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All Nand Lal wants out of life is death. A good part of the 80-year-old retired soldier’s 10ft by 10ft tumbledown room on the outskirts of New Delhi is a humble home shrine of two idols of Hindu gods on a tattered piece of red cloth. Lal, a widower, lives in this rented room in a small house tucked away in a dingy lane all by himself, dependent on a part-time maid for the smallest of chores. Barely able to walk, see or hear, he spends most his days praying to those gods to end his misery.
A year ago, Lal became the face of the havoc unleashed by Indian Prime Minister Narendra Modi’s shock decision to withdraw high-denomination banknotes from circulation. As some 86 per cent of the cash in circulation was declared void overnight in a cash-driven economy and a fraction of it replenished with new legal tender, millions of Indians found themselves standing in long bank lines for weeks to exchange their liquid holdings for legitimate banknotes. After three days of queuing in vain, Lal broke down when he lost his spot in a queue on the fourth day. As he tearfully begged bank officials to allow him to withdraw his pension, the pain and helplessness on his face was captured in a photo taken by the Hindustan Times newspaper. It instantly went viral as a symbol of the hardship inflicted by demonetisation, as the currency ban is called in India.
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“I don’t want to live another single day, I’ve suffered enough,” Lal says often as we talk in his gloomy neon-lit room. But his face lights up when asked about demonetisation. The social media fame brought by that photo means he doesn’t have to queue up any longer. These days when his maid takes him to the bank, he is given a seat and the bank officials do the rest – a big deal in a public sector Indian bank. “Thanks to you journalists, I have no bank problems now,” he says, hands folded in a gesture of appreciation.
Lal may be one of the very few people for whom demonetisation actually worked out, even if in a perverse way. As evident from nationwide opposition protests this week to mark the anniversary of the currency ban, endless media coverage of its impact, and the disdain and anger that any mention of the note ban often evokes in casual conversations, it rankles for the most part.
A poorly designed and executed nationwide goods and services tax (GST) that followed in the wake of the note ban only worsened its pain. India’s growth rate slowed down as a result of the disruption caused by the twin policy shocks. For many Indians, the note ban has thus become shorthand for Modi’s mismanagement of the same economy he had promised to turn around, severely denting his image as a smart economic manager. Modi had tried to kill cash with the note ban. A year on, cash remains king in India – it’s Modi’s reign that appears under threat, with his aura of infallibility on the wane.
PROMISES, PROMISES
When Modi announced on the evening of November 8, 2016, that he was pulling 500 rupee (US$7.7) and 1,000 rupee notes, he laid out two main purposes: to eradicate “black money”, or unaccounted wealth in local parlance; and wipe out terror financing through counterfeit notes. It was an odd rationale as a fraction of ‘black money’ is held in cash, most of it being parked in more productive assets such as property or gold, or funnelled abroad through the grey market. Counterfeits, similarly, make for a fraction of the money in circulation.
The government’s reasoning was that those with unaccounted cash would be caught off-guard and forced to abandon their stash, wiping out a chunk of black money. It told the Supreme Court that it expected that a quarter of the total value of banned notes would not return to the banking system. But this year, the central bank reported that just 1 per cent of the money did not return, meaning the entire exercise hardly had any effect on black money. As for fake currency and terrorism, just 0.0002 per cent of banned notes turned out to be counterfeit, while terror incidents in restive Jammu and Kashmir state have risen nearly 38 per cent and civilian deaths are up 2,500 per cent.
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After a few weeks of its launch, Modi changed the narrative of the note ban from a war on black money to a war on cash. A cashless economy was said to be the end game of the exercise, bringing into the mainstream the 40-odd per cent of the Indian economy that operates informally. Since only 1 per cent of the 1.3 billion Indians pay direct taxes, forcing people into digital and bankable transactions would supposedly widen the tax base and improve public finances.
Within a month of the note ban, Finance Minister Arun Jaitley announced that tax collection had increased nearly 15 per cent, as proof that demonetisation was working. More updated figures now show that tax returns this year merely conform with the trend growth of past years. As for digital payments, they are also back to trend levels after a brief spike following the ban. A new research report, in fact, finds that more than 40 per cent of the people who started using mobile wallets after the note ban have shifted back to cash. Like Nand Lal, cash just refuses to die.
“In retrospect, it is now clear that the original stated goals for Modi’s cash ban were disingenuous and dishonest. Its subsequent justification as some magic wand to suddenly transform a poverty stricken developing nation to a digital economy is ludicrous and laughable,” says economist Praveen Chakravarty, a senior fellow at think tank IDFC Institute.
