Modi’s Gamble
On November 8th, the same day as Donald Trump was elected as President of the United States, India faced political turmoil of its own. Prime Minister Narendra Modi made the shock announcement that 500- and 1,000-rupee notes — which constitute nearly all of the cash in one of the world’s fastest growing economies — would now be completely worthless.
The aims behind this surprise move seemed reasonable. The government wanted to boost prosperity, increase the use of banks and expand its tax base by forcing the shadow sector into the light. The bulk of transactions within India take place in cash, with economists estimating that the black economy accounts for at least 20% of GDP, allowing corruption to boom. Flushing out the counterfeit notes, he claimed, would tackle terrorism and organised crime.
Cracking down on venality while boosting your tax base seems like a popular platform for any leader. Yet abruptly voiding 86% of the cash in circulation is undoubtedly a risky way to achieve this. The decision came with only four hours of notice. What followed was chaotic; queues for ATMs that had not yet been adapted for the new notes stretched for miles, banks ran dry, hoarding and panic ensued. The move had an immediate impact on the economy. A lack of cash reduced consumption and demand, impacting on traders’ incomes. In rural areas, workers could not be paid their cash salaries, sometimes for days on end, and many were reportedly going without food.
In the face of this chaos, the Prime Minister asked for 50 days to allow for the country to adjust to the new system. Two months on, it seems this process is still ongoing.
There have been some positive reports. Proponents of demonetisation suggest that increased liquidity in the banking system and the ensuing lowering of interest rates has stimulated the economy. The government points to increased tax collections in recent months, undermining rumours of a demonetisation induced slow-down.
But good news is scarce. The IMF and the World Bank have both downgraded India’s growth projections, with the former predicting growth full percentage point lower than its earlier estimate. It has been reported that there has been a 50 percent dip in revenue and a 35 percent drop in jobs in small-scale industries as a result of the decision.
Was the suffering worth it? In terms of the fight to tackle illegal wealth, it seems Modi could have directed his political capital elsewhere. Only 6 to 10% of India’s unaccounted money is held in cash. So called ‘black money’ tends to be stored in real estate, stocks and shares and in foreign bank accounts, meaning that the decision barely affects those with assets amassed through illegal activity.
Rather than tackling the criminal aristocracy, the decision has hit the poor the hardest. Over 90% of transactions in India are conducted in cash, with over 85% of workers being paid that way. India’s shadow economy provides genuine employment and income, and does not translate easily into the formal sector — meaning a loss of economic activity. A lack of cash may also be causing small firms without access to credit to shut down permanently. So far, it seems as if Modi’s decision has had little impact on the wealthy, who are more likely to be “cashless” — while hitting the poor and middle classes the hardest.
Despite these evident flaws, Modi seems to be reaping praise for this move. He has skilfully branded the decision as a fight against “corruption, black money, fake notes and terrorism”, framing the argument as a patriotic duty. In line with the austerity narrative that persuaded populations the world over, Modi has described the decision as a “sacrifice” that will cleanse India. In presenting himself as a force for change against a bloated elite, Modi is in line with the populist sentiment sweeping the world. This decision may not end organised crime, but it is unlikely to hurt his popularity either.
