Modi’s Pied Piper Moment: Note Ban Aimed Only at Drawing Votes

The PM was aware of the pitfalls of the scheme, but the possible election benefits forced his hand.

The legend of the Pied Piper of Hamelin, a town in Germany, survives to this day through the writings of literary greats such as Robert Browning. Sometime during the 13th century, the Piper rescued the town of Hamelin from a deadly rat infestation by luring the rats with his enchanting music into the river Weser, where they drowned.

On not being paid his promised compensation by the Mayor, he repeated his trick on the children of Hamelin, luring 130 of them into a cave through his music. The children were never seen again.

In the last month, the legend of the Pied Piper has been re-enacted on the national stage with Prime Minister Narendra Damodardas Modi virtually hypnotising a very significant chunk of the population, if not a majority, through his pipe dreams of a country free of corruption and black money.

The Pied Piper of Vadnagar, Gujarat, has transformed the potentially explosive middle class into a docile lot willing to undergo unprecedented hardships for the realisation of his patriotic dreams.

The Disastrous Effect

In what follows, I analyse why Modi’s dreams will remain just that, the disastrous consequences of his policies for the economy, and the reasons why these very policies coupled with cleverly crafted propaganda would ensure electoral success in the short run.

Modi rode to power in 2014 on the strength of his promise of Acche Din for the masses and Rs 15 lakh in the bank account of every poor Indian, drawing cleverly on the disenchantment of the Indian public with the decadent and scandal-ridden reign of UPA-II and its readiness to lap up every glimmer of hope.

Needless to say, the second of the mentioned promises never materialised; the fulfillment of the first promise is difficult to verify as it is too vague and general, and no measurement of the incidence of poverty in the Modi era is available.

Nevertheless, it is worth noting that according to the Global Wealth Report 2016 compiled by Credit Suisse Research Institute, India is the second most unequal country in the world, with the top one percent of the population owning nearly 60 percent of the total wealth. This indicates that there has been no magical or even tangible transformation of the plight of the masses.

A Regressive Policy?

Despite failed promises, by all indications and polls, Modi’s popularity remains undiminished. A major chunk of the Indian population, especially those belonging to the middle and lower middle classes, remain under his spell as he leads them into the dark tunnel of ‘demonetisation’ with promises of light, the like of which they have never seen before.

In its short history, the policy has wreaked havoc and inflicted rare physical and economic misery upon the Indian population. The impact is regressive in nature despite claims to the contrary: The rich (or the top 10 percent of the income distribution) have suffered the least; the middle and lower middle class (the segment of the population lying between the 40th percentile and 90th percentile) significantly more; and the poor (this includes those below the poverty line or those slightly above it with a real danger of falling below it in bad times) the most.

Privilege Banking Facilities Only For the Rich

My conclusions follow from an application of common sense and economic logic.

A significant proportion of the rich are salaried professionals earning their money through perfectly legitimate means. They generally conduct their transactions with plastic money and have thus been affected very little by demonetisation. Their use of cash is limited to paying the domestic help – a single trip to the bank in a month suffices. Many in this category have access to privilege banking services in private banks and thus have been virtually spared the physical discomforts of queuing.

The middle and lower middle classes make a greater proportion of their transactions in cash, not because they lack access to plastic money but because of their mindset. According to Visa’s Global Payment Tracking Survey conducted in 2011, the debit card penetration rate in India was 53 percent. Now, five years later, it could well be 60 percent, thus covering every household not included in the mentioned category of poor households.  However, the survey finds that the rate of usage is still low, with consumers preferring traditional forms of payment such as cash.

Purchasing Power

This is attributed to two major misconceptions: The fear that an additional fee is incurred on each debit card transaction and that regular use of the debit card leads to overspending. The first perception, though, might not be false as shops in the formal sector selling medicines and other essentials or jewellery often offer discounts on cash purchases significantly in excess of those offered for card purchases. Obviously, these discounts, which translate into small savings, are valued more for the middle and lower middle income classes and result in greater propensity for undertaking cash transactions.

Second, very often the same products are available in the formal sector as well as the informal sector; while the rich meet their requirements almost entirely through purchases from supermarkets and branded outlets, those below them in the income strata are more cautious in their purchases from the formal sector, often settling for cash purchases of lower priced substitutes from the informal sector.

