The Modi Years: He came, he saw, he ravaged

'India remains a bright spot in the global economy,' the International Monetary Fund’s (IMF) chief Christine Lagarde said in April 2016. This would all change in a few months as Modi executed his first ‘[master]stroke’, one that would gut the Indian economy and push millions into distress.

Demonetisation was the idea of a man with a diploma in mechanical engineering from Latur, a town in Maharashtra. Anil Bokil runs an institution called ArthaKranti (economic revolution), and describes himself as an economic theorist. His thinking was: in a country like India where 70 per cent of the population survives on just Rs 150 per day, why do we need currency notes of more than Rs 100?

He revealed in an interview days after Modi abolished 86 per cent of India’s currency how the prime minister had got the idea. In July 2013, soon after Modi was declared the BJP’s prime ministerial candidate, Bokil went to Ahmedabad

with his colleagues and sought to make a presentation about an ArthaKranti proposal.

Modi gave Bokil ten minutes. ‘By the time I was done, I realised that he had listened to me for ninety minutes. He said nothing after I had made my presentation,’ Bokil said. This is not surprising. The idea that a simple, magical and transformational action could be executed by him would have transfixed Modi.

On the ArthaKranti website, the benefits of demonetisation which were conveyed to Modi at that meeting are listed, including: ‘Terrorist and anti-national activities would be controlled’, ‘the motive for tax avoidance would be reduced’, ‘corruption would be minimised’ and there would be a ‘significant growth in employment’. What’s not to like?

But there are no details about any of this nor how demonetisation would be executed and its benefits achieved. There is no reference to or analysis of what the fallout could be. ArthaKranti also proposed withdrawing the entire taxation system in favour of a transaction tax, accompanied by a

Rs 2,000 limit on cash transactions. Its ideas were reductive, simplistic and, apparently, easy to implement. It was perfect for Modi, who picked out the single most dramatic element from this—demonetisation—and pushed it through.

In his speech announcing it on 8 November 2016, Modi said the problems of India were corruption, black money and terrorism. And strong steps would need to be taken against these and he would take them.

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Modi acknowledged that there would be some discomfort through this policy, but it would not be a problem. This was because, he said, ordinary citizens were enthusiastic about sacrifice and hardship for the country. He spoke of a poor widow giving up her LPG subsidy, a retired schoolteacher who gave some money from his pension to Swachh Bharat, an Adivasi woman who sold her goat to make a toilet and a soldier who contributed money to make his village clean.

In the war against corruption, black money, counterfeit notes and terrorism, people would be fine with ‘a little difficulty and only for a few days’, he said. To ensure minimal distress, Modi said that people could deposit their Rs 500 and Rs 1,000 notes in the bank till 31 December. He asked those who could not do so to not worry because they had till 31 March 2017 to deposit their notes with the Reserve Bank of India’s (RBI) offices. People could withdraw Rs 10,000 a day and Rs 20,000 a week for a limited period of time.

Strangely, he also announced the introduction of a Rs 2,000 note and a new Rs 500 note. Effectively, India replaced its Rs 1,000 note with a Rs 2,000 one. Any black money held in four Rs 500 notes could now be held as one note of Rs 2,000. Modi’s demonetisation exercise had all the eccentricity of the Bokil plan without any real change in high value currency notes as Bokil had envisaged.

No nation has fought corruption by abolishing its currency. It didn’t work in India either. On Transparency International’s Corruption Perceptions Index of 2015, India was ranked 76. In 2016, India fell to 79. In 2019, it fell further to 80. In 2021, it fell again to 86. Even the perception of corruption had not improved. The total currency in circulation only a few months after demonetisation was already higher than it was in 2016. There was more cash in the system and at higher denomination. ‘Less cash’, one of the post facto justifications, did not materialise.

The other arguments also fell apart quickly, as the data showed… Modi had been specifically warned by the RBI… that demonetisation was a mistake. Raghuram Rajan resigned as governor after having discussed and disapproved of this move. The new governor Urjit Patel was forced to accept it by Modi within weeks of taking office. He then refused to release the minutes of the meeting the RBI urgently held on 5.30 p.m. on 8 November (just before Modi’s speech) to approve the unhinged move, citing national security and a ‘threat to life’.

When the minutes were finally leaked to the press two years later in November 2018, Patel quit and left the following month.

The RBI minutes said it had been told by the government that:

• The economy had grown 30 per cent between 2011 and 2016 but the currency notes of higher denomination had grown at a much higher rate.

• That cash was the facilitator for black money.

• That counterfeit money of an estimated Rs 400 crore was present in the system.

• And, therefore, the Rs 500 and Rs 1,000 notes should be made invalid.

The RBI’s response to the government was:

• That the economic growth referred to by the government was real while the rise in currency was nominal and not adjusted for inflation and ‘hence this argument does not adequately support the recommendation’ for demonetisation.

• That most black money was held as land or gold and not cash, and abolishing currency would have no effect on curbing black money.

• That demonetisation would have a negative impact on GDP.

• That Rs 400 crore in counterfeit currency was insignificant (only 0.02 per cent) compared to the total cash in circulation, which was Rs 18 lakh crore.

Having said all this, the RBI board nonetheless put its rubber stamp on Modi’s idea. The reason why it fought to keep this capitulation secret is clear. It had done its job in pushing back and pointing out the flaws; it was now protecting Modi. That is why Urjit Patel shamefully claimed there was a national security reason why he could not reveal the minutes, when Right to Information (RTI)activists sought to access them.

Of course, events proved that on every count the RBI had accurately predicted both the damage and the lack of benefit. What the RBI was hiding was the fact that Modi had ignored its concerns—all of which turned out to be true—and gone ahead anyway.

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In India, the unorganised or informal sector (including agriculture) is about half the total economy and it operates almost entirely on cash. The scale and depth of the trauma inflicted on this sector and on India’s poor can only be imagined. There was no preparation for it from Modi because that was mere detail and, therefore, not interesting or attention worthy. The Cabinet itself did not know about the decision till a few minutes before the announcement, meaning that the departments run by the ministers did not know and did not prepare.

(Extracted with permission from Price of the Modi Years, Vintage Books)