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HomeOpinionMake no mistake: Demonetisation has been as much a political failure as...

Make no mistake: Demonetisation has been as much a political failure as an economic one

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It is a myth that demonetisation helped the BJP win Uttar Pradesh.

Demonetisation has been such a complete failure that we struggle to understand its ‘real’ purpose. It has been widely presumed that the stated objective of demonetisation – destroying black money stored in cash – was never the real objective. 

The objective was political, we believe, not economic. We have further come to believe that the political objective was met: the BJP won Uttar Pradesh thanks to demonetisation.

Nothing could be farther than the truth.

Why would the Narendra Modi government make such a big move if it knew it was going to be an economic failure? Would the government have liked to look embarrassed when all the money came back? 

We don’t like to believe the simplest explanation for things, and we always search for the conspiracy theory. Perhaps, Prime Minister Modi genuinely thought demonetisation would result in stashes of black money being destroyed, and the government making windfall gains. The attorney general at that time had said the government expected to save Rs 3 lakh crore thanks to demonetisation. 

Also read: India was asked to choose between society and economy in 2014. Now they have neither

To say that this was never the objective is a narrative meant only to cover the failure of demonetisation.

The objective of the shock move was both political and economic – for the Modi government, there was no contradiction. It was an economic idea that, unlike most economic ideas, was also a populist one. In those days, there was some discussion on what the government would do with the money it would save through demonetisation.

How will we spend 3 lakh crores?

Soon after demonetisation, the 2016-2017 Economic Survey had a full chapter on the idea of universal basic income (UBI) scheme. The chapter said the UBI would account for 4.9 per cent of India’s GDP, and the government didn’t have fiscal room to make such a move. It is possible that the government thought demonetisation would give it the windfall savings to go ahead with UBI. 

For instance, here is then-defence minister Manohar Parrikar speaking on 18 December 2016: “A minimum of Rs 2 lakh to Rs 3 lakh crore in taxes will be collected and once this tax comes to the government, it will help fulfil the needs of the common people and the poor. The central government will utilise the money to give financial strength to these sections”.

Demonetisation was used by PM Modi and his party to project a pro-poor image overnight. Suddenly the ‘Brahmin Baniya’ party was becoming the Indira Gandhi-esque pro-poor, anti-rich party. There were tax raids across the country. Amounts as small as a few lakh rupees were being confiscated. 

Modi dropped his keywords like Vikas and Mitron, and started talking about Garibi, Garibi, Garibi all the time. However, by the time GST arrived and the sense of economic gloom was all-pervasive, the Prime Minister and his party quietly dropped the Garibi plank. The failure of demonetisation has hurt the BJP’s attempt to transform into a party of the poor. 

Had demonetisation been successful, the BJP would have been so big today that surveys wouldn’t have been talking about the prospect of a coalition government in 2019. The failure of demonetisation has hurt the BJP politically, there is no doubt about it. It may not have shown in state election results so far, but that’s partly because of PM Modi’s mastery with managing the narrative and partly because the Congress party is too weak to capitalise on the Modi government’s failures.

BJP won UP despite demonetisation, not because of it

Which brings us to the big evidence people cite: the Uttar Pradesh assembly election in 2017. It is widely believed that people in UP voted handsomely for the BJP because they were impressed by demonetisation. Additionally, notebandi also broke the back of the opposition campaign.

Success has many fathers. Given how stupendously the BJP won UP, it was able to even make the ridiculous claim that Muslim women voted for it. If demonetisation was an issue in the UP elections, why was it largely absent from the BJP campaign in UP?  

By the time the UP elections began in February 2017, the failure of demonetisation was absolutely clear. Everyone could see that an overnight industry had come up to change old notes, no questions asked. This is also why demonetisation didn’t hurt the opposition campaign: they had the new notes. Everybody did.

Also read: Bhima-Koregaon arrests, Rafale row, note ban have one common problem: BJP’s execution

Voters were not upset with the failure of demonetisation, and the backlash was limited to a fraction of the trader community. (have trimmed a line here) The BJP managed the failure of demonetisation by telling people that the benefits will come later and also with “at least he’s trying” narrative.

When asked why they were voting for the BJP, voters in UP said it’s because of Modi, the Ujjwala LPG scheme, their frustration with the Yadav raj. And there was anti-Muslim polarisation too. But demonetisation was strangely out of the conversation. Don’t take my word for it, just see what others were reporting around the time. Here is Prashant Jha writing in The Hindustan Times: “In the first month after the note ban, there was euphoria as the poor, the rural affluent, as well as the professional middle classes saw it as a move against the country’s corrupt elements. By the end of the second month, the enthusiasm had evaporated. The benefits remained elusive although the pain was tangible, but there was no hostility either… Counter intuitive as it may sound, despite its disruptive implications, voting may not necessarily happen on the issue of the note ban but other local factors.”   

