PM Modi is Rattled by Demonetisation’s Resounding Failure

Modi is playing a mind game by talking about everything else except the gains from note ban, writes Abheek Barman.

Before 7:30 PM on 31 December, fear and hope alternated among folks awaiting Prime Minister Narendra Modi’s telecast.

After all, the last time he had gone live on TV, at 8 PM on 8 November, he had sucked out 86.4 percent of all currency in circulation by value from the economy, leading to a cash crunch which sent the system into a tailspin. Optimists hoped for huge handouts after suffering the stress of demonetisation.

Disappointed One and All

Many looked forward to an honest accounting of how much ‘black’ money had come back to banks, the amount of ‘fake’ currency seized, the total amount of money returned to banks and some indication of when the withdrawn cash would be fully returned to the system. In the end, everyone was disappointed.

So were patrons of a chain of pubs which had promised customers a pint of beer for Rs 31, instead of the usual rate of Rs 85, every time Modi said, mitron (or friends). The mitron count was zero, though Modi uttered doston-saathiyo six times, bhaiyon-behno four times and mere pyare deshvasiyon thrice. Nobody got a discount beer.

Old Wine in New Bottle

The New Year’s Eve speech was a rambling paean to patriotism, and the so-called triumph of good (read honesty) over evil (the straw man who holds black money). Modi also rolled out a few, mostly-repackaged, schemes from the earlier UPA administration and some sops which will severely strain the finances of India’s creaky banks.

For example, the Rs 6,000 cash award to pregnant rural women already existed under the UPA’s Food Security Act, 2013, and was administered by the National Rural Health Mission. In the last two years, Modi’s administration had stopped the scheme; it was simply revived on 31 December.

A 4 percent interest rate cut on home loans up to Rs 9 lakh, a 3 percent cut on
loans up to Rs 12 lakh and 8 percent assured returns to senior citizens will leave the poor, who cannot access formal funds, untouched. But banks will take a beating.

Also Read: Fact-Check: PM Modi’s New Year Largesse is Old Wine in Old Bottle

Mounting Burden of Debt

Banks are also being pushed to lend more to small and medium businesses, Modi’s core bania support base. This will increase costs of compliance, bump up default risks, because most of these businesses run on cash, have dodgy accounts and are mostly unaudited. After all, there is a reason why 45 percent of formal bank lending is concentrated among 300 large companies in India.

In any case, till 8 November, India was staring at a financial crisis. According to IMF data released May, 2016, India’s banks have the largest amount of bad debt to total lending – at 5.9 percent – among all Asian nations. That compares with China’s 1.5 percent and Korea’s 0.6 percent.

Given that, Modi’s sops threaten to make an already bad situation worse. Days before Modi’s 31 December speech, the RBI warned that bad debt could go up to as much as 10 percent of total lending. Given these risks, it is hard to see bank lending go up sharply. In any case, given the rate of printing, transporting and transmitting new currency in the system, it could take as much as three to eight more months to
get all the cash back in the system.

This is something Modi left out of his speech. He claimed demonetisation was a grand success, but forgot to say how much of the Rs 15.4 lakh crore worth of currency rendered illegal, had come back to the banking system. He had earlier claimed that hoarders of cash would rather sink their stashes in the Ganga, than deposit it
in cash.

Also Read: Did the PM Admit to the Nation That Demonetisation Has Failed?

Skipping the Data on Note Ban

Yet, by mid-December, there were reports that Rs 14 lakh crore had already come back to banks. So, the government’s earlier hopes that Rs 3-4 lakh crore would stay out of the system, and enable the RBI to give the exchequer an extraordinary dividend of that amount, have evaporated.

Modi was also silent about exactly how much of the returned cash was ‘fake’ – he had alleged in his 8/11 speech that fake currency was used to sponsor terrorism. Yet, terrorists attacked a military base in Nagrota on 29 November, killing seven soldiers. The militants, who were killed, carried new currency on them.

His claims about wiping out black money are also rapidly unravelling. Till now, bureaucrats, cops and politicians – including three dozen from the BJP – have been caught with large hordes of cash, in mint fresh notes.

That Modi stayed away from making any reference to numbers or data demonstrates an implicit admission that the project had failed to deliver on its promised benefits. His eagerness to offer sops to rustic folks, women, the poor and small businesses show Modi is desperate to buy out the huge economic costs suffered by these segments of the population.

Bluffing People

In Lucknow, on 2 January, Modi addressed a vast crowd – repeatedly referring to the size of the crowd as a measure of his own popularity. He offered development and progress in a state that lags both, despite having three chief ministers there. One of them, Rajnath Singh, was on the dais with him.

He spoke about his ‘war’ against graft and ‘eliminating black money’ – clear references to his botched demonetisation scheme, and the Aadhar powered BHIM payment gateway as facilitators of a ‘cashless’ economy. The response of the crowd, large as it was in size, was noticeably muted.

It is probably tough to convince a crowd of villagers about the merits of ‘notebandi’ when many are going through the pangs of the Modi-imposed cash crunch, despite all attempts to instigate the poor to rise against the rich – the Narendra Modi version of class warfare.

(The writer is a Delhi-based senior journalist. He can be reached @AbheekBarman. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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