Indians stand in long queues to get bank notes. Photo: AP
Apart from the winding queues at ATMs, people faced other severe inconveniences such as problems in buying essentials and denial of medical treatment for the lack of new notes. More than 100 people died as a result of the note ban. It brought most of the economy to a grinding halt. Traditionally cash-driven industrial and agricultural supply chains froze up, demand plunged and job losses mounted. Hundreds of thousands of migrant workers had to return to their villages, adding to the rural economic crisis in a country where 70 per cent of the people still live in villages.
According to data from the Centre for Monitoring Indian Economy (CMIE), around 1.5 million jobs were lost in the first four months of the year. From 9.1 per cent in the first quarter of last year, the Indian economy grew just 5.7 per cent in the June-September quarter, the weakest in three years. It is the sixth straight quarter of slowing growth for an economy that once prided itself on outpacing China as the fastest growing major economy. But even that number does not capture the full extent of the slowdown. The Modi government changed the methodology for calculating GDP in 2015. Going by the old method, the current growth rate would be about 3.7 per cent, rather than 5.7.
DOUBLE WHAMMY
“It has been hell since demonetisation,” says Jitu Vakhariya, president of the Federation of All India Textile Processors Association. “Much of this industry relies on casual labour as work flow depends on order volumes, which are highly seasonal,” says Vakhariya, who runs a textile firm in Surat, a city of about 4.5 million in the western province of Gujarat, Modi’s home state.
In Surat itself, he says, there are 150,000 to 200,000 women engaged in what Vakhariya calls “additional work”, such as part-time embroidery and stitching to complement the family income.
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Much of the labour force is also drawn from migrant workers, who do not want to have anything to do with banks, often because there may be none where they come from. While the government pushes cashless transactions, nearly a quarter of Indian villages do not have a bank within 5km and most have little or no electricity and poor internet connectivity. Data journalism portal IndiaSpend reports that villagers in parts of India are struggling with cheques that agricultural traders have started paying them with since the note ban. These cheques take weeks to clear, as the rural banking network is ill-equipped to handle the load, denying farmers the money when they need it the most.
“The intention of demonetisation may have been good, but how do you formalise a transient labour force in a highly seasonal industry? How can you change the mindset in one day?” says Vakhariya. “The industry was still limping back to normal, then GST hit us in July.”
Traditionally, textiles have never been taxed in India. Overnight, after the ambitious GST was rolled out amid much fanfare, textiles became subject to an 18 per cent tax. Surat’s once-bustling textile industry has never been the same. Trading almost stopped for weeks and thousands of power looms shut down. After repeated appeals to the government, the GST on cotton has now been brought down to 5 per cent and that on polyester to 12 per cent, but the industry is yet to recover.
A bank employee fills a form after counting stacks of old 1,000 rupee banknotes in Jammu. Photo: Reuters
GST, which subsumes all indirect taxes paid by businesses to the central and individual state governments separately to simplify collection, has become a bane for business with its maze of layers and complexity. As tax is levied on the value added, companies can claim input refunds. But clunky software means businesses are struggling to recover these dues.
Surat’s other big industry, diamonds, survived demonetisation as it exports 94 per cent of its product, but is now reeling from GST. “The infrastructure for GST compliance is still weak. The government should have waited to put the software and system in place, and discussed it with the industry,” says Dinesh Navadiya, regional chairman of the Gems and Jewellery Export Promotion Council, who blames bureaucrats for the mess.
GST levies a tax on transfer of cut diamond from Surat’s manufacturing hub to the same companies’ marketing offices in Mumbai and it can take months to collect the refund. While big firms like Navadiya’s can live with the hit and access bank loans to make up the shortfall, small and medium-sized enterprises are finding the going a lot more difficult.
Like cotton and diamonds, complaints of unsuitable taxes and cumbersome refund procedures abound across all industries as a result of GST. The new tax regime also requires a complex filing process three times a month. While GST brings many new companies into the tax net, it also imposes a heavy compliance burden on small traders and manufacturers grappling with the intricacies of filing online returns. To ease the GST pain, the government is now slashing the rates, which is also adding to the uncertainty and confusion.
POLITICAL GAIN, ECONOMIC PAIN
Prime Minister Modi rode to power in 2014 largely on the promise of fixing a sputtering economy and ridding the country of corruption. After a decade of a coalition government in which the ruling Congress Party was seen to be bending too much to accommodate the often unreasonable demands of allies and a prime minister seemingly subordinated to his party chief and unable to check corruption or stem an economic slowdown, Modi’s clean image, his reputation as an economic reformer and his strongman style answered the yearning for decisive leadership.
