How Modi’s Party Avoided the Fallout from Demonetization

elections

“Hard work is much more powerful than Harvard,” quipped Indian Prime Minister Narendra Modi, a consummate politician, at an election rally at Maharajganj, in Uttar Pradesh (UP). He was taking a dig at critics of demonetization — particularly former finance minister P. Chidambaram and Nobel Laureate Amartya Sen, the first a Harvard alum and the latter a Harvard don. Both had predicted a demonetization disaster. “Well-known intellectuals from Harvard and Oxford have said that GDP would go down by 2% [because of demonetization]. Some others said it would go down by 4%,” Modi continued.

The Prime Minister was speaking after the GDP growth numbers for the third quarter of 2016-2017 (October-December) were released. At 7.0%, it was slower than the 7.4% recorded in the previous quarter, but enough to maintain India’s status as the fastest-growing large economy in the world. (China stood at 6.8% in the last three months of 2016 and has forecast 6.5% for 2017.) The numbers were further bolstered by the index of industrial production (IIP), which rose 2.7% in January after contracting by 0.4% in December.

More numbers: The stock markets rallied at the prospect of the BJP victory in UP. The next trading day, the Bombay Stock Exchange Sensitive Index (Sensex) shot up 496 points (1.71%) to reach 29,442. The Nifty (the National Stock Exchange 50-share index) closed at more than 9,000 for first time in its history.

But as it turns out, demonetization wasn’t a negative issue in the polls. “The election results have been surprisingly positive for the BJP [Bharatiya Janata Party], much more so than I had imagined,” says Jitendra V. Singh, emeritus professor of management at Wharton. “In UP, especially, to have more than 80% of the seats is unprecedented. I had said that much would depend on how the common man responded to the demonetization decision. The economic impact has been minimal, according to government statistics. The results seem to suggest that Modi’s efforts at rooting out corruption have trumped the inconvenience the common man may have suffered in the past few months.”

“The Congress and other parties ridiculed and tried to exploit demonetization as anti-people and despotic,” says Prabhudev Konana, a management professor at the University of Texas. “But common people thought otherwise. I was shocked that even Nobel Laureate Amartya Sen and some well-known economists criticized demonetization. But an immoral economic growth is not desirable, nor do you want to build a system with the unethical and corrupt dominating. Democracy responded correctly.

“Even though demonetization impacted the rich, it is a signaling mechanism to the rest — the middle class, the poor and the honest — that the government cares for the masses,” he adds. “There may be some schadenfreude aspect to it, but people don’t vote on that issue. It is the signaling mechanism that the government cares for the poor and to make life better than just working for the rich.”

“The results seem to suggest that Modi’s efforts at rooting out corruption have trumped the inconvenience the common man may have suffered in the past few months.” –Jitendra V. Singh

Saikat Chaudhuri, executive director of Wharton’s Mack Institute for Innovation Management, has a slightly different point of view: “I actually don’t think this election had as much to do with demonetization as analysts have made it out to be. It was the opposition that was making demonetization and the potential negative consequences for the economic growth rate a big issue. Once demonetization did not show the drastic economic decline predicted by some, the issue fizzled out to some extent. This is also partly because Indians are very resilient, so they have by now adjusted to the withdrawal of the old currency notes. As various stats show, electronic transactions have picked up across the board.”

“People did not buy the arguments of experts on demonetization; instead they believed Modi and his arguments,” says Mirza Asmer Beg, professor of political science at the Aligarh Muslim University. “It appears to have worked in the favor of the BJP. People were certainly inconvenienced, but they did not have any other attractive and convincing narrative on this issue.”

Modi is credited for having created a “demonetization constituency” of the poor which crossed caste lines to vote for the BJP. Although demonetization was ushered in as recently as November 8, it has been all but forgotten except by people who took the wrong call. This is particularly true of the Congress, led by Rahul Gandhi, which suffered humiliating losses. In UP, where it had tied up with the ruling Samajwadi Party (SP), in power since 2012, it could get just seven seats. It even lost in its strong-hold boroughs of Rai Bareli and Amethi, which are the Lok Sabha (lower house of Parliament) constituencies that have traditionally returned the Gandhi family to power.

The Eclipse in UP

“Other parties [in UP] are getting marginalized, and Modi has emerged as the most influential leader in the country,” says Beg. “The politics of communalism sugar coated with nationalism and development has triumphed.” But, he adds, “UP could see some real development as the BJP has got a clear mandate and it is in power at the center also. With a decisive and strong leader at the helm, some headway in this direction is possible.”

UP has 140 million voters, 403 assembly seats and 80 parliamentary seats (the latter provides a better measure of the relative importance of a state from a national perspective). With some 60% plus exercising their right to vote, it eclipses the 62.9 million people who voted for President Donald Trump in the whole of the United States in the recent election.

