Revolutions are often paradoxical things. In the minds of the revolutionary, they conjure up images of radical change. But reality is more recalcitrant. It makes a fool of the revolutionary, exacerbating those very things that the revolution seeks to change. Demonetisation has turned out to be no different. It was a populist measure, done in the name of the poor. But like many revolutions done in the name of the poor, it hurt them by extracting the highest price from them.
It was a measure driven by an obsessive moralism more than a grasp of practical reality. The moralism forgot that “black” is not an inherent property of money. It is doubtful that the measure dented the complex webs through which plutocracies shield their money. Indeed, there is some evidence that new laundering mechanisms came into being as a result. It was a measure done in the name of transparency: Data that will help detect tax evasion. But citizen transparency turned out to be a shield to cloak political financing. While the citizens are being transparent to the state, political donations, through anonymous bonds, are being shielded ever more from public scrutiny. So this was a revolution in bad faith.
Demonetisation created fantasies of a cashless economy. Digital payments are up somewhat, but cash is back with a vengeance. Demonetisation was supposed to accelerate growth. It might, on a time horizon where causally attributing growth to demonetisation will be an unfalsifiable claim. But in the short run, it dented growth perhaps by as much as two percentage points. The human cost of a two percentage point slowdown in GDP growth is high. Demonetisation was supposed to be revenge on intellectuals, those know-nothings who have held India back. Turns out the predictions of most of those “know-nothings” were not far off the mark.
One can go on. It was supposed to result in a bonanza to government in the form of unreturned cash. Most of the cash came in, suggesting how little the purveyors of the scheme knew about how money functions. It was to usher in a utopia where everything, from terrorism to counterfeiting, ended. But when utopia did not arrive, the revolution changed the goal post, presenting modest statistical trends as success: The rising number of taxpayers, the amount of cash under scrutiny, the rise in digital payments. The trend line was heading in this direction anyway. But modest acceleration of these trends could have been achieved with much less callousness. The quantum of the increase in taxpayers or digital payments achieved could have been done by other means and at much lower cost. Formalisation was a desirable objective of demonetisation. But it underestimated the fact that informality was also a form of low-cost participation.
Formalisation without preparation leads to exclusion. Demonetisation will probably lead to more state capacity in terms of its ability to investigate. But there is little sign that the main institutions of investigation are more credible, not merely more powerful. Most importantly, demonetisation was a revolution in one respect: Like all revolutions, it was an exercise in unprecedented state power (as this column argued ‘You have been warned’, November 17, ‘It’s a permanent Revolution’, November 26, 2016). Demonetisation was a revolution that turned the world upside down, only to find the world was the same again, only more so.
There is no doubt that demonetisation seemed like a political watershed. It was, for a time, immensely popular for a variety of motives: Moralism, expectations of gain, schadenfraude at the possibility that some of the well-off might have to suffer. The sheer audacity of it was politically its greatest attraction. The fact that a government was willing to inflict supposedly short-term pain was taken as a sign of its unprecedented sincerity. As a civic matter, there was an unprecedented poignancy about the moment. The country, for the most past part, went along with the cause. It was a quiet but nevertheless mass mobilisation on an unprecedented scale. The people were willing to trust the prime minister, and he rode the wave with political aplomb, especially in the UP elections. It was not the economic experts who were wrong. It was our political assumptions that seemed, for a moment, shaky. The people did seem to respond to a call for sacrifice.
The popularity of the measure posed a challenge for democracy. What did the popular support signify? On the other hand, anti-corruption movements, built on a general anger, speaking the language of virtue, often end up reinforcing authoritarianism. But in this respect, the reality has turned out to be more reassuring. The people were willing to cut the government an immense amount of slack. They were willing to trust a prime minister who asked for time. But it was a trust conditional on promises being fulfilled.
This was not, in retrospect, blind faith. As it became clear that the promises were not fulfilled, the mood quietly started shifting; there is a great sense of a trust being belied. This may not immediately translate into electoral outcomes, but there is no doubt that the government’s stock of political credibility has fallen as the full consequences of demonetisation have become apparent. The RBI’s announcement that most of the cash had been deposited was, shorn of its technical complexities, seen as a sign that there was not going to be this windfall that could be distributed as largesse. The magnitude of the pain inflicted, the supply chains broken, the uncertainty around growth, have begun to dent the credibility of the government. The crystallisation of an alternative is always uncertain and takes time, but there is no question that the government is losing credibility on this issue, and therefore on its capacity to be able to control the narrative.
Demonetisation was an ill-conceived step, a revolution that was not going to succeed, because it was, above all, an act of hubris. It was part of a political imagination that is closer to a technocratic authoritarianism: Combining great faith in technology with state power. The very limited success of demonetisation is reassuring in reminding us that reality takes its revenge on revolutionary hubris.
But it does raise two questions: What of the underlying angst about corruption that demonetisation tapped into? Is that a political force or will it now devolve into a general cynicism? And second, will the failure of hubris lead to an intelligent humility or more hubris? There is reason to worry that revolutions don’t admit their own shortcomings.
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