Modi’s style of governance is in sharp contrast to that of his predecessor, the soft-spoken economist Manmohan Singh. Where Singh was the first among equals in his cabinet, Modi is the undisputed boss in his. Singh strove to strike consensus between conflicting interest groups in the government, Modi takes no prisoners. Every decision the government makes essentially emanates from Modi’s office, which also closely monitors their execution.
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Sidelining most senior leaders and stacking his cabinet with a younger breed of mid-ranking leaders who swear fealty personally to Modi, he has eliminated any possibility of internal dissent. While this highly centralised style allows Modi to railroad many of the decisions that would have otherwise stalled in bureaucratic wrangling and has improved government functions in many aspects, it also takes away the built-in checks and balances of collective responsibility that filter policymaking in parliamentary democracies like India. “Demonetisation is the symptom of a pattern of government where there is no consultation,” as former BJP leader Arun Shourie puts it.
The currency ban was a glaring example of the potential of institutional damage such centralised governance can wreak. Once Modi convinced himself of the need for the currency ban, there was little the otherwise autonomous Reserve Bank of India (RBI), the central bank, could do but play along. In his recent book, former RBI governor Raghuram Rajan says he had let it be known to the government eight months before the note ban that “although there might be long-term benefits…the likely short-term economic costs would outweigh them”. The RBI, he writes, “flagged what would happen if preparation was inadequate”. Rajan left two months before the currency ban amid rising acrimony with the government and the ruling party.
But it is this particular trait of Modi that also endears him to his followers – a man not afraid of taking tough decisions and who has the wherewithal to override institutional obstruction. A recent Pew survey finds that 55 per cent of Indians support autocracy and 27 per cent want a “strong leader”. The thumping election victory of Modi’s party in the northern state of Uttar Pradesh soon after the currency ban was seen as yet another endorsement of this strongman style as well as the note ban.
The Congress has launched a full-throttled bid to defeat Modi. Photo: AP
“Black money” is politically resonant in India, where income disparity is at its highest level since 1922. According to a new study by Thomas Piketty and Lucas Chancel, the top 1 per cent of Indian earners corner 22 per cent of the total income. “Despite the untold difficulties endured by the general public, most people put up with the note ban thinking it was for a larger good, that it was inconvenient for them but it would destroy those who have been hoarding wealth,” says Sankarshan Basu, a professor of the Indian Institute of Management, Bangalore.
Opposition parties too, barring a few, were unsure at that point as to how the public was perceiving the currency ban, and did not mobilise any mass movement against it. As the results in the Uttar Pradesh election showed, their hesitation was well-grounded. The war on black money did have plenty of takers.
“The note ban was a political victory for Modi. It helped him shed his pro-business image and create the image of a pro-poor crusader against black money. He, in fact, may have built himself a whole new constituency with the note ban. But now he is facing the economic consequences of that decision,” says Rajdeep Sardesai, a TV host and author of 2014: The Election that Changed India. “As the impact of the note ban becomes increasingly clear, it leaves Modi a little more vulnerable.”
SHIFTING WINDS
It also gives the pushback against Modi a little more momentum. While the government celebrated November 8 this week as “Black Money Day”, fielding its ministers to launch a blitzkrieg of stats defending the note ban – one minister even said prostitution was down as a result – the opposition Congress observed it as “Black Day”. Congress leader Rahul Gandhi, who has launched a full-throttled bid to defeat Modi’s ruling Bharatiya Janata Party (BJP) in Gujarat in the state election due next month, spent the day in Surat in protest marches and meeting diamond and textile workers and trade bodies to tap into the anger over lost business.
And anger there is plenty. From office goers, traders and corner shop owners to corporate bosses and government officials, disenchantment with Modi’s handling of the economy is widespread. At least one regional ally is on the warpath. The social media is abuzz with swipes at his mega initiatives that are high on decibel and low on substance. Modi jokes, once unthinkable, are everywhere. Rahul Gandhi is logging more retweets than Modi. The Congress, in a state of atrophy since being ousted from power three years ago, appears to be stirring back to life.
So are some of the heavyweights within the BJP who had so far fallen silent. In a stinging opinion piece titled “I need to speak up now” in The Indian Express, former finance minister and BJP executive council member Yashwant Sinha sums up the crisis of the Indian economy: “Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, the construction industry is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled…Demonetisation has proved to be an unmitigated economic disaster.” His view, he says “reflects the sentiments of a large number of people in the BJP and elsewhere who are not speaking up out of fear”.
