Saturday 26 November 2016

What Was He Thinking?!!!

When you think of the BJP, you think of Brahmins and Baniyas. Add to that, some Adivasi groups who have been Sanskritised by Sangh missionaries and you broadly have the social base of the party. In other words the BJP has largely been a coalition of upper castes and traders, with some adivasis and communally polarised groups thrown in.

In 2014, Narendra Modi rode on this core base, which makes up about 20% of India’s voters, and added to it all the discontents of the UPA’s disastrous second avatar – the urban poor crushed under runaway inflation, the unemployed youth, the farmer facing higher input costs, the agricultural labourer denied the promise of MNREGA and the businessman affected by an overall slowdown in the economy.

But, it is easier to promise acche din when you are fighting an unpopular incumbent, than when you have to deliver on those promises as PM. Two and a half years into his rule, Modi has realised that the economy is in a worse shape than what the Manmohan-Chidambaram duo left it in: farmers are in deep distress, there are no new jobs and businesses have no reason to invest. Narendra Modi has realised that he needs a radical new plan if he is to expand the BJP’s core base beyond the stable 20%.

Demonetisation is that radical plan, the mega gamble. If it fails, Modi loses nothing, because he would have lost the next elections any way. If it works, he reinvents Indian politics by creating a new coalition of the poor and big business that the Congress depended on for the first 30 years after independence.

Whether Modi anticipated the immediate impact of demonetisation or not, he has committed himself to a series of other actions to make political capital out of it. There is little doubt that this one act has helped him reinvent his image as a pro-poor PM, something last done by Indira Gandhi in the early 70s. There is an element of schadenfreude in the way the poor have reacted to demonetisation. Even when they curse the cash-crunch and the loss of wages, they praise the PM’s intentions. They believe that even if they are suffering, the corrupt rich are suffering more.

Of course, Modi knows that this emotion will not last forever. Even the greatest supporter of demonetisation knows that, in the short run, it will hit the poor the most. Even after the economy is remonetised, the action against black money will also hit the poor.

Here are a few facts to back that:
  • About half of the Indian economy is in the cash-dominated informal sector and it employs 80% of the workforce.
  • 45% of India’s GDP comes from small and medium enterprises who employ 46 crore people. They will take a huge hit if they have to pay regular taxes.
  • There are 10 crore small traders and retailers and only 1% of them have credit or debit card machines. Reducing cash transactions will push consumers to organised players.
  • All of village India operates on cash, because 93% of villages do not have an actual bank branch.
  • The black-money driven real estate sector, which is one of India’s biggest employers of daily wage-workers, will slow down.
  • Another black-money driven sector, gems and jewellery, which employs about 1.5-2 crore daily wage workers, will also be hit.
  • The informal-dominated textiles and garments industry, which employs 3 crore people has already stopped paying 50 lakh daily wage workers.
  • Rabi crop sowing, which grew by 16% in the week leading to demonetisation, dropped marginally in the following week and grew by less than 5% two weeks later. Coarse cereals grown by poor farmers has dropped by 19%. And this is in a year when reservoirs have 25% more water than last year.

So, why did Narendra Modi demonetise when even a little analysis must have told him it will hurt the poor? The answer will, most probably, be known on the 1st of February when next year’s Union Budget is announced.

Modi’s aim is clearly to create a large fiscal space for himself ahead of the busy election years of 2017 and 2018. This can be achieved through the following moves:

  • Get the RBI to hand over the entire ‘profits’ from 1000 and 500 rupee notes that are not returned or exchanged, to the government. Current estimates suggest it could be anywhere between 2 to 3 lakh crore rupees. The special dividend payout might be legally suspect, but no one is betting on Urjit Patel standing in the way.
  • Levy punitive taxes on unaccounted for cash deposits – don’t forget it is the I.T. department which will decide whether your cash is black – and collect an additional one lakh crore rupees in the next assessment year.
  • High level of bank deposits will push up the demand for government bonds and bring down yields. It will also reduce the government’s interest payments, which is its single biggest expense. A one per cent drop in interest rates could shave off 40-50,000 crore rupees.
  • The budget will project higher level of direct and indirect tax receipts by claiming that the action against black money will force many more people to pay taxes. If the government estimates net tax receipts to go up by 15% in nominal terms that will work out to an additional 1.5 lakh crore rupees.
  •  Finally, Modi might even say that the economy needs a fiscal stimulus and therefore the Budget will not stick to the 3% fiscal deficit target for 2017-18.

In effect, the Modi government could give itself an additional fiscal space of 5-6 lakh crore rupees, over and above the five lakh crore rupee fiscal deficit it would have otherwise worked with in this budget. In terms of actual expenditure, the government could end up with a chance to spend 24-25 lakh crore rupees, instead of the 19 lakh crore rupees it is budgeted to spend this year.  There is a lot that can be done with so much extra money.

  • Take food for all. The UPA had estimated in 2013 that it will cost one lakh crore rupees extra to cover everyone under a liberal PDS scheme. In current prices that would be about 1.2 lakh crore rupees.  
  • Another two lakh crores could be transferred directly through DBT to 10 crore poor households. That’s a neat 20,000 rupees additional income per year for each family.
  • The remaining 2-3 lakh crore rupees can be spread across various things like additional stimulus to infrastructure, tax holidays and incentives to high-employment sectors like textiles, real estate.
  • He could also spend more on defence, especially increasing the size of the army. This would provide a stable and respectable source of income for the rural poor.

In other words, Modi can combine populism with Keynesian economics. This will create additional jobs, boost lower-end consumption of staples, boost demand for two-wheelers, feature phones, telecom services, cement, capital goods, steel, power and fuel. And then, instead of a slowing down, the economy would pick up pace and ultimately, even private investment cycle could revive. By 2019, India Inc could also start seeing their earnings grow.

In the process, Narendra Modi would have changed the political character of the BJP. His core voters would have shifted from the upper caste/trader combine to a much wider lower-class/lower-caste support base.

Of course, all this is easier said than done. The social composition of the BJP’s cadre is upper-caste. There is a deep distrust towards Dalits and backwards within the party. Its moneybags are mostly from the trading classes and Modi himself has got a lot of money and backing from India Inc. Anything that works against these groups is going to disrupt the entire political-mobilization and fund-raising structure of the BJP.

Can the Modi-Shah combine pull it off? They have done it in Gujarat in the past, by winning elections even when sections of the RSS and VHP have worked against them. They did in Uttar Pradesh in 2014, when the entrenched backbone of the party organisation in the state refused to work under Amit Shah.

Feature phones, WhatsApp, Twitter are the key weapons in the Modi-Shah armoury. In their hands, Digital India is a political weapon – a means to bypassing the physical networks of political organisation.

Modi is trying to turn India into a cyber-nation, where the citizen’s identity is driven by a WhatsApp nationalism. Much of political rhetoric today is constructed through videos, images, jokes, trends and viral memes, all of which have successfully created a new language of extreme nationalism – a binary of deshbhakti and deshdroh.

Modi had already won this semiotic battle. He is now trying to create the economic conditions to turn it into an unbeatable political strategy.