The other states that went to the polls are relative minnows. The Punjab assembly has 117 seats and it sends 13 representatives to the Lok Sabha. The Congress won here with 77 seats. But the state also dealt a blow to the Aam Aadmi Party, a newcomer that had won the Delhi Assembly elections in 2013. Uttarakhand has 70 seats (five members of parliament — MPs). The BJP swept there also with 57 seats. Manipur has 60 seats (two MPs) and Goa 40 (two MPs). The Congress and the BJP ended up neck and neck there with the latter forming the government in Goa, too. In Manipur, where the BJP drew a blank in 2012, it bagged 21 seats in the 2017 polls.

The Congress is celebrating in Punjab. But the victory is a hollow one. In UP, where the BJP won 312 seats (a three-fourths majority of 325 along with its allies), it clearly rules the roost. In the last assembly polls in 2012, it had managed just 47 seats.

The portents have been ominous for the pan-India, non-BJP parties. Since demonetization, there have been assembly by-elections in four Lok Sabha and nine assembly seats. The elections, which took place on 19 November, a few days after demonetization, saw the regional parties — the AIADMK and the Trinamool Congress — hold sway in Tamil Nadu and West Bengal. But the BJP won elsewhere. The Congress drew a blank except in the Union Territory of Puducherry.

“An immoral economic growth is not desirable, nor do you want to build a system with the unethical and corrupt dominating. Democracy responded correctly.” –Prabhudev Konana

Maharashtra, far away from rural UP, gave another signal. In the municipal elections in several cities (including Mumbai), the BJP won hands down. The process was complicated by the fact that the right-wing Shiv Sena party, a long-standing ally of the BJP at the state and central levels, had decided to go it alone in the civic polls. What normally happens in a pre-election split is that both sides lose a few seats. But a different story played out in Mumbai, the financial capital of the country. The Shiv Sena won 84 seats (up from 75) and the BJP 82 (up from 31). The party which once ruled the city – the Congress – was left with 31 seats (down from 52). Elsewhere in the state, it was the BJP all the way. “BJP cuts tiger’s tail,” headlined The Times of India. (The tiger is the Sena’s symbol.) “Wins eight of 10 Maharashtra corporations.” (The other one – Thane – went to the Sena; Mumbai is still tiger territory with the BJP catching up.)

Reforms on the Way

The current victory in the Hindi heartland means more to Modi than a reaffirmation of his popularity. It gives the BJP the status of becoming the single-largest party in the Rajya Sabha (the upper house) when polls are held in a few months (one-third of the Rajya Sabha members retire every two years). This matters because the Congress has been in pole position in the upper house so far and has successfully thwarted some of Modi’s initiatives. “This result has multiple implications,” says Chaudhuri. “For one, the BJP has shown that they are firmly popular again. This should pave the way for bolder reforms.”

Adds Singh: “The good news does seem to be that with the BJP and its allies now having a majority in both the Lok Sabha and the Rajya Sabha, implementing their agenda may become easier. We may yet see further reforms in India.”

At the top of the to-do list are labor laws and the Goods and Services Tax (GST). The latter is still crawling its way past committees. And reforms in the former are taboo in an environment in which jobs are scarce. Singh lists his own reform priorities. “Speedy implementation of GST, banking reforms, divestiture of public sector companies, labor laws and the education sector.”

“I love what Modi has done with Aadhaar (a biometric unique identification scheme), banking for the poor and digitization,” says Konana, adding that “people have begun to see that digitization of transactions will reduce corruption. Modi needs to push this aggressively. Reforms should focus on education, health care and infrastructure first. These impact masses. However, there are those sectors where millions work. I don’t see how the loss-making public sector can survive on subsidies. Bank cleanup should be continued aggressively. This has been relatively slow. Cleanup also signals to the masses that the system doesn’t work only for the rich, and the rich who exploited will pay dearly.”

“The BJP has shown that they are firmly popular again. This should pave the way for bolder reforms.” –Saikat Chaudhuri

Is there a deeper message for the Indian political system – the return of the pan-Indian parties? The Congress once filled the role but, with 44 out of 543 seats in the last Lok Sabha (the BJP won 282), it seemed to settle for becoming a shadow of its former self.

Has the BJP stepped into the void? Much as they would like to think so, it seems improbable.

“Modi and the BJP must now demonstrate that they will improve the situation in UP and the other states where they won, or else there may well be a swing back to regional parties next time,” says Chaudhuri. “On the political side, regional parties such as the ones in West Bengal, Bihar and the South will surely be anxiously watching now, as the BJP will be buoyed and wanting to make their presence felt there, too. They will seek new strategies with assembly elections coming up in the near future in the various states. Personally, I believe debate over development is much better for the country’s progress than ethnic and social bases for political discourse.”

Amid the euphoria for BJP, there is another big question: Do these results foretell what will happen in the general elections scheduled for 2019? Will Modi and the BJP return to power for another five years? While the pundits have started their crystal ball gazing, Omar Abdullah, the outspoken leader of the opposition in the Jammu & Kashmir assembly, may have hit the nail on the head. “At this rate, we might as well forget 2019 and start planning [and] hoping for 2024,” he tweeted.

Monday, March 13. Headline in The Economic Times: “Demonetization comes full circle, all cash withdrawal limits lifted from today.” Mission accomplished.

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