Currency ban: The politics vs the economics
Last Wednesday, the Central Statistical Office (CSO) released the annual income data for the final quarter of 2016-17. It was keenly awaited as it overlapped with the period following the 8 November demonetisation of high-value currency notes: the big question was whether demonetisation had, as feared, dealt a body blow to economic activity in the country.
For the record, the data showed a marked deceleration in growth; Q4 growth slowed to 6.1%, compared to 7% in the previous quarter—though the numbers also show that the economy was steadily decelerating through the two previous quarters too. However, since the growth in the previous quarters has been revised upwards, the overall growth for the year is projected to be the impressive 7.1% forecast earlier.
It has predictably brought out the demonetisation naysayers—waving the evidence with their usual exaggerated sense of indignation—reviving the binary debate that haunted social media for months. But is this really what the nation is fixated on? It is my argument that it is not the economics, but the politics of demonetisation that is swaying people.
This is partly because the debate over the economics of demonetisation is premised on vague claims and counter claims. And the debate will remain inconclusive till such time some diligent researcher is able to isolate the impact of demonetisation from other factors—like slowing global trade—that have slowed economic growth.
To be fair though, the economic arguments put forth by the government to justify demonetisation were always a bit of a stretch—with the benefit of hindsight, we do know that the government fundamentally erred in assuming all the black money (or wealth on which due tax has not been paid) is held in cash or that demonetisation was sufficient to immobilize it (most of the Rs15 trillion in currency notes is back in the financial system). But it is also a fact that the latest GDP numbers reveal the worst affected sector to be construction/real estate, the primary vehicle for the corrupt to launder their illegally generated wealth.
However, to its credit, the Union government led by Prime Minister Narendra Modi recovered its poise admirably and reframed the argument for demonetisation with greater emphasis on it as a key anti-corruption initiative and a big boost to the idea of a less cash economy; another matter that this was Plan-B.
And this is precisely where the opposition—the politicians as well as the droves of armchair critics who weighed in on the debate—lost the plot as it were. While they kept emphasizing the faulty economics underlying demonetisation, Modi cleverly spun his argument around the politics of the move.
For a country reeling under the impact of unbridled corruption in public life and the visible spurt in ostentatious consumption, Modi’s rhetoric connecting the dots was too compelling (recall his speech dwelling on the small taxpayer base compared to the growing acquisition of luxury cars). The result: voters of Uttar Pradesh, where the rivals of the Bharatiya Janata Party (BJP) erred by turning the election into a referendum on demonetization, conclusively backed the saffron party—ensuring a record win.
The anti-corruption message from the voters cannot be overlooked (or dismissed by claims that polarization of voters was the sole reason underlying the BJP win; no election is ever won on one single issue). There is an opportunity cost associated with corruption, which the urban elite may ignore or choose not to see. It denies merit a fair chance and, worse, severely erodes the capacity of public services. And to the public, nothing can be more patently unfair.
Modi seems to have read the tea leaves as it were. By championing the politics of demonetisation, he has also assumed the mantle of an anti-corruption crusader. Presumably, he will deploy the social capital so earned to drive good economics.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.