It is not market failure but social failure that is being addressed with demonetisation.
If the demonetisation program was shoved into people’s throats, as many think it was, it would have created a huge backlash in the first week. But people intrinsically understood that the dramatic announcement was necessary to shock the crooks.
“This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember, all I'm offering is the truth. Nothing more.” Morpheus then hands out the two pills to Neo in the “Matrix”, in one of the most iconic scenes in cinema history. Inspite of many learning moments offered by current events, our effete media takes the blue pill and stays in la-la land. Whether the ignorance is wilful is a moot point.
Just last week after the defeat of Hillary Clinton there was a surfeit of articles on how the “people who have been spoken to” have had their last laugh. There was enough in the media about Brexit and Trump parallels. Our own purveyors of insight took all that and added Modi and 2014 to them. But perhaps like a student in our education system that reads and does well in exams but does not actually learn, our opinion makers do not seem to have imbibed the actual lessons. That they are out of touch with the zeitgeist is apparent in their unnuanced opposition to the demonetisation. The person in the queue says, “I am not suffering”, but the person with the mike almost seems to respond with, “No, you are suffering”. It is a tragicomedy of sorts going on with field reporting. (Or maybe our journalists have figured out the nature of Maya and true suffering!)
It is a no-brainer that the demonetisation is going to cause harm to the economy in the short-medium term. The supporters feign ignorance to this; the opponents seem focussed only on this. Perhaps a point they unite on is the personal hardships of people standing for hours to deposit/withdraw cash and small businesses that faced difficulties last week. The ability to replenish the cash stock at the rate of 1 crore bills a week is hardly enough lubricant for a large cash based economy. Our economists have resorted to hair splitting on GDP, RBI accounting, economics of rupee printing, failure of firms etc. Whilst these are genuine issues that warrant deep analyses, they seem to miss the bigger picture - that the problem being solved is a moral one, not an economic one. It is not market failure but social failure that is being addressed. They allowed the pictures of rupee notes, old and new, to confound them into defining it simply as a monetary stability and liquidity issue. A solution to a higher order problem is being attempted is escaping their grasps. It is often forgotten that the great economists, Smith, Marx, Friedman etc. were social psychologists first. Without the underlying moral foundation, the economic principles they had espoused would not have carried the weight it has done over the years.
Politicians are masters in understanding the deep social undercurrents. Their grasp of what animates people is fundamental to their success in a democracy. If a person has progressed from the grassroots to become the prime minister one can assume that he could effortlessly reincarnate the aspirations of the common man in himself. Prime Minister Modi’s weaving of his own personal story in backing the demonetisation program reveals his ability to identify with people while exercising authority at the same time. His zeal in oratory, reminiscent of the last Lok Sabha campaign, is back.
Modi has taken a leaf out the play book of his ideological adversary, the Left. In his recent speeches he has clearly pitched it as the divide between the beleaguered poor and the honest tax payer and the rich bad people. When the problem is posited that way, it triggers the primal emotion of a “us versus them” class divide. Modi knows that 95 per cent of India falls in the former bracket and tapping into the discontent by standing up for them is not just morally right but electorally wise.
Modi has this knack of creating mass movements by enlisting energies of the people. It happened with Swachh Bharat before where the young have gleefully followed him. If the demonetisation program was shoved into people’s throats, as many think it was, it would have created a huge backlash in the first week. But people intrinsically understood that the dramatic announcement was necessary to shock the crooks. Modi grasps and trusts this robust common sense, which unfortunately evades the media. The people felt pride in a leader that has stood up for them against this monstrous injustice that is visceral in their everyday dealings. It has made people stoically soak up the short term pain. Modi for his part has repeatedly underlined the “50 days of pain” and people seem to have welcomed this straightforward nature of the clarion call. It is only incumbent upon the politician to solve a problem of socio-economic justice. That is his role in the democratic society. Economists should not grudge that.
Like the much touted “Happiness Index”, I wonder if economists can come up parameters for measuring the economic impact of increased trust or confidence among people. If the demonetisation becomes a success and people go forward with trust that they won’t be short-changed, how much will that add to productivity gains? Macroeconomists are a creative bunch and it is not beyond them to conjure it up. When at a micro level, economic output is viewed as a translation of human endeavour to monetary output, the role of leadership comes to light. Leaders enthuse and motivate people and create conditions for people to give in their best. If Modi has that transforming effect by tackling a hard moral problem, it will go a long way in making of a great society.
If one asks “what were you most upset about last year, in November 2015, in your personal or professional life?”, most people will not even be able to recall it. That is the nature of human psyche. We are poor evaluators of time. Nobel laureate Daniel Kahneman, in his best seller, “Thinking Fast and Slow”, posits that of we remember only the peak and end of each experience. If one thinks standing in a long line before a bank is what people remember going in to the polling booth in 2019, they are mistaken. The peak of hardship is perhaps already past us. The end of the experience will largely be defined by narratives. And in Modi, there is an unmatched narrator who speaks with rare conviction and who believes that people are willing to rally behind him. And if people feel they have personally invested in solving corruption, it is almost impossible to create disenchantment against this program. As far as his battle with the media, it only reminds me of Sachin Tendulkar against Henry Olonga, who repeatedly bowls bouncers only to be hit for boundaries. It seemed then as if Tendulkar had psyched Olonga into bowling that way!