Delhi pundits have created the mythology that demonetisation helped the BJP in UP. It’s a story that helps the BJP because in the end there’s something to say for demonetisation. The truth is that UP was won despite demonetisation, not because of it. Not that the truth matters. 

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  1. The Demo Scam – which no Newspaper reported – as they were all paid off – as they are of the ilk of the Brahmins and Banias.dindooohindoo

    It is the disaster of the Brain of Narendra Modi ! dindooohindoo

    Part 1

    Conversion Route (Elementary Level – rest to be submitted at the CIC Hearing)

    • Party A has Rs 1 crore of Old Cash (which is obviously unaccounted) and the choice of paying tax and interest thereon has lapsed as there is no VDIS – and post Demo the deemed tax is 100% at the minimum
    • Party B (Stage 1 Converter) has Rs 65 lacs of New Cash – which is given to Party A in lieu of the Old Cash of Rs 1 crores which is then given to Party C to X as under:
    o Party C to X (Stage 2 Converter) are legal entities who trade in Nil VAT/ST products (or under Exemptions and /or Compounding) and are POS Retailers who then , make manual or backdated E-Bills for fictitious sales of items to unknown individuals and deposit the new cash into the bank
    o Party C to X deposit the cash in banks whose books are open for 30-45 days before the date of announcement of the Demo or whose IT systems allow backdating of E- Bank Statements (within the period of reporting to the RBI and other Regulators)
    • Party Z then taps Party A to convert the New cash Received of Rs 70 lacs into a capital entry to clean the cash at a rate of , say 15%, wiring Rs 59 Lacs to Party A, as a capital receipt etc, and taking the Rs 70 lacs of new cash from Party A
    • Party Z which is basically front for Party B – hands the cash to Party B, after charing the custodial, logistics and security charges
    • Party B then resumes the same chain as in Step 2 above, wherein the rate of the conversion, id.est., 30% keeps rising as the DEMO deadline appears
    • Party A can convert the Rs 50 lacs into cash – new and old – at a premium, at any time that it is required


    • Since converters had the new cash within a day and as per news reports , even before the announcement of Demo, they have to be part of the establishment
    o If the converters had withdrawn the new notes from the bank, the banks would have tipped off the DRI/ED etc and possibly reported to the RBI – in which case they would be raided (but were not) or they would have to explain why large amounts of cash were withdrawn (for labour wages – although wages are not paid in Rs 2000 notes , agri payments etc) and on specific dates and how/why the banks were satisfied about the same
    o Hence, if the converters got the new cash o/s the Banking system – that is fraud and PROOF THAT THE CONVERTERS ARE PART OF THE ESTABLISHMENT
    o If the converters got the new cash from the banks – it is proof of collusion and fraud by the bankers, as past patterns of withdrawal by bank customers (for labour, wages, agri payments etc), would not support the new notes withdrawal
    • Since converters had TO TRANSPORT CASH ACROSS LOCATIONS, IT WOULD HAVE REQUIRED SECURITY OR PERHAPS STATE SECURITY, they have to be part of the establishment as
    o It is impossible that the state would not be aware of the logistics and security
    o It is impossible that the state would not raid the cash movement
    • Since Party C to X, who would have reported drastic increase in cash sales and deposit of cash into the bank , would not be able to support the same by PAST PATTERNS OF RAW MATERIAL PURCHASES AND TRADING PURCHASES AND SUCH LARGE AMOUNTS OF PURCHASES OF RAW MATERIALS IN CASH – COULD NOT HAVE BEEN JUSTIFIED BY PARTY C TO X , W/O THE SUPPORT OF THE ESTABLISHMENT

    • Cash recovered in the “form of old notes” by the “DRI/ED and the Police” – were all recovered from the “so called originators” and “so called garbage dumps”- w/o “a single case of cash recovered” from “the converters/entry operators”

    • No cash was recovered from the “converters/entry operators (Party B and Party C to X, as stated above)”, who are obviously part of the establishment – which is unusual , as the operators would be having the new currency which

    o Is either kept in a house/safe or
    o Stocked in the bank (which would have tipped off the DRI/ED etc or
    o Transferred the cash around in new stocking points and neither of the 2 above points can happen w/o the support of the establishment