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The cover of This Week in Asia asked a year ago, “Is the ground below Modi shaking after currency crisis?” The tremors are far more palpable today, and it will take all of Modi’s consummate political skill to hold his ground. A year ago, Modi’s grip on power was considered unquestionable and his victory in the 2019 election a foregone conclusion. It may not be so any longer.
Apart from the note ban and the GST, other factors are also contributing to Modi’s distancing from the electorate, especially the urban middle class that forms the bedrock of his support base. “Modi is no longer the larger-than-life leader he was to the urban middle class, which has begun to wonder if he is more a showman than the messiah they thought he was,” says Sardesai.
Many of these factors are related to what Indian psephologists call “incumbency”, or the burden of power that automatically puts a ruling party in the crosshairs of governance-induced voter resentment. A fatal stampede on a Mumbai railway bridge in September, for example, quickly became an issue of poor infrastructure investment and misallocation of resources. More so because shortly before the stampede, Modi had announced a Japanese-funded US$17 billion bullet train that many criticised as wasteful and unnecessary in a country which still has miles to go in basic transport infrastructure.
The textile industry in Surat never recovered. Photo: AFP
Modi’s “outsider” appeal has also worn off. After nearly four years in power, he is the establishment. As Sinha, the former finance minister tells me, “Every government inherits legacy issues. But how long can this government continue to blame the last one? It’s time to deliver.” The compulsions of national politics means Modi is also making deals with the kind of dubious local politicians he once railed against – and blamed the previous government for pandering to – blurring the line between him and the rest.
The cow vigilantism of his party’s ultra-right Hindu supremacist elements and the serial attacks on Muslims and liberal intellectuals are putting off more middle-of-the-road supporters. Adman and commentator Suhel Seth, who supports the currency ban, for example, believes Modi’s cabinet is the cleanest India has ever had, but despises the “trojan horses” whose religious extremism has “hijacked Modi’s development agenda”.
“Modi needs to understand that the people elected him prime minister, not prime priest,” says Seth, who sees demonetisation and GST as necessary shocks to formalise the economy and for the country’s long-term development. “The problem with Indians is that they expect major surgery without pain.”
A new report published on Tuesday by the All India Manufacturers’ Organisation found that 45 per cent of jobs in trading organisations were lost in the October-December quarter of 2016 as a result of the note ban. The figure was 35 per cent for small and medium enterprises, 15 per cent for large companies and 25 per cent for exporters. This trend of job losses continued in the next quarter as well. Nearly 80 per cent of the 10,000 businesses in the survey felt the note ban was unnecessary and achieved nothing. GST too has bruised business, it finds. The July-September quarter saw jobs drop 18 per cent in trading firms, 25 per cent in small and medium enterprises, 15 per cent in large companies and 20 per cent for exporters.
IT’S THE ECONOMY, STUPID
Modi’s continued grip on power will largely depend on convincing more people like Seth that pain like this will not be in vain, that he will make it all good eventually, that despite the current problems, he is still the best bet. By far the best communicator among the current crop of Indian leaders and still the most charismatic and popular national-level leader, Modi has both the capacity and the energy to turn the tide, if there is indeed one. He also has a winning machine of a party that’s run with a level of clinical efficiency rarely seen in India.
With the opposition fragmented, it is still too early to say if the reputational damage suffered in the past year is enough to unseat him. Anger against Modi may not necessarily translate into votes for the opposition, retweets are not votes, and it’s never been easy reading Indian voters. But one thing is clear, Modi can’t afford to allow the economy to bleed any further. He had promised to rescue the economy, now the economy needs to rescue him.
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In a recent article titled “There is something in the air”, Shekhar Gupta, editor of ThePrint and among the foremost political analysts in India, says that for the first time since coming to power, Modi is on the defensive. Even though Gupta doesn’t think the winds are shifting yet, “the air is thick with doubts”.
In Delhi this week, the air is thick with PM2.5 as well, with the government closing down schools as toxic smog envelopes the capital, making a mockery of Modi’s yet another grand campaign, “Swachh Bharat” (clean India). A day outdoors in Delhi this week is equivalent to smoking 40 cigarettes. With the level of carcinogenic pollutants at roughly 10 times the reading in Beijing, Delhi’s chief minister is calling the capital a “gas chamber”. Too bad Nand Lal can’t walk. Mere evening strolls on his lane would have brought him the death he so longs for.
Flight operations in Delhi have been hit as visibility falls. Only one of the three runways could be used on Wednesday because of the haze. The silhouette of the city I saw from my hotel window earlier in the day is probably how Lal sees me through his partially blind eyes. “What do you think of Modi? Will he win the next election?” I ask him, rounding off the interview, and bracing to step out in the smog again.
