What Explains the Popular Support for Demonetisation?

Despite quite a few (hopefully unbaised) economists/experts (if they matter today) saying that demonetisation is a bad policy, the public support for the same has been amazing. After all politicians unlike experts have a scorecard in form of elections and initial results suggest no damage to the ruling party.

Prof Rita Khera of IIT Delhi tries to unravel this puzzle:

We have been confronted with an odd situation in the aftermath of demonetisation. Most economists and analysts are of the view that demonetisation is a bad policy that was badly implemented. Yet, most opinion polls suggest that the move is popular even among the people who have suffered because of it. Many have been puzzled by this divergence between the facts on demonetisation and the public support for it.

Recently, students at the Indian Institute of Technology Delhi surveyed about 700 small businesses in the city to primarily document the impact of demonetisation on sales and earnings. At the end, they asked: “Overall, do you feel that demonetisation was a good idea or a bad idea?” Based on an informal student feedback, there appear to be six categories of respondents to that question.

First, those who are unclear in their responses. It seems that in some cases, people find it better to not reveal what they actually feel. These are the ones who in their responses sometimes add, “you’ll know when we vote next”.

Second, are the uncritical supporters whose backing of the move is primarily political and is based on faith in the leader and/or the party. For them, since Prime Minister Narendra Modi has said demonetisation is good for the country, there is no further need to question the move.

Third, many respondents who express their support for demonetisation, despite being badly hit by it, do so because they feel it has hurt the rich, it acts as an equaliser and is forcing the rich – even if only temporarily – to finally treat them as fellow human beings (for instance, talking to them politely when in need for change for the Rs 2000 notes).

Fourth, are the people who feel it is best to say that the note ban is a good thing because it is the easiest response to give. When “everyone” is saying it’s good, why be contrarian, get into an argument or maybe even get beaten up? When probed about why they believe demonetisation to be a good thing in the long run (for instance, because tax compliance may improve in the future) even though they can see that it has been bad in the short run, such respondents are unable to give a credible answer.

Fifth, are those for who believe that criticising demonetisation will amount to saying that they support corrupt practices or are admitting to having ‘black money’ stashed away. I have myself fallen into this trap. Upon hearing harsh criticism from a chartered financial analyst – a man who used to argue with people if they criticised Modi until before demonetisation – I could not help but wonder if he had lost money because of the move.

Sixth, are the people who have applied their mind, followed the issue very keenly and have reached a conclusion about why they think it is good. But, within this group emerges a worrying trend; upon being probed, one learns that their arguments are based on misinformation. For instance, they believe that demonetisation will end ‘black money’, which is premised on the belief that high denomination notes are the main or only form of holding ‘black money’. In some cases, when presented with data and arguments that challenge their belief (for instance, only 6% of the total haul from income tax raids is cash and the rest is held in other forms, such as gold), they are receptive and do not resist the facts.

The government has spinned the narrative brilliantly:

It is one thing for ordinary citizens going about their daily lives, to believe that ‘black money’ is only held in cash in high denomination notes and is stacked away in cupboards, mattresses and pillows, but for a government to endorse such a line of reasoning is mind-boggling. In his November 8 speech, the Modi said, “Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officers? Or by reports of cash found in gunny bags?”

The government is proactively spreading misinformation and its narrative has been flawed right from the get-go. People have been led to believe that the one-off removal of Rs 500 and Rs 1000 notes would fix the black economy, with Modi saying in his demonetisation announcement: “To break the grip of corruption and black money, we have decided that the 500 and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight”.

Modi has given strength to the false notion that cash deposited in bank accounts post-demonetisation is tainted. In Japan, he said, “Now, even those sons who left their mothers at old-age homes are depositing two-and-a-half lakh rupees in their mother’s accounts.” Bogus claims like, “The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways” have also been made by the prime minister. Neither he nor his advisors appear to have anticipated the negative shock to the economy from the sudden loss of liquidity. This staggering lack of foresight may cost the economy for months or longer.

The perception that to oppose demonetisation amounts to supporting corruption is almost directly attributable to the speeches made by the prime minister. When some opposition parties raised valid concerns, he is reported to have said, “I see that people in public life are giving speeches in support of corruption and black money”.

When the government was cornered on its flawed narrative, it cleverly changed the narrative to ‘retrofit’ benefits. There was an expectation that a large share of demonetised notes would not return to the banking system. When nearly all of it was returned, we were told that this would enable the income tax department to conduct enquiries. The truth is that whether it is tax raids or cashless society, demonetisation was not necessary for any of these retrofitted benefits to materialise.

In the end, the divergence between the ‘facts’ and people’s beliefs can be attributed to the government’s successful propaganda machinery and to the failure of a weak opposition. The fact that the government felt compelled to change the narrative suggests that only facts are effective against propaganda.

This is not the first time. Indian governments have periodically managed get political support for their erroneous economic policies. Though, this is hardly the final wording on demonetisation with much more research to follow.

Given the similarities, things are slightly different on one aspect which is criticism. The moment anyone criticises the current polices, there is defence giving the standard answer that these things were worse in UPA-II . We have moved from a narrative where we judged policies from who is better to who is worse.

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