Why Narendra Modi Is Still Flogging The DeMo Horse Despite Weak Results

Why did Prime Minister Narendra Modi, despite short-term economic losses on demonetisation (DeMo) exceeding the gains, spend so much time explaining the real and hoped-for benefits from it in his Independence Day speech?

Among other things, he said Rs 1.25 lakh crore of black money had been detected and brought to book, Rs 3 lakh crore of undisclosed incomes had come into bank accounts, that 5.6 million new taxpayers had come into the system between 1 April and 5 August, double the number of last year, and that 1.8 million people had made deposits in excess of their known sources of income, and many of them had accepted the discrepancies. Moreover, he also talked about the detection of three lakh shell companies, of which 1.75 lakh had been asked to close shop or deregister themselves from the Registrar of Companies’ database.

None of this could probably mean anything to the average voter, who has no clue on how canning shell companies will create jobs, or how the increase in the tax base will impact his life, but Modi still made a virtue of it.

Modi did not talk about the 1.5 million jobs that may have been lost due to demonetisation, or the poor performance of the PM Garib Kalyan Yojana, which saw only around Rs 5,000 crore deposited, half of which will come as tax, and another 25 per cent as interest-free deposit for four years. This scheme, launched at the peak of the demonetisation months, was supposed to net those caught unawares by the move. Nor did Modi talk about the fact that banks incurred huge costs in managing notebandi, or that the dividend income from the Reserve Bank of India halved due to demonetisation. He made no reference whatsoever to the drop in gross domestic product growth rates pre- and post-demonetisation, or the possibility of the slowdown continuing for two more quarters due to the uncertainties unleashed by the implementation of the goods and services tax.

The question is why did the PM up the ante on his fight against black money and corruption, when the benefits seen on the ground may be meagre or non-existent?

The answer may lie in an insight offered by Ruchir Sharma, chief global strategist and head of Emerging Markets Equity at Morgan Stanley Investment Management. Sharma believes that in India, politics is more delinked from economic outcomes than elsewhere. He notes that in the last few years, even chief ministers whose states outperformed the national average in terms of growth faced a two-thirds possibility of defeat. Either the anti-incumbency factor is bobbing up again, or voters are looking for something else in a leader.

Sharma wrote in The Times of India recently: “Seventy years after Independence, India has changed in many ways, but is more or less the same in one: there is no connection between politics and economics. When Prime Minister Narendra Modi came to power over three years ago, expectations were high that he would have a dramatic effect on the country's economic prospects. Yet, for all his power, Modi is having much less impact on the economy than either his detractors or supporters imagine. Just as surprising, this disconnect is hardly hurting him politically. He remains very popular with the masses, who increasingly favour a strong, nationalist leader.”

In an interview to CNBC TV18, Sharma made a more direct mention of the economic impact of demonetisation, and why it has not hurt Modi. “On demonetisation, I think that I have made my stand pretty clear that this was something which was the classic Indian trait of (how) bad economics can be good politics…in fact, when we spoke about it last December, I was not a fan of what was done. I thought it was not the appropriate remedy for this economy. But I was surprised when I travelled to Uttar Pradesh to follow the elections in late February and early March. I was surprised by how politically popular demonetisation was on the ground, with a lot of people there saying that this was the right thing that the Modi government has done because it sounds big and it is the right way to sock it to the rich. So, this was a classic case of something which was possibly bad economics but good politics.”

In India, schadenfreude – the vicarious pleasure one gets when a rival or someone who one dislikes gets hurt – works pretty well as a political strategy.

Modi knows that there is not going to be any growth nirvana or an explosion in jobs before 2019. Even if 2018-19 turns out to be a golden year of growth, it will not be visible to a lot of voters. He has clearly figured out that socking the rich may have more votes embedded in it than claiming success on growth, jobs or inflation. Who knows, it may well work if Sharma’s insight holds for another two years.