The Nov. 8 declaration by Prime Minister Narendra Modi to demonetise the economy was a bolt from the blue widely hailed by many Indian citizens. The BJP was quick to jump on the bandwagon and call it a ‘masterstroke’ that would redeem the party’s election promise in 2014 to end black money in the country.
Demonetisation included the replacement of the existing 500- and 1000-rupee notes (86 percent of India’s currency in circulation) with the explicit aim of ending tax evasion, financial crime and rampant corruption. The prime minister said it would reduce counterfeit Indian notes printed by Pakistan to worthless pieces of paper and dry up funding channels of insurgent groups in the country.
The demonetisation decision has evoked sharp reactions from opposition political parties and informed opinion on its impact darkly clouded public discourse. However, a recap of the policy in praxis after a month reveals that the policy of demonetisation seems to have run into rough weather, not only slowing the wheels of Indian economy but also causing collateral disruption in common people’s everyday life.
It becomes imperative to figure out the political and economic fallout of the move and its long-term impact on the politics of India. The move to demonetise the economy arises from many factors but it can be attributed to the following reasons:
1) The BJP led by Narendra Modi had promised in general election rallies to bring back black money stashed abroad and put 1.5 million rupees in every Indian’s bank account on coming to power. The pressure weighed heavily on the saffron party to deliver on its main electoral plank and bring ‘Acche Din’ (good days) to the people of the country. The party took recourse to currency exchange, a soft option in its long-drawn battle to end black money and corruption in India and fulfil its electoral promise.
2) The setback for the saffron party in the 2015 Bihar election and its failure to make electoral inroads in states such as Tamil Nadu and West Bengal raised red flags. The twin strategy of BJP of taking a hard line against Pakistan by launching a surgical strike on terror camps and the move to demonetise the Indian economy would provide the right combination for a pole position in upcoming elections in Uttar Pradesh, Uttarakhand, Punjab and Goa.
The history of monetary restructuring undertaken by various governments in India would provide a clue to the future of demonetisation underway in India. The first signpost of currency reforms can be traced to the rule of Muhammad bin Tughluq (1324 - 1351), the Sultan of Delhi, when he ordered the minting of new currency in ordinary metal and declared it equivalent to silver and gold coins in circulation. The experiment failed miserably because it was ill-timed, ill-planned and badly executed leading to counterfeit coins flooding the market.
The first demonetisation of the Indian economy was done in 1946 by the British government and rupee notes in denominations of 500, 1000 and 10,000 were changed overnight with the aim of curbing black marketing. The repercussions were inhumane as people died of shock, there were exceptionally long lines at the bank and the middle-class took a big hit. The second round of demonetisation was undertaken by the Janata Dal government in 1978 and currency notes of 1000, 5000 and 10,000 rupees were changed with the aim of stopping black money transactions in the country. The move failed to get its desired results.
The current demonetisation seems to be repeating the history of earlier fiascos and is bound to boomerang on the BJP government and its political fortunes. The only way in which the incumbent government can retrieve its falling political stock is by bringing back black money stashed abroad and in India, and transferring 1.5 million rupees in the bank account of each Indian.