Demonetisation Paradox: Lack of Popular Opposition to a Move That Has Caused Widespread Havoc

Despite the hardships being faced by the working class due to the note ban, the rhetoric of fighting corruption and targeting the wealthy means they are bearing the pain in silence.

People gather at the entry gate of a bank to exchange and deposit their old high denomination banknotes in Jammu, India November 15, 2016. Credit: Reuters/Mukesh Gupta

People gather at the entry gate of a bank to exchange and deposit their old high denomination banknotes in Jammu, India November 15, 2016. Credit: Reuters/Mukesh Gupta

Prime Minister Narendra Modi’s demonetisation move was projected as being part of a concerted policy to root out black money from the system, deal a blow to the counterfeit currency in circulation and disrupt the financial operations of terrorist networks. A few weeks after the note ban, the mantra being repeated is that demonetisation would push India towards becoming a ‘cashless society’. This could open the path to an overt monitoring of all transactions and possibly facilitate a shift to a bank transaction tax – a policy move that has been under discussion for sometime now.

In a single stroke, nearly 86% of the currency – in an economy where cash accounts for the bulk of economic transactions – was wiped out. The disastrous fallout of this move is echoing through the country. However, popular opposition to this move is not evident, which is the real puzzle.

Two implications of demonetisation

Informed commentary by economists, activists and other experts is quite unanimous in arguing that demonetisation will have very little impact on the black economy in India. The black economy is composed of two parts – illegal activities like smuggling, drug-dealing and trafficking, and legal activities where income is under-reported for the purposes of tax evasion (like the transactions of real estate agents, professionals, merchants, traders and moneylenders). The income generated in these two types of activities, which we can call ‘black income’, is then held in various forms, including cash.

By design, demonetisation will have no impact on activities that generate the flow of black income, hence the real source of it will remain completely untouched by the policy move. In fact, once new currency notes flow back into the system, black income will be generated in these new notes. Moreover, only a small fraction of black money – around 6% – is held in the form of cash. The rest is in the form of real estate, gold, deposits in foreign bank accounts or other forms.

By now, it is clear that entrepreneurial ingenuity has found a variety of channels through which the demonetised notes could be brought back into the banking system. Hence, even of this small cash component of black income, what will actually be destroyed will be a pittance. Demonetisation will thus have a negligible impact on the existing stock of black money.

Also, it is doubtful if this move will have an impact on the use of counterfeit currency and on the financing of terrorist organisations because both of them will pick up momentum as the new currency flows into the system.

At the same time, media reports and expert commentators have been underscoring the enormous suffering that this move has caused. The overwhelming majority of the working people earn their livelihood through the informal sector where cash is king. A large section of this working population is also outside the purview of the formal banking system so cash is their only means of transaction. They earn their income – often on a daily basis – in cash and use it to purchase essential commodities. Due to the sudden cash crunch, the flow of their incomes will contract sharply and their access to essential commodities will be drastically curtailed. Thus, a far-reaching disruption of life and livelihood of the vast majority of India’s working poor is underway.

The paradox

While the first implication of demonetisation – the negligible effect on the black economy – is difficult to pin down, the second implication – enormous suffering of the common people – has become increasingly clear in the one month since the move was announced.

Also watch: A Month in, the Impacts of Demonetisation

The informal sector workers have been thrown out of work because their employers don’t have the cash to pay their wages, many migrant workers in cities are returning to their villages, farmers have been unable to sell their produce or purchase seeds for the Rabi crop, vendors, merchants and small-scale producers have seen their businesses decline precipitously, supply chains have been thoroughly disrupted due to the lack of cash and credit and people have been spending long hours standing in queues outside banks and ATMs to withdraw cash.

But this sudden, drastic and unambiguous blow to the material well-being of the poor – the vast majority of the country – has not been met with widespread resistance. People have not come out on the streets in angry protest demanding a rollback of the disastrous move. The note ban has not triggered working class riots across the country. The attempt of the opposition parties to organise a countrywide protest, a ‘Jan Akrosh Diwas’, on November 24, was ineffective at best.

How can we explain this seeming paradox where on the one hand a drastic, poorly-designed policy move has hurt the material well-being of the common people and, on the other, there is a complete lack of widespread protests against the move?

A class analysis relating to the effect of demonetisation on the major classes in the Indian society might throw some light on the matter. Moreover, while thinking of the possible effects of demonetisation, it will be useful to distinguish between a ‘wealth effect’ and an ‘income/transaction’ effect. The former refers to a decline in the stock of wealth and the latter to a reduction in the flow of income and/or a contraction of transactions.

