Although the murmur around it has waned considerably, the demonetization of higher denomination currency notes in November 2016 was arguably one of the most momentous events in India since 1947, at least because it affected virtually every Indian citizen, which perhaps even Independence failed to do. Yet, it has not led to much disinterested enquiry even among India’s academics and intellectuals. The difficulty is perhaps that Prime Minster Narendra Modi has polarized opinion so thoroughly that most people (from the middle-classes) respond to his actions primarily based on what they already feel about him. To his followers he is an ascetic who cares for nothing except India’s welfare and is waiting to retreat into seclusion if India rejects him. To his detractors (largely from the left) he is not only an icon of ‘intolerance’ but also an agent of global corporate interests and financial institutions.

The publicized aim of demonetization has been to eradicate the parallel economy and black money but there seems to be more than that in the decision. The government is not obliged to explain its actual motives clearly and mere persuasion is enough but its critics are well informed and educated, and some disinterested speculation would be expected from them - rather than partisan diatribes. Demonetization only elicited the following arguments from them:   

1. A currency note is a ‘promise to pay’ and demonetization amounts to reneging on a promise.
   
   
2. Black money held as currency is small when compared to that held as goods and property or money held abroad. Demonetization will therefore not eradicate the parallel economy.
   
   
3. It will not stop the generation of black money, which will be facilitated by the Rs 2000 currency note.
   
   
4. The Indian economy’s growth will be cut by 2%.
   
   
5. The government’s intentions are suspect because it has waived bad loans to the extent of Rs 1.14 lakh crores to corporations in the past two years.
   
   
6.  People outside the cities will be badly affected by the inadequate planning and the slow pace at which new currency has been introduced. The informal economy has been destroyed.
   
   
7. There was no need for abrupt and secret process to remove currency. It could have been done gradually.
   
   
8. Destroying currency is destroying national wealth/assets.
   
   
9. The move was initiated under pressure from the credit card/ Paytm lobby. 

If some of these criticisms are valid, they are the most obvious ones like people having been put to difficulties and black money being mainly in other assets like merchandise and property rather than cash. Since these are the criticisms of some of India’s most esteemed social scientists/ economists/ commentators one is even surprised by some of the suppositions  – like the confusion between a ‘write-off’ and a ‘waiver’.  Bad loans of corporations have been ‘written off’ – a book adjustment which is intended to tidy up a lending bank’s balance sheet and which in no way gives respite to the borrower/defaulter from legal action. A loan ‘waiver’, on the other hand, is what farmers get when it is felt that in their conditions they cannot be expected to repay bank loans in the normal course. A borrower whose dues have been ‘waived’ has his/her slate wiped clean but not so someone whose loans are ‘written off’. Secondly, black money is created by undeclared income and not by printing high-value currency notes; the only advantage of the Rs 2000 note to holders of black money is that large denomination notes occupy smaller spaces in warehouses. Demonetization, by itself, will not reduce the generation of black money, which will eventually revive - like the informal economy. But it will certainly go some distance in destroying existing undeclared wealth in private hands. To the government/state, demonetized money which does not return is a liability liquidated and not an asset destroyed. As regards the contention that the credit card lobby was behind the drastic decision, how powerful is that lobby and how was it resisted hitherto? Cannot every action by the state be similarly attributed to the machinations of some lobby or another – like expenditure on infrastructure attributed to construction industry lobbying?    

The demonetization move received predominantly negative responses from the western media (the NYT, the Economist, Forbes, Huffington Post etc.) and the criticism was largely of the small economic sense in the move. But the trouble may partly be in the disciplines of economics and political science having become so separate that any expert view can either be economic or political - without an analysis which combines the two intelligently. A factor about the global responses is that they had little or no notion of politics in India, which is Narendra Modi’s territory, or what black money does politically, or that political parties subsist on it. We could say, in summary, that few commentators made convincing sense of demonetization through economic or political theories, or hypotheses about global conspiracies. My proposition is that the move should be looked at through information widely available without depending on ‘expert opinion’, which while being scholarly, has not been particularly helpful.

