Politics of Currency

This blog is not how good or how bad the demonetization move is. It is not an opinion about how the Prime Minister has killed growth and is reneging on his promise of “Achche Din’. This piece is about reading the tea leaves. In trying to do so, I am trying to post facts in a dispassionate manner with some opinions thrown in.

8^th November 2016 will be a watershed day in Indian history. On this day, the Prime Minister of India announced the withdrawal of Indian currency notes of Rs. 500 and Rs. 1000.

Since then life has changed for everybody. Right from a street vendor, to a senior corporate executive to a top notch businessmen, to a politician life changed for everybody. Across the spectrum, everyone has been subject to hardship. People who had little money, were scrambling to change notes. People who had too much colored money, were wondering what to do.

One thing is sure, the decision has been bold. I am sure it has been unpalatable even for the BJP. It is a known secret that the political machinery runs on cash. This move has just cut out the funding tap not only for other parties, but also for the BJP. There are accusations that BJP people knew about this beforehand, but these accusations are rubbish. Narendra Modi is too suave politically to commit this kind of error. In an operation like this, secrecy was the key, and there is a report in public domain that only 6 people knew of this and the cabinet were told only hours before the announcement, and were allowed to leave only after his television address ended.

The jury is out whether this is a good move or a bad move. You have one section of the opposition crying coarsely from rooftops about how it hurts the common man. On the other hand reports about the resiliency have started coming in. I have seen street vendors move to Paytm and turn cashless. Last week I was in Faridabad and spoke to a whole lot of people from taxi and auto drivers, waiters, daily wage earners etc. Everybody is happy about the decision and is backing the Prime Minister on this.  On the other hand there are reports about how people are suffering at the mercy of hospitals in rural areas. There are also reports about people willing to stand in queues for money, while there is another shocking report (unconfirmed) about people being hired to stand in queues and make them look longer in order to give an impression that the common man is suffering.

The most interesting response has been from the media. A lot of the English media is already predicting this as a Waterloo moment for Narendra Modi. 20 days after the event, media is still talking about unending queues and how if cash is not supplied fast, public patience will shift to anger. They talk about possible riots on the streets and one Chief Minister publicly warning about the same. On the other hand there are quite a few surveys which says that more than 70% of the public is backing Narendra Modi on the same. One of them is a survey by the PMO itself on an app which is called the Narendra Modi app. Do I see a hint of megalomania? The media response, is that the survey is not well designed and have criticized it from a technical point of view. As if the respondent cares!

There are three events that lead me to believe that the media lives in a cocoon of its own making. During the 2014 Lok Sabha elections, most predictions presented a BJP majority but very few predicted an NDA landslide with BJP getting a simple majority. In 2015, in UK even the Brexit vote was predicted wrongly. And the 2016 US Presidential elections took the cake. Nobody gave Donald Trump even a small chance, they predicted a landslide win for Hilary Clinton. Does the media hear and listen to only what it wants? Has it become so elitist that it cannot listen to the voice on the ground? I sometimes think so.

Now let us look at the timing of this decision by Narendra Modi. It is middle of his term and two and and a half years to go to the next general elections. Diwali is just over and no major festivals in sight. Christmas is 45 days away. Some economists are saying that this demonetization is at a time when the economy is in a take off mode. There is 7% growth, we have had a good monsoon and inflation is coming weaning. By demonetizing 86% of the currency, the PM has shot at speeding tyres. Here’s where the economists get it wrong.  A radical measure like this has to come when the going is good and there are shock absorbers in place. Imagine trying to do this when inflation is high and the economy is struggling for growth. The timing of the move is completely countercyclical which is good. If the pain subsides in three months and some good comes out of it, Narendra Modi will be an absolute hero. Remember public memory is weak and the recency effect is massive. I personally will give Modiji a 10 on 10 for getting the timing perfect.

A small voice tells me, that this is Narendra Modi’s defining moment and biggest political gamble. If he pulls this off, I am sure there are other tricks in his bag of a populist nature which he will unleash closer to 2019 General Elections. Something tells me, that 2019 is already in the bag.