Class analysis

The big capitalists – the Ambanis, the Tatas, the Adanis and some others in this category – won’t face a negative wealth effect or a negative income/transaction effect due to demonetisation. This is because they are likely to hold only a minuscule portion of their wealth in the form of currency notes. The majority of their wealth is in the form of capital stock, real estate, deposit accounts in foreign banks, stocks and bonds and other financial non-cash assets. The pernicious practice of round-tripping – the siphoning of unaccounted income by corporate houses to off-shore accounts from where it is reinvested back in India or elsewhere across the globe – remains untouched. Moreover, it is quite possible that these big capitalists actually gain in terms of access to credit.

The infusion of cash into the banking system after November 8 has in effect mobilised the cash holdings of the larger population as reserves of the banking system. While the overwhelming pressures of demonetisation have put a damper on credit, a growth in deposits should, in due course, seek profitable investment outlets. Withdrawal limits have been put in place, deposit rates have been cut and the temporary hike of the cash reserve ratio has been removed. So this surge in deposits is, in principle, available for lending if the banking system weathers these pressures.

If recent practice is any indicator, the ensuing bonanza of credit, while it lasts, would be captured by the large business houses who have seen their debt grow by about 12% between 2013 and 2015. The longer it takes to restore the circulation of cash, and the longer withdrawal limits are in place, the longer this bonanza will last.

Also read: The Poor Are Paying for Demonetisation



This increased access to credit would come after a period of the banking sector dealing with vulnerable balance sheets, which have borne the high burden non-performing loans cornered by a few large business groups.

If the credit is used to finance acquisitions abroad, this access to credit would not translate into investment and job growth in the domestic economy. Moreover, the fall in profits in the domestic economy due to the fall in spending resulting from the cash crunch may not significantly damage corporate earnings that are bolstered by investments in foreign lands. Hence, the big capitalists are likely to come out of this seismic shake-up relatively unscathed, if not better off. The actions taken by the Reserve Bank of India to manage this surge of liquidity and calibrate credit flows through the banking system will be critical in shaping this outcome.

The new middle class of white-collar salaried professionals, whose income goes directly into their bank accounts, will also not face a loss of wealth or any loss of income. While they face limits in cash withdrawals, they are able to finance their transactions through credit or debit cards and digital transactions.

The vast majority of the working population – the workers and the self-employed – will face a massive negative income/transaction effect, but only a small wealth effect. This is because they work predominantly in the informal sector where incomes, both wages and profits, are earned in cash, and where that income is spent on essential items using cash transactions.

A contraction of cash will severely impact the working people on this count. But since their incomes are, and have been, low, they have probably managed to accumulate very little stocks of wealth. A significant proportion of this population also doesn’t have a bank account. If they do have any wealth in the form of old currency notes, they can deposit it in their – possibly newly created – bank accounts without any penalty (the limit being Rs 2.5 lakh). Hence, they are likely to face a small, if any, negative wealth effect. The income effect, however, is likely to be deep and prolonged since it will take a while before the economy recovers from the monetary shock – and the resulting fall in demand – and they can find work again. In the meantime, they are in the danger of sinking into debt.

Also read: In Bundelkhand, Farmers Sink Into Debt As Rural Economy Collapses Under Demonetisation

Between these two extremes – the big capitalists and the poor working people – reside the class of middling property owners – the smaller businessmen (and businesswomen), the traders, the merchants, the moneylenders, the real estate dealers, the labour contractor and the bureaucrats – who are likely to experience a negative wealth effect, no matter how small.

This is because they are the ones most likely to hold unaccounted wealth in the form of cash – in the form of bribes and unreported income. They will certainly lose some, though it remains unclear clear how much, of their black income. This section will also face a loss of earnings due to the disruption of spending and the consequent fall in their business. In fact, some may even be forced to shut their businesses altogether. However, this group is also likely to have access to the banking system, so that the negative income/transaction effect will be temporary and relatively small.

This simple class analysis suggests a straightforward political-economic explanation for the puzzle of demonetisation – a policy move that has disastrous consequences for the poor but has elicited, at least so far, a complete lack of protests by them.

Demonetisation: right-wing populism

Demonetisation is a populist political gamble that the BJP leadership, and the prime minister in particular, intends to use not only to generate mass support ahead of the UP elections but also to cement and establish a legacy in a tenure that has been mired in a series of controversies.

The dramatic announcement of demonetisation, in the wake of the disappointing performance of the scheme implemented to mop up undisclosed assets and foreign income, is designed to showcase a determination to strike at the ill-gotten wealth, no matter what the cost. It is intended to be seen as the delivery of the promise of good governance and development that brought Modi into power in 2014.