Therefore, compared to the honest rich, demonetisation has impacted the middle and lower middle class households to a greater extent on two counts. First, their greater propensity for making cash purchases implies a more significant impact of demonetisation on spending habits in the form of a forced switch to cashless purchases of higher priced products from the formal sector, thereby leading to a discernible decline in purchasing power. This greater propensity combined with the fact that lower incomes lead to a tendency to make smaller withdrawals may result in more frequent trips to the ATM/bank and more time spent in queues.

The Policy Which Proved Catastrophic For the Poor

But if the middle classes have been significantly inconvenienced by the demonetisation policy, the effect on the poor has been catastrophic.

Most poor people deriving their income from non-agricultural sources do so by either working as wage workers or by peddling and hawking varied merchandise. Lakhs of wage workers have been rendered unemployed because their employers do not ostensibly have the cash to meet their wage payments.

In regard to the self-employed hawkers, peddlers and small shopkeepers, the main reason for their woes is the deluge of Rs 2,000 notes accompanied by a trickle of notes of smaller denominations. Only a miniscule number of Rs 500 notes have been printed and circulated; at the same time, the scarcity of Rs 100 notes has fed on itself with people stashing these away for a rainy day.

Thus, only a fraction of even the vastly diminished desired purchases from the informal sector actually go through in these troubled times. The resulting deflation will sound the death knell for most small informal sector operations, many of which will be forced to indulge in distress sales and then fold up.

There is no reason why the situation for small and marginal farmers should be any different, though it must be conceded that those in the second category producing food grains for self-consumption will be somewhat insulated from the ravages of demonetisation.

However, production of food grains for self-consumption necessarily has to be accompanied by sale of one’s labour for cash to meet other needs. The story here will be no different from that in the non-agricultural sector – a saga of dwindling employment and crashing wage rates.

Large and medium farmers will go in for large doses of mechanisation through cashless transactions that will displace human labour with their need for regular cash payments.

Jan Dhan Accounts Flooded With Black Moolah

But what about the rich who earn significant amounts of black income?

Declarations of intent by the government to punish such individuals supported by a slew of measures have rallied the middle and lower middle classes to the war cries of their beloved Prime Minister.

The cold facts that have emerged till now are not very encouraging – about 55 percent of the invalidated currency in existence has already found its way to banks even before the country has reached the half-way mark in the period earmarked for the deposit of such notes.

The chances that black money stashed away by the rich will become valueless after 30 December, thus reducing the amount of black income in the entire economy, have dimmed considerably. According to a report in the Indian Express, in the first two weeks of demonetisation, the total balance in accounts under the Pradhan Mantri Jan Dhan Yojana, launched ostensibly to bring about financial inclusion of crores of poor households, has seen an increase by about 60 percent to Rs 72,834.72 crores. Thus, 14 days have seen an increase in total balances by about Rs 27,198.11 crores.

Compare this to the preceding period of 26 months, starting from the inception of the scheme in August 2014, during which the balances slowly inched their way to around Rs 45,600 crores. Advisories to such account holders through national television that warn against collusion with holders of black income virtually amount to an admission that a significant amount of money has been laundered through these accounts. Thus, the entire exercise of demonetisation, launched with apparently good intentions, may be reduced to a financial laundry.

Why then was this massive operation undertaken if the net outcome is large-scale money laundering, minor inconveniences for the rich, major inconveniences for the middle classes and an almost devastating impact on the fortunes of the poor?

What About PM’s Appeal In the Long Run?

Surely the Prime Minister and his team of advisors were aware of the pitfalls in the scheme. The answer lies in the fact that economic cost benefit analysis and political arithmetic are almost as different from each other as chalk and cheese. Though the middle classes, approximated to be about 50 percent of the population, have been put to major inconveniences, both physically and materially, they have almost risen as one to the clarion call of the Prime Minister; and satisfaction levels in this class have risen in anticipation of the punishment to be meted out to the dishonest rich.

A support of even 35 percent of the population might assure the Prime Minister of victory in impending multi-party electoral battles such as the UP elections. Already, the BJP has won huge victories in civic elections in Maharashtra and Gujarat, signifying that the appeal of Modi and his policies remains undiminished, if it has not grown.

What about the long run? Will the middle classes wake up to realise that the promises that buoyed them were just a mirage? Or will they again fall prey to another spate of promises from the Pied Piper from Vadnagar? The future of the country hangs in the balance.

(The author is a Professor and Coordinator at the Department of Economics, Centre for Advanced Studies, Jadavpur University. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)