    • Since the GDP is still growing on the “computation mode of GDP on expenditure mode”, and there is “no shortage of notes” of less than Rs 100,it would mean that the Industrial agglomerations typified by the SSI and the Cash sector,have been “able to convert the bank deposits”, back into cash – “obviating the purpose” of the notebandi (Rs 100 is assumed,as the wages are paid in that denomination

    • Since the GDP is still growing on the computation mode of GDP on expenditure mode, and there is no shortage of notes of Rs 500 and Rs 2000,it would mean that the Industrial agglomerations typified by the SSI and the Cash sector,have been able to “convert the bank deposits back into cash” – obviating the purpose of the notebandi (High denomination notes being used for “sales,logistics and purchases”, if at all required)

    • It is of interest to know how Billions of USD of New Notes “were available with Entry Operators”,on Day 5 of the scheme (to build demand from Day 0), at “strategic demand and vantage points” in “key capitals and towns”, across India – for converting the old notes

    • It is of interest to know “how and why” the Billions of USD of INR, in the form of “new notes being delivered to the user” and the “old notes delivered to the entry/converter operator”, was “logistically executed” – with “not a single case” of “interception” by the police/DRI/IB/CID/ED – as the “logistics was provided by the state” – Police (all interceptions were from the “end user of petty amounts” and could have been “fake note plants”, by the GOI – as the notes were cancelled in any case)

  2. After demonetisation there’s not even a single big-head that rolled. None of the corporates and industrialists have corrupt money! The most effected are the poor and the middle class.
    I know a poor widow of middle class family who was left with a few lakhs for her maintenance by her late husband is chased by income tax department sleuths like a criminal. I am not against paying tax. However, what about looters of Banks? Why middle classes have become targets in Modi regime? He is hitting hard those who voted for him. What kind of patriotism is this? If he’s for tightening middle classes and collecting revenue by way of tax, let his minister also follow the same austerity by not holding their meetings in five star hotels. What’s sauce for goose is sauce for the gander.

  3. For many, many centuries, the Indian countryside has always remained very poor. A struggle for daily survival. They have accepted life.They have no grievance.
    If they feel that someone is trying to do something good, without any malicious intent, they always support it. Irrespective of the end result.
    Demonetization was one such intent which was supported by the masses because of the good intent.

  4. An interesting viewpoint. However, the BJP has won some elections after UP and lost some. The most recent was an impressive gain in the Karnataka elections, though it could not form the government. Thus it seems that correlation between demonetisation and electoral success or failure is rather thin. The author is partly right. Will demonetisation be a factor to reckon with in 2019? Frankly speaking I don’t know. The opposition is bound to harp on its supposed failure and it is to be seen how the voters remember the event. However, strictly from the point of view of pure economics, demonetisation was a non-event. The most important aspect is that demonetisation offered no solution to the most vital and basic issues afflicting our economy, such as poverty, unemployment, agrarian crisis, mounting NPAs, yawning trade deficit etc. However, there is also no evidence of demonetisation having caused or aggravated these deep rooted and long standing economic ills. Has demonetisation brought in better tax compliance, as it is a now being claimed? The important indicator in this regard is Direct Tax Collection to GDP ratio. The ratio tells us about the improvement in tax compliance in our economy. The ratio was 5.6% in 2016-17 and has provisionally improved to 5.8% in 2017-18 and is slated to improve to 6.1% in 2018-19 as per budget. Gross Tax Revenues to GDP had improved from 11.2% to 11.4% in the same period, according to RBI Annual Report. Let us see what the final figures tell us. Thus, while the proclaimed long term benefits thereof are yet to be validated, its adverse effects are now showing signs of dissipation. Liquidity is back to normal and GDP growth rate is climbing. The tremors were felt for just two quarters. Thereafter, the economy seems to have simply shrugged it off and continued to move forward on its normal course. The demo- shock has now been fully absorbed.

    • What about the lives lost and hardships faced by common man? Economic and financial evaluation must be done with human-beings at the centre not excluding them altogether.

  5. It was neither a scam nor a folly. It was a perfectly well intentioned idea that went horribly wrong in execution. First RBI should have been taken into confidence and instructed to ramp up printing of smaller denomination notes well in advance. Could even have been outsourced. Second the new notes should have been exactly the same size to fit into ATMs. Third a possible nexus between corrupt bank officials and black money holders should have been factored in. This in fact was the biggest flaw; there was no cash between 9:00 and 5:00 in the banks and plenty in the evening! DeMo made millions of millionaires in the banking sector…who helped open fake accounts and converted old notes to white. Finally this was a great opportunity to switch to plastic notes which are practically impossible to forge. Hindsight as they say is 20-20 and poor NaMo ended up paying a heavy price.

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