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In the normal course, politics is a careful, cautious and calibrated profession. When in the government, politicians tend to turn even more conservative and risk-averse. Given this context, the demonetisation announcement by Prime Minister Narendra Modi does not fit the conventional mould. Why did he go ahead with it? What were his motivations?
As even his opponents have been forced to concede today, the economy had been repaired significantly in the past two years. The fiscal health of the government was an ocean apart from the profligacy of the UPA years. Foreign investment had picked up. Consumption was slowly beginning to regain lost ground. Domestic private sector investment and job creation remained a problem, but there was hope that the passage and implementation of the Goods and Services Tax (GST) would indicate a more broad-based recovery by 2019, when Modi led the BJP into its re-election campaign.
Modi was in as sweet a spot as is possible for an Indian prime minister in mid-term. Why then did he plunge into this massive disruption, one that was unprecedented in a healthy as opposed to a collapsing or inflation-assaulted economy and the consequences of which could be guessed and surmised but never accurately forecasted? The answer lies in a single word: belief.
While “black money” is a hot-button issue in Indian politics and Modi used it as his marketing tool on November 8, the fact is promoting greater reliance on formal banking channels and digital payments where feasible and among those for whom it is feasible was always part of the demonetisation blueprint. It was not an add-on or afterthought. Neither is the promise to attempt to clean up the property market.
If an analogy could be drawn here, it would be with the UPA I government’s decision to break with the CPI(M) and press ahead with the India-United States nuclear deal. Then too there were naysayers in the Congress, who argued all was well and a Congress-CPI(M) alliance for the 2009 election was a desirable goal. Yet, Manmohan Singh stuck by his principles and his belief that the nuclear deal was part of a transformation of Indian energy, defence and foreign policy that defined national grand strategy. Voters acknowledged the honesty of that effort, and rewarded Manmohan Singh in 2009.
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Modi is luckier and stronger in that he has won his own mandate and the BJP recognises he is its sole mascot for a popular election. These are attributes Singh never had. In comparison to 2014, today the BJP is much more Modi’s party. In 2019 it is likely to be even more so. All this gave Modi the political capital to overcome doubting Thomas MPs, who had to abide by his decision.
How will demonetisation play out politically? Much will now depend on what steps Modi takes to continue his battle against slush funds and corruption.
In some senses, the Uttar Pradesh election in February-March will be a testing ground for the faith people retain or don’t retain in the BJP. One suspects though that the recasting of Modi as at once a responsible leader and a resurgent prime minister is aimed at making him, once more, the champion of the underdog and the issue of a referendum in 2019. The political after-effects of demonetisation will be with us longer than the economic after-effects.
The author is distinguished fellow, Observer Research Foundation. He can be reached at @MalikAshok