“I don’t know, sir. I can’t watch TV, can’t read newspapers, god knows what’s going on out there. Even if I did, these things are always difficult to tell.”
All Nand Lal wants out of life is death. A good part of the 80-year-old retired soldier’s 10ft by 10ft tumbledown room on the outskirts of New Delhi is a humble home shrine of two idols of Hindu gods on a tattered piece of red cloth. Lal, a widower, lives in this rented room in a small house tucked away in a dingy lane all by himself, dependent on a part-time maid for the smallest of chores. Barely able to walk, see or hear, he spends most his days praying to those gods to end his misery.
A year ago, Lal became the face of the havoc unleashed by Indian Prime Minister Narendra Modi’s shock decision to withdraw high-denomination banknotes from circulation. As some 86 per cent of the cash in circulation was declared void overnight in a cash-driven economy and a fraction of it replenished with new legal tender, millions of Indians found themselves standing in long bank lines for weeks to exchange their liquid holdings for legitimate banknotes. After three days of queuing in vain, Lal broke down when he lost his spot in a queue on the fourth day. As he tearfully begged bank officials to allow him to withdraw his pension, the pain and helplessness on his face was captured in a photo taken by the Hindustan Times newspaper. It instantly went viral as a symbol of the hardship inflicted by demonetisation, as the currency ban is called in India.
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“I don’t want to live another single day, I’ve suffered enough,” Lal says often as we talk in his gloomy neon-lit room. But his face lights up when asked about demonetisation. The social media fame brought by that photo means he doesn’t have to queue up any longer. These days when his maid takes him to the bank, he is given a seat and the bank officials do the rest – a big deal in a public sector Indian bank. “Thanks to you journalists, I have no bank problems now,” he says, hands folded in a gesture of appreciation.
Lal may be one of the very few people for whom demonetisation actually worked out, even if in a perverse way. As evident from nationwide opposition protests this week to mark the anniversary of the currency ban, endless media coverage of its impact, and the disdain and anger that any mention of the note ban often evokes in casual conversations, it rankles for the most part.
A poorly designed and executed nationwide goods and services tax (GST) that followed in the wake of the note ban only worsened its pain. India’s growth rate slowed down as a result of the disruption caused by the twin policy shocks. For many Indians, the note ban has thus become shorthand for Modi’s mismanagement of the same economy he had promised to turn around, severely denting his image as a smart economic manager. Modi had tried to kill cash with the note ban. A year on, cash remains king in India – it’s Modi’s reign that appears under threat, with his aura of infallibility on the wane.
PROMISES, PROMISES
When Modi announced on the evening of November 8, 2016, that he was pulling 500 rupee (US$7.7) and 1,000 rupee notes, he laid out two main purposes: to eradicate “black money”, or unaccounted wealth in local parlance; and wipe out terror financing through counterfeit notes. It was an odd rationale as a fraction of ‘black money’ is held in cash, most of it being parked in more productive assets such as property or gold, or funnelled abroad through the grey market. Counterfeits, similarly, make for a fraction of the money in circulation.
The government’s reasoning was that those with unaccounted cash would be caught off-guard and forced to abandon their stash, wiping out a chunk of black money. It told the Supreme Court that it expected that a quarter of the total value of banned notes would not return to the banking system. But this year, the central bank reported that just 1 per cent of the money did not return, meaning the entire exercise hardly had any effect on black money. As for fake currency and terrorism, just 0.0002 per cent of banned notes turned out to be counterfeit, while terror incidents in restive Jammu and Kashmir state have risen nearly 38 per cent and civilian deaths are up 2,500 per cent.
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After a few weeks of its launch, Modi changed the narrative of the note ban from a war on black money to a war on cash. A cashless economy was said to be the end game of the exercise, bringing into the mainstream the 40-odd per cent of the Indian economy that operates informally. Since only 1 per cent of the 1.3 billion Indians pay direct taxes, forcing people into digital and bankable transactions would supposedly widen the tax base and improve public finances.
Within a month of the note ban, Finance Minister Arun Jaitley announced that tax collection had increased nearly 15 per cent, as proof that demonetisation was working. More updated figures now show that tax returns this year merely conform with the trend growth of past years. As for digital payments, they are also back to trend levels after a brief spike following the ban. A new research report, in fact, finds that more than 40 per cent of the people who started using mobile wallets after the note ban have shifted back to cash. Like Nand Lal, cash just refuses to die.
“In retrospect, it is now clear that the original stated goals for Modi’s cash ban were disingenuous and dishonest. Its subsequent justification as some magic wand to suddenly transform a poverty stricken developing nation to a digital economy is ludicrous and laughable,” says economist Praveen Chakravarty, a senior fellow at think tank IDFC Institute.
