Are Modi’s calculations going awry?

The script appears to have gone awry over the last fortnight for Prime Minister Narendra Modi and his demonetisation programme. The cash availability situation has failed to improve especially in the hinterland, economic growth —going by anecdotal evidence — is headed for a slowdown and worse, the intended objective of smoking out unaccounted cash in the economy may also have failed, going by official accounts.

Modi appeared to be in control of the narrative till the end of November. The new ₹500 note had made its entry even if it wasn’t freely available, and aggregate cash deposited in banks was only a little over half of the total demonetised value of ₹14.5 lakh crore, raising hopes of a substantial ‘killing’ of unaccounted cash. Even if the anecdotal evidence of a sales slowdown across sectors had started flowing in, it could be explained as the price for invalidating a part of the shadow economy.

The Centre had just framed the Pradhan Mantri Garib Kalyan Yojana (PMGKY), an income declaration scheme to tap into the unaccounted cash returning as deposits into the system. And the people were largely tolerant despite the inconveniences that they were subjected to.

The picture appears to be changing now. Cash continues to be scarce and the new ₹500 note which is crucial to bridge the gulf between the ₹2,000 and ₹100 notes is still not freely available. Those in charge of remonetisation at the RBI and Finance Ministry have obviously miscalculated or are proving unequal to the huge logistical task of spreading new notes across the country. This is even as income tax raids and searches are throwing up large caches of new ₹2,000 notes, leading the common man to wonder how the hoarders have been able to lay their hands on such large quantities of notes when banks and ATMs are running dry.

To be sure, people seem to still be giving Modi the benefit of the doubt, but as new information flows in on a daily basis, especially on the amount of hoarded cash returning to the system as deposits, they’re beginning to ask the question: are my troubles worth it? This is even as reports stream in of small units in the informal sector across the country laying off workers due to fall in their sales and several sectors ranging from automobiles to cement reporting a fall in offtake.

What’s changed the narrative now is the admission by the Centre in the Supreme Court on Friday that it expects most of the invalidated currency in circulation to return to the system. As of middle of last week ₹11.55 lakh crore had already returned according to the RBI. This can only mean that hoarders of unaccounted cash have managed to launder their money, proving wrong the original assumption that between a quarter and a third of the invalidated notes would not return. It is possible that a substantial number of counterfeit notes have managed to find their way into bank deposits.

If things had played out as per expectations, Modi could have claimed credit for destroying anything between ₹3-4 lakh crore of unaccounted cash, and the suffering common man would have rested happy in the knowledge that the rich had been hit. That’s not possible anymore. Also gone is the chance of a bonanza for the Centre through transfer from the RBI of an amount equal to the liability extinguished on its balance sheet.

It is clear that Modi has to now urgently look for ways to turn things around to weather the political storm. The Pradhan Mantri Garib Kalyan Yojana (PMGKY) was one such attempt but he has run into a wall with the Opposition in Parliament. The bill to amend the Income Tax Act is stuck in the legislative process now and the government has not been able to open the scheme for declarations. On Thursday, the Centre announced several incentives to promote digital payments. Welcome as they are, moving people to a cashless system cannot be adequate justification for unsettling the economy and causing immense discomfort to citizens, something that is likely to continue for several weeks more. The objective of cashless economy could have been achieved without the disruption we see now.

There are not too many options for Modi to emerge from this with minimal damage. First, pursue the PMGKY seriously. He needs the cooperation of the income tax department in this as the data on deposits have to be mined, analysed and the laundered accounts have to be identified. Only proof of the stick being wielded will persuade the offenders to declare their concealed cash. It is doubtful if the tax department has the requisite capabilities to mine the data quickly.

If the PMGKY succeeds it will help Modi appropriate at least half of the unaccounted money declared and give a boost to tax collections which is critical for him to pursue his welfare agenda for the poor through cash transfers. Second, he has to get banks to identify those who’ve managed to launder their money and let loose the full fury of the law not just on them but also on their accomplices in the banking system. Without the connivance of bank officials, high or low, it would be impossible to launder cash and secure new notes running into tens of crores, as the stash uncovered by raids over the last couple of days show. The partners in crime have to be identified, named (including the banks) and shamed.

Third, Modi will need to be seen acting against fellow politicians, in BJP and other parties, who may have laundered their money. A few high-profile cases brought to light will certainly help his cause. Remember, in this battle, optics are very important.

Simultaneously, the other pluses of demonetisation will have to be highlighted. Such as how it will bring the informal sector into the banking system and catalyse a process of creative destruction of small units that survive only by not paying taxes, how the abysmal income tax base will increase and so on.

But these will play out only over the medium-to-long term. And these are not enough for Modi to go back to voters and convince them that the difficulties have been worth it. He has to now get after those who hold unaccounted wealth as land, gold and in banks abroad. Alongside, he has to show proof that he’s making those who managed to launder their cash pay. That alone will help him recoup his expended goodwill.