While the role of propaganda in building and maintaining mass support is important, the BJP leadership’s task has been made much easier because the move taps into real class antipathy of the poor working people for their immediate and daily oppressors – the big merchants, the moneylenders, the landlords, the contractors, the bureaucrats, the police, the big doctors, the lawyers, the real estate mafia, the politicians and his goons.

Demonetisation has been packaged as an attack on the ill-gotten wealth of the class that exploits and humiliates them day after day, the class with whom the working poor interact on a daily basis. Thus, the working poor, even when they face hardships and sufferings due to a fall in incomes or loss of jobs or face difficulty in purchasing essential commodities due to the cash crunch, are willing to see this as a pain necessary to get back at their daily oppressors.

For those slightly better off, even the infringement of the right to property with the withdrawal limits in the bank accounts is worth it if some of the big offenders also get hurt in the process. Reports of seizures from small businessmen, traders and officials have provided some reassurance in the face of daily indignities.

Inequality has exploded in the neoliberal era and wealth has been amassed on an unprecedented scale by a small section of the population. This has allowed demonetisation to be repackaged as a strike against the growing inequality and against the widening class divide.

The poor have been told that with payments going into their bank accounts, they will no longer be underpaid for their labour. There are also talks of how the illegal wealth swooped up by this move would be put to the service of the working poor. All the hardships and sufferings are being mobilised as an act of sacrifice for cleansing the nation of corruption under the direction of a powerful leader. Given the ravages of neoliberal reforms and the daily indignities inflicted by the system, the rhetoric of fighting corruption, and of attacking the ill-gotten wealth of their daily oppressors, has struck a chord with many people.

If the ongoing events in the rest of the world – from Brexit to the election of Donald Trump – are any indication, we are in a new political moment marked by the growth of right-wing populism.

Both Brexit and the US elections show that public fury against the ‘system’ can lead to outcomes that defy expectations. Even in the case of demonetisation, it can be seen that while the experts are pointing to the flaws in the scheme, public opinion seems to be that if the move gets rid of the black money, the pain from it is worth it.

But this is right-wing populism in its purest and most cynical form. It taps into the real disaffection of the working poor and mobilises it in the service of the nation under the leadership of an authoritarian demagogue. The policy measure will fail in its stated objective of destroying the engines of black unaccounted income and wealth. Forget the pipe dream of improving the lives of the people by exterminating the menace of corruption, what is worse is that demonetisation might even help mobilise the cash holdings of the wider population in the service of a few large corporations.

It is also becoming increasingly obvious that the regime was so caught up in selling demonetisation as the price of the war against corruption that it completely failed to prepare for the collateral damage it will impose on the people who have forcibly drafted into this war.

Given the frequent changes in rules by the RBI and the government since November 8, and the logistical nightmare that have ensued, it is also becoming obvious that the regime failed to even prepare for the logistical aspects of this war. Part of the justification offered for this lack of preparation and analysis is the need for secrecy. But the cloak and dagger drama of the announcement, while explicable for an ambush on unaccounted cash, is less explicable if the agenda is a move to push for a cashless economy. Whatever one believes of the merits of the latter agenda, nothing warrants a policy-driven shock of this magnitude.

Demonetisation, like all political gambles, contains the possibility of failure. It is possible that the financial system in India will not be able to remonetise the economy for several months, and the support of the working people for the regime will be gradually eroded. The RSS seems to have been closely monitoring the situation, and even though it has come out in support of the government, it is clearly keeping an eye out for the possible erosion of its support among the trading community. There is a real possibility that the inadequate preparation and the limitations of infrastructure will undermine the effort of the BJP government and restoring normalcy will take much longer than even the present projections.

If this happens, the populist rhetoric will have to ramped up. There is more to come.

The Left needs to think carefully before formulating a counter strategy. The ideological battle against right-wing populism is far more complicated and difficult than the fight against straight-out neoliberalism. Portraying demonetisation as one more neoliberal policy move might not be sufficient to counter the growth of right-wing populist forces in the Indian polity.

Pooh-poohing the movement against corruption seems to come with a heavy price for genuine Left forces in India. A few years ago it was outflanked by a centrist populist force, the Aam Aadmi Party. Now it seems to have been outmaneuvered by a right-wing populist force, the BJP. Probably it is high time that the Left in India develops a class-based analysis of, and class oriented strategy to, fight against corruption.

Deepankar Basu teaches in the Department of Economics at the University of Massachusetts Amherst and Ramaa Vasudevan teaches in the Department of Economics at the Colorado State University.

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