Apart from the winding queues at ATMs, people faced other severe inconveniences such as problems in buying essentials and denial of medical treatment for the lack of new notes. More than 100 people died as a result of the note ban. It brought most of the economy to a grinding halt. Traditionally cash-driven industrial and agricultural supply chains froze up, demand plunged and job losses mounted. Hundreds of thousands of migrant workers had to return to their villages, adding to the rural economic crisis in a country where 70 per cent of the people still live in villages.
According to data from the Centre for Monitoring Indian Economy (CMIE), around 1.5 million jobs were lost in the first four months of the year. From 9.1 per cent in the first quarter of last year, the Indian economy grew just 5.7 per cent in the June-September quarter, the weakest in three years. It is the sixth straight quarter of slowing growth for an economy that once prided itself on outpacing China as the fastest growing major economy. But even that number does not capture the full extent of the slowdown. The Modi government changed the methodology for calculating GDP in 2015. Going by the old method, the current growth rate would be about 3.7 per cent, rather than 5.7.
DOUBLE WHAMMY
“It has been hell since demonetisation,” says Jitu Vakhariya, president of the Federation of All India Textile Processors Association. “Much of this industry relies on casual labour as work flow depends on order volumes, which are highly seasonal,” says Vakhariya, who runs a textile firm in Surat, a city of about 4.5 million in the western province of Gujarat, Modi’s home state.
In Surat itself, he says, there are 150,000 to 200,000 women engaged in what Vakhariya calls “additional work”, such as part-time embroidery and stitching to complement the family income.
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Much of the labour force is also drawn from migrant workers, who do not want to have anything to do with banks, often because there may be none where they come from. While the government pushes cashless transactions, nearly a quarter of Indian villages do not have a bank within 5km and most have little or no electricity and poor internet connectivity. Data journalism portal IndiaSpend reports that villagers in parts of India are struggling with cheques that agricultural traders have started paying them with since the note ban. These cheques take weeks to clear, as the rural banking network is ill-equipped to handle the load, denying farmers the money when they need it the most.
“The intention of demonetisation may have been good, but how do you formalise a transient labour force in a highly seasonal industry? How can you change the mindset in one day?” says Vakhariya. “The industry was still limping back to normal, then GST hit us in July.”
Traditionally, textiles have never been taxed in India. Overnight, after the ambitious GST was rolled out amid much fanfare, textiles became subject to an 18 per cent tax. Surat’s once-bustling textile industry has never been the same. Trading almost stopped for weeks and thousands of power looms shut down. After repeated appeals to the government, the GST on cotton has now been brought down to 5 per cent and that on polyester to 12 per cent, but the industry is yet to recover.
GST, which subsumes all indirect taxes paid by businesses to the central and individual state governments separately to simplify collection, has become a bane for business with its maze of layers and complexity. As tax is levied on the value added, companies can claim input refunds. But clunky software means businesses are struggling to recover these dues.
Surat’s other big industry, diamonds, survived demonetisation as it exports 94 per cent of its product, but is now reeling from GST. “The infrastructure for GST compliance is still weak. The government should have waited to put the software and system in place, and discussed it with the industry,” says Dinesh Navadiya, regional chairman of the Gems and Jewellery Export Promotion Council, who blames bureaucrats for the mess.
GST levies a tax on transfer of cut diamond from Surat’s manufacturing hub to the same companies’ marketing offices in Mumbai and it can take months to collect the refund. While big firms like Navadiya’s can live with the hit and access bank loans to make up the shortfall, small and medium-sized enterprises are finding the going a lot more difficult.
Like cotton and diamonds, complaints of unsuitable taxes and cumbersome refund procedures abound across all industries as a result of GST. The new tax regime also requires a complex filing process three times a month. While GST brings many new companies into the tax net, it also imposes a heavy compliance burden on small traders and manufacturers grappling with the intricacies of filing online returns. To ease the GST pain, the government is now slashing the rates, which is also adding to the uncertainty and confusion.
POLITICAL GAIN, ECONOMIC PAIN
Prime Minister Modi rode to power in 2014 largely on the promise of fixing a sputtering economy and ridding the country of corruption. After a decade of a coalition government in which the ruling Congress Party was seen to be bending too much to accommodate the often unreasonable demands of allies and a prime minister seemingly subordinated to his party chief and unable to check corruption or stem an economic slowdown, Modi’s clean image, his reputation as an economic reformer and his strongman style answered the yearning for decisive leadership.