The following are some facts which are widely known to Indians and could help us interpret demonetization:

1. While there is no doubt that common people have suffered there have been virtually no civic disturbances on its account. Those making the most noise have been political parties, suggesting that they have been affected the most.
   
   
2. The RSS and much of the BJP have been silent about it, except for a few leaders close to Modi. Some of the BJP’s allies have been against the move, suggesting that they have been badly affected as well. Extremists of the Hindu right have either been strangely quiet or have come out against the move. The cow protection brigade has been inactive since November 8th and the mood before the elections in UP has been generally peaceful – when communal riots broke out prior to every previous election. Kashmir is also peaceful, for the moment, after a long period of violence.
   
   
3. The RBI has indicated that it knew about the move only one day in advance. This indicates that the move was kept very secret. The Prime Minister accepted full responsibility for it and it was probably his decision alone. The Prime Minister not being an economist, it would seem that the decision was a political/strategic move rather than economic wisdom.
   
   
4. Much of the demonetized money has come back but the government has instituted a voluntary disclosure scheme effective till 31st March 2017, which could see good tax recoveries for the government. The threatening noises being made are likely to improve collections here.   
   
   
5. Withdrawal limits have not been eased, which suggests that large deposits are being held on to for further appropriation by the state.

All these factors suggest that demonetization is not an economic as much as a political move and the targets have been the Prime Minister’s political adversaries both outside and within his own party; the move is presumably also to curtail political power outside that held by the state. Black money may be held in various ways but it can be argued that since liquidating physical assets at short notice is difficult, political parties, which need high levels of liquidity to keep the political fires burning, will need to hold it as cash. A factor about unaccounted cash not usually taken into account is that is used easily to subvert the state and its laws. It is used to pay bribes, fund illegalities and is most likely to be used for street action of every kind including creating disturbances – like paying agitators and protestors. The quiet way in which the public has taken demonetization may owe to the paucity of available cash.  Even if/when matters return to normal, the state will have more information about the sources of unaccounted money, who have held it and where it accumulates, which can help it be specific in its targets. There is little doubt that Indian society and the citizen will be more susceptible to economic surveillance after demonetization but whether that is a bad or good thing is still open to debate.   

Narendra Modi has come out hitherto as an extremely bold Prime Minister and even his detractors would find it difficult to deny it. If anything, he is pugnacious at heart and his undertaking a drastic measure like demonetization when his stock with the public was high and most badly affecting the BJP’s traditional constituency of small traders, suggests a willingness to take risks; it is not the move of someone succumbing to pressure. For those of the left who see the US and US interference in every act of the states in the ‘Third World’, we must note that the US has been trying to pressurize Pakistan on a variety of issues – like putting its nuclear arsenal under international control and/or acting against its radicals – without much success. All the US is allowed is to bomb Pakistan’s tribal areas. The US has also been unable to make headway in the Philippines, which is moving swiftly towards China. There is hence little reason to believe that Modi would ‘succumb’ to the US or its agents readily.  

The only plausible explanation for demonetization is that it is intended to strengthen Modi’s hands in politics. Coming just before a crucial set of elections it risks much: a bad defeat for the BJP would weaken Narendra Modi inside the party – leaving him with no option but to share power, which he is not doing now. ‘Sharing power’ could simply manifest itself in cabinet expansion and not with his having to step down. But faring well in the elections would mean that his hands would be further strengthened.  As of now there is little reason to expect the BJP’s humiliation in the forthcoming state elections. They may not come to power in UP because of electoral arithmetic but it appears that they will still get a respectable share of the votes.

After the conclusion of the demonetization Narendra Modi made a speech declaring that the public had a right to know where the BJP gets its money from, and this should be taken as an ominous sign. Another strategic move on its way could be political parties being placed under the RTI act. This is also a move which would be difficult to fight on moral grounds. If anything, this could change the shape of politics and the conduct of elections in India and make Narendra Modi unassailable – at least in the medium term. As political parties weaken, a charismatic and canny leader stands to gain. But if the prospect is frightening to some, it could also lead to the strengthening of the weak Indian state, which has been undermined by political corruption. Curtailing the economic freedom of political parties may be the most effective way of strengthening the state. Only a strong state can deliver services the way it is expected to and India is woefully underadministered.

Editor