain support.

Five years ago, Prime Minister (PM) Narendra Modi succeeded in overturning this basic principle. A political movement that in fact negatively affected people and, at the same time, increased support for the regime that was responsible for politics in the first place. And this is where the mystery of the politics of demonetization lies.

The answer to this riddle was reported in this newspaper in November 2016, fifteen days after Prime Minister Modi announced the government’s decision to hand over ??500 and ??1,000 null and void banknotes. And it came from citizens of one of the poorest parts of India, eastern Uttar Pradesh. Queuing in front of crowded public bank branches in small bazaars and sitting in village tea rooms, young men and old women, laborers and laborers of all castes, had no money to spend and were facing an acute crisis to meet daily needs. But they had an almost unanimous refrain – Modi was right to do what he did.

Here’s why.

On the one hand, many citizens on the ground bought into the narrative – at least in the first months after the move was announced – that while they suffered, those who were better off suffered even more. . Prime Minister Modi was able to capitalize on a deep underlying resentment against the economic elite, portraying demonetization as a movement that would destroy the undeclared wealth of the corrupt and the way he stood alongside the poor masses and laborers of India against this elite. To the citizen of a small town or rural India, this corrupt elite was not necessarily the representative of big business in Mumbai or Delhi – it was the local entrepreneur, the corrupt government official, the great owner. “We have almost no money. What are we going to lose? But these people with their black money will be the losers. Modiji made society equal, ”said an elderly woman from Jaunpur in 2016.

That cash was only a tiny fraction of ‘black money’, or that some of the better-off found enough ways to secure their assets even after demonetization, or that demonetization may have made it worse instead that addressing inequalities doesn’t really matter. What mattered was the perception that the rich were being punished and that everyone, regardless of their economic status, was in the same boat for this fleeting moment at midnight on November 8, 2016. Modi exploited what the revolutionaries did. Radical Marxists had hoped but never were. able to exploit – resentment against inequalities.

The second reason the BJP was able to benefit politically, or at least not lose, was that it introduced a strong element of national security into the lexicon of economic policy-making. By presenting the action as one that would destroy the economic base of the terror in Kashmir, or the resource base of the Maoists, she was able to argue that the citizens were suffering but for a larger cause.

“If our soldiers can protect us for 24 hours, we can stay in the bank queue for a few hours. If that puts an end to terrorism, then we can make sacrifices for the nation, ”said a young trader from Mirzapur.

It did not matter that the political economy of the insurgencies and terror in India remained unaffected for a long time. What mattered was that the citizens felt, at this precise moment, that they were participants in a larger collective national enterprise – from which the good would come, for which sacrifice was essential.

Third, there was a widespread perception that demonetization would give the government fiscal space to deliver on its election promise to give money directly to the poor or improve welfare. “There is temporary pain. But in a month or two, the money that will be collected from the rich will then be invested in the poor, ”said a Dalit farmer, a traditional supporter of the Bahujan Samaj party.

The fact that many were able to preserve the income they had hidden from the tax authorities, or that there was no dividend the government accrued from the move, or that more money entered the banking system than expected, didn’t matter. What mattered to many was the temporary hope that the poor would finally have access to resources.

But the last reason demonetization worked politically for the BJP was Modi’s belief in personal integrity. It is unlikely that another contemporary leader could have pulled off such a radical and disruptive feat. If there was any sense that a corrupt political leadership had made the decision, the political consequences of demonetization might have been entirely different. And Modi knew he had to leverage his own image – to be able to compensate for the pain the citizens were going through. And that’s why at rallies at the time, the Prime Minister’s message revolved around that he had no property, no desire for power or wealth, and would be happy to go – but was determined to fight vested interests. He painted himself as a warrior, but also as a victim.

It didn’t matter that a policy should be judged by its impact. who forced the government to reorient its political economy messages – and to present itself as a man committed to the welfare of the poor. What mattered, at that time, that a leader perceived as honest be behind the movement.

Indian citizens were prepared to live with tangible suffering, for intangible good. But over time it was recognized that demonetization had paid little dividends. He did not punish the corrupt. It did not create a more egalitarian society. It did not lead to a universal income transfer. It did not weaken the terror. BJP technocrats decided it was better to change the goals and see it as a step towards further formalization of the economy and digitization (and on both, recent data suggests that there is had a radical change); the political leadership decided that the less people remembered the experience of demonetization, the better off they would be politically. And the citizens decided that while the decision did not deliver what they hoped for, the policy intent was benign. India has moved on. And the most radical economic measure in Indian history, in retrospect, had a positive short-term and neutral long-term political impact.

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