Modi’s style of governance is in sharp contrast to that of his predecessor, the soft-spoken economist Manmohan Singh. Where Singh was the first among equals in his cabinet, Modi is the undisputed boss in his. Singh strove to strike consensus between conflicting interest groups in the government, Modi takes no prisoners. Every decision the government makes essentially emanates from Modi’s office, which also closely monitors their execution.
Delhi, where even China’s pollution fades into insignificance
Sidelining most senior leaders and stacking his cabinet with a younger breed of mid-ranking leaders who swear fealty personally to Modi, he has eliminated any possibility of internal dissent. While this highly centralised style allows Modi to railroad many of the decisions that would have otherwise stalled in bureaucratic wrangling and has improved government functions in many aspects, it also takes away the built-in checks and balances of collective responsibility that filter policymaking in parliamentary democracies like India. “Demonetisation is the symptom of a pattern of government where there is no consultation,” as former BJP leader Arun Shourie puts it.
The currency ban was a glaring example of the potential of institutional damage such centralised governance can wreak. Once Modi convinced himself of the need for the currency ban, there was little the otherwise autonomous Reserve Bank of India (RBI), the central bank, could do but play along. In his recent book, former RBI governor Raghuram Rajan says he had let it be known to the government eight months before the note ban that “although there might be long-term benefits…the likely short-term economic costs would outweigh them”. The RBI, he writes, “flagged what would happen if preparation was inadequate”. Rajan left two months before the currency ban amid rising acrimony with the government and the ruling party.
But it is this particular trait of Modi that also endears him to his followers – a man not afraid of taking tough decisions and who has the wherewithal to override institutional obstruction. A recent Pew survey finds that 55 per cent of Indians support autocracy and 27 per cent want a “strong leader”. The thumping election victory of Modi’s party in the northern state of Uttar Pradesh soon after the currency ban was seen as yet another endorsement of this strongman style as well as the note ban.
“Black money” is politically resonant in India, where income disparity is at its highest level since 1922. According to a new study by Thomas Piketty and Lucas Chancel, the top 1 per cent of Indian earners corner 22 per cent of the total income. “Despite the untold difficulties endured by the general public, most people put up with the note ban thinking it was for a larger good, that it was inconvenient for them but it would destroy those who have been hoarding wealth,” says Sankarshan Basu, a professor of the Indian Institute of Management, Bangalore.
Opposition parties too, barring a few, were unsure at that point as to how the public was perceiving the currency ban, and did not mobilise any mass movement against it. As the results in the Uttar Pradesh election showed, their hesitation was well-grounded. The war on black money did have plenty of takers.
“The note ban was a political victory for Modi. It helped him shed his pro-business image and create the image of a pro-poor crusader against black money. He, in fact, may have built himself a whole new constituency with the note ban. But now he is facing the economic consequences of that decision,” says Rajdeep Sardesai, a TV host and author of 2014: The Election that Changed India. “As the impact of the note ban becomes increasingly clear, it leaves Modi a little more vulnerable.”
SHIFTING WINDS
It also gives the pushback against Modi a little more momentum. While the government celebrated November 8 this week as “Black Money Day”, fielding its ministers to launch a blitzkrieg of stats defending the note ban – one minister even said prostitution was down as a result – the opposition Congress observed it as “Black Day”. Congress leader Rahul Gandhi, who has launched a full-throttled bid to defeat Modi’s ruling Bharatiya Janata Party (BJP) in Gujarat in the state election due next month, spent the day in Surat in protest marches and meeting diamond and textile workers and trade bodies to tap into the anger over lost business.
And anger there is plenty. From office goers, traders and corner shop owners to corporate bosses and government officials, disenchantment with Modi’s handling of the economy is widespread. At least one regional ally is on the warpath. The social media is abuzz with swipes at his mega initiatives that are high on decibel and low on substance. Modi jokes, once unthinkable, are everywhere. Rahul Gandhi is logging more retweets than Modi. The Congress, in a state of atrophy since being ousted from power three years ago, appears to be stirring back to life.
So are some of the heavyweights within the BJP who had so far fallen silent. In a stinging opinion piece titled “I need to speak up now” in The Indian Express, former finance minister and BJP executive council member Yashwant Sinha sums up the crisis of the Indian economy: “Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, the construction industry is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled…Demonetisation has proved to be an unmitigated economic disaster.” His view, he says “reflects the sentiments of a large number of people in the BJP and elsewhere who are not speaking up out of fear”.
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The cover of This Week in Asia asked a year ago, “Is the ground below Modi shaking after currency crisis?” The tremors are far more palpable today, and it will take all of Modi’s consummate political skill to hold his ground. A year ago, Modi’s grip on power was considered unquestionable and his victory in the 2019 election a foregone conclusion. It may not be so any longer.
