I was in my car, stuck in one of Mumbai’s infamous traffic jams, when I received an SMS alert. Prime Minister Narendra Modi was about to make an important announcement. “What now?” I remember thinking. I’d spent most of the day tracking the US election, as it slowly became obvious that predictions of an easy victory for Hillary Clinton were premature, at best. My Facebook inbox was blowing up with messages from worried friends in the US. To top it all off, I’d spent the past two hours in bumper-to-bumper traffic. All I wanted to do at that point was to go home, have a drink and go to sleep hoping that I wouldn’t wake up to the news that the leader of the “free world” was now an orange-skinned misogynist.
But Modi was having none of that. A few minutes later, I got a frantic call from my partner. At 9pm, on 8 November 2016, Modi had appeared on national television to announce that in an attempt to fight corruption and terrorism, currency notes of 500 and 1,000 rupee denominations would no longer be considered legal tender. In one stroke, 86 per cent of the cash in circulation in the country would become worthless paper. And there was nothing we could do about it.
Modi also announced that banks would be closed the next day, that withdrawals from ATMs would be limited to Rs. 2,500 per day, and that there was a limit of Rs. 24,000 per week for withdrawals from bank branches. In a country where 40-45 per cent of transactions happen in cash, the ensuing pandemonium was entirely predictable. Within the hour, long lines appeared at ATMs across the country as citizens rushed to withdraw enough cash to get them through the next few days. Most of them would return empty-handed, with ATMs running out of the still-valid notes in minutes. In order to preserve secrecy, Modi and his small team of insiders had kept any information about the impending move from the banking system or the country’s bureaucracy. As a result, both found themselves severely unprepared to handle the fallout.
The news over the next few weeks would be full of troubling images and heart-breaking stories. Millions of people stood in queues outside banks hours on end, only to find that the banks had no cash to give them. The lucky few who did get cash found that the new Rs. 2,000 notes were little more than showpieces, because nobody had enough change to break them. People with life-threatening conditions were turned away from hospitals because they didn’t have enough ready cash to cover the costs. India’s billions of unbanked – the daily wagers, small traders and farmers, who make up almost half the country – were the hardest hit, as they struggled to convert their paltry savings into usable currency.
Social media was soon filled with stories – of construction workers laid off because their employers couldn’t pay their salaries, of small businesses shutting down because they couldn’t afford to make rent and pay bills, of people breaking down in tears from the sheer frustration of it all. By the second week, more than 50 deaths had been reported as a direct result of the policy. People died of heart attacks while standing in line for hours, while those with medical emergencies were turned away from private hospitals for lack of cash. Bank employees succumbed to stress after being overworked for days as they struggled to help the other affected. In the rural hinterlands, there was a spate of suicides, as farmers were left without cash to buy seeds and farming materials in the middle of the crucial sowing season. A month later, the reported demonetisation-related death toll stood at 82. The unreported figure could be much higher.
Not all were equally affected. For the relatively affluent urban classes, demonetisation was a minor discomfort. Most of us were already plugged into the “cashless economy” of digital payment wallets, Uber and online shopping apps. All we had to do was to shift our custom from small neighbourhood shops to e-commerce platforms, which incidentally were overjoyed by the move (PayTM, an e-wallet company, even took out a front page ad in the leading national daily to praise the Prime Minister). That’s probably why the talking heads on television, and their counterparts in upper-middle-class living rooms, were so comfortable with the “necessary sacrifice”. One relative happily told me of the nationalist pride she felt standing in line at the bank. That her relationship manager at the bank expedited the process in no way detracted from the warm glow of “doing something for your country”.
In the three months since demonetisation was implemented, we’ve seen much grumbling, a few outbreaks of violence against bank officials, and sporadic protests across the country. Why not more? That is a testament to the extent of the common man’s anger against corruption, as well as the Modi government’s management of the political narrative.
The PM’s first masterstroke was painting the move as a strike against terrorism, much of which is financed by black money and counterfeit notes. Bharatiya Janata Party (BJP) functionaries spoke about how the new notes would be impossible to counterfeit, thanks to their advanced security features. When the Reserve Bank of India pointed out that the notes had no new security features, the Modi government quickly shifted focus onto the black economy. Once economists pointed out that only an estimated 6 per cent of the country’s black money is kept in cash, the government once again shifted goalposts. Now, it seems, their aim was to push the country into the bold new age of a cashless economy. Meanwhile, BJP supporters have kept up a relentless campaign maligning anyone who criticises the move as “anti-nationals” or “terrorist sympathisers”. When confronted with the deaths attributed to demonetisation, the party’s leaders compared them to “soldiers dying at the borders”.
Such an emotionally charged PR campaign is designed to deflect attention from the hard economic truth – that at least in the near-to-mid term, demonetisation has been a disaster. The Reserve Bank of India’s official growth estimate of the year was revised downwards from 7.6 per cent to 7.1 per cent. Most private forecasters believe it will be even lower. The State Bank of India’s near-term composite index for December, which forecasts industrial activity, crashed to an all-time low. Real estate sales are set to see a 20-30 per cent fall in 2017, while many manufacturing industries such as cement, steel and automotives have seen major declines in output.
To make matters worse, the cash crunch has still not been eased, in part because the government greatly over-estimated its ability to print new notes. By the 31 December 2016 deadline, when Modi had promised that things would return to normal, only Rs. 6 trillion of the Rs. 15.4 trillion withdrawn was back in circulation. The full impact of the move will not be known for some time, but indications are that much of it will be negative.
As for the benefits of demonetisation, they are few and largely temporary. While the black economy took a hit, the loss of cash reserves has done nothing to address the systemic problems that make corruption so attractive, and so easy. The shift towards banks and electronic payments will make the taxmen happy and have benefits in the long term, but the coercive nature of that shift leaves a bad taste in the mouth. And the disruptive shock – disproportionately affecting millions of the country’s most economically vulnerable – will have political costs.
Public support for the move – and for the Prime Minister – remains strong. Multiple surveys report that most people are waiting to see the results before they make up their minds. But as the effects of the economic downturn spread, that may soon change. In the coming month, the BJP faces two major tests of its popularity – state elections in Uttar Pradesh and Punjab (along with three other states). Many will view those elections as the first real test of demonetisation’s popularity. When the results come out on March 11, it might be Mr. Modi and the BJP’s turn for a rude shock.
Bhanuj Kappal is a freelance journalist based in Mumbai. Follow him @StonerJesus.