Even his most vehement critics must now admit he was probably right. When India’s prime minister Narendra Modi first executed his demonetisation policy – invalidating, overnight, 86 per cent of all India’s currency – opinion was sharply divided. Even if the merits of demonetisation were accepted – and not all economists believed it was a good idea – the question became a political one: could Mr Modi pull it off? Would tens of millions of Indians accept the pain of queuing, the uncertainty, the loss of daily wages and accumulated savings, all in order for Mr Modi to strike against corruption?
After last weekend’s victory for his Bharatiya Janata party in Uttar Pradesh, India’s largest state, the answer must be yes. The north Indian state of 220 million people returned the BJP in a landslide – 311 seats, trouncing its closest rival on just 54 seats. The swing appears to have come from the poor: while merchants were badly hit by demonetisation, the poor appear to have understood it was done to target black money. Mr Modi’s gamble has paid off.
This newspaper has previously argued in favour of Mr Modi’s policy. It was a shock doctrine. And the pain was real: hundreds of millions of working hours were lost as Indians queued to replace their banknotes. Tempers flared, fights broke out. Incalculable nights were lost to worry as cash became impossible to obtain, and this in a society where an estimated 95 per cent of transactions are carried out in cash. Employees were not paid. Some who had hoarded cash found it was now worthless and took their own lives. All of those were real and very painful consequences of Mr Modi’s policy.
Yet the status quo also had costs and equally painful ones. Indians have become used to corruption, used to the wheels of its vast bureaucracy grinding to a halt unless greased with cash. Businesses have become used to cash and have not invested in newer, more efficient technology. The cash economy has meant billions of rupees every year never make it into government coffers as tax is not paid. These consequences also have a cost, but it is invisible, the daily irritation of too many who live in India.
Mr Modi gambled that the public, sick of the inertia of the system, would no longer accept the argument that change would be too painful. A sharp shock was delivered to the system and, it appears, the public, having experienced the pain, agreed it was worth the price. Politically, then, Mr Modi’s gamble has paid off. But the economic verdict will need longer to assess.