Apart from the note ban and the GST, other factors are also contributing to Modi’s distancing from the electorate, especially the urban middle class that forms the bedrock of his support base. “Modi is no longer the larger-than-life leader he was to the urban middle class, which has begun to wonder if he is more a showman than the messiah they thought he was,” says Sardesai.
Many of these factors are related to what Indian psephologists call “incumbency”, or the burden of power that automatically puts a ruling party in the crosshairs of governance-induced voter resentment. A fatal stampede on a Mumbai railway bridge in September, for example, quickly became an issue of poor infrastructure investment and misallocation of resources. More so because shortly before the stampede, Modi had announced a Japanese-funded US$17 billion bullet train that many criticised as wasteful and unnecessary in a country which still has miles to go in basic transport infrastructure.
Modi’s “outsider” appeal has also worn off. After nearly four years in power, he is the establishment. As Sinha, the former finance minister tells me, “Every government inherits legacy issues. But how long can this government continue to blame the last one? It’s time to deliver.” The compulsions of national politics means Modi is also making deals with the kind of dubious local politicians he once railed against – and blamed the previous government for pandering to – blurring the line between him and the rest.
The cow vigilantism of his party’s ultra-right Hindu supremacist elements and the serial attacks on Muslims and liberal intellectuals are putting off more middle-of-the-road supporters. Adman and commentator Suhel Seth, who supports the currency ban, for example, believes Modi’s cabinet is the cleanest India has ever had, but despises the “trojan horses” whose religious extremism has “hijacked Modi’s development agenda”.
“Modi needs to understand that the people elected him prime minister, not prime priest,” says Seth, who sees demonetisation and GST as necessary shocks to formalise the economy and for the country’s long-term development. “The problem with Indians is that they expect major surgery without pain.”
A new report published on Tuesday by the All India Manufacturers’ Organisation found that 45 per cent of jobs in trading organisations were lost in the October-December quarter of 2016 as a result of the note ban. The figure was 35 per cent for small and medium enterprises, 15 per cent for large companies and 25 per cent for exporters. This trend of job losses continued in the next quarter as well. Nearly 80 per cent of the 10,000 businesses in the survey felt the note ban was unnecessary and achieved nothing. GST too has bruised business, it finds. The July-September quarter saw jobs drop 18 per cent in trading firms, 25 per cent in small and medium enterprises, 15 per cent in large companies and 20 per cent for exporters.
IT’S THE ECONOMY, STUPID
Modi’s continued grip on power will largely depend on convincing more people like Seth that pain like this will not be in vain, that he will make it all good eventually, that despite the current problems, he is still the best bet. By far the best communicator among the current crop of Indian leaders and still the most charismatic and popular national-level leader, Modi has both the capacity and the energy to turn the tide, if there is indeed one. He also has a winning machine of a party that’s run with a level of clinical efficiency rarely seen in India.
With the opposition fragmented, it is still too early to say if the reputational damage suffered in the past year is enough to unseat him. Anger against Modi may not necessarily translate into votes for the opposition, retweets are not votes, and it’s never been easy reading Indian voters. But one thing is clear, Modi can’t afford to allow the economy to bleed any further. He had promised to rescue the economy, now the economy needs to rescue him.
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In a recent article titled “There is something in the air”, Shekhar Gupta, editor of ThePrint and among the foremost political analysts in India, says that for the first time since coming to power, Modi is on the defensive. Even though Gupta doesn’t think the winds are shifting yet, “the air is thick with doubts”.
In Delhi this week, the air is thick with PM2.5 as well, with the government closing down schools as toxic smog envelopes the capital, making a mockery of Modi’s yet another grand campaign, “Swachh Bharat” (clean India). A day outdoors in Delhi this week is equivalent to smoking 40 cigarettes. With the level of carcinogenic pollutants at roughly 10 times the reading in Beijing, Delhi’s chief minister is calling the capital a “gas chamber”. Too bad Nand Lal can’t walk. Mere evening strolls on his lane would have brought him the death he so longs for.
Flight operations in Delhi have been hit as visibility falls. Only one of the three runways could be used on Wednesday because of the haze. The silhouette of the city I saw from my hotel window earlier in the day is probably how Lal sees me through his partially blind eyes. “What do you think of Modi? Will he win the next election?” I ask him, rounding off the interview, and bracing to step out in the smog again.
“I don’t know, sir. I can’t watch TV, can’t read newspapers, god knows what’s going on out there. Even if I did, these things are always difficult to tell.”
