Prime Minister Narendra Modi projects a stern, unbending public image. But the strain of leading the most dramatic and disruptive political change introduced in India for a generation seems to be getting even to him.

“I know that forces are up against me,” he said, his voice cracking with emotion, in the aftermath of his sudden move on November 8th to junk India’s two largest denomination rupee bills overnight, launching shock therapy for the country’s cash-driven shadow economy. “They may not let me live, they may ruin me,” he added darkly, “because their loot of 70 years is in trouble.”

That sounds dramatic, but the scale of Modi’s gamble invites hyperbole. The sudden scrapping of the Rs500 and Rs1000 notes — worth roughly $7 and $15 respectively, and accounting for nearly 90 percent of the value of cash in circulation — has plunged India’s economy into chaos. For two weeks, newspaper front pages have pictured long lines snaking around banks, as rich and poor alike queue up to exchange old notes for new. 80 billion dollars has been deposited so far. The final total will be much higher.

Strict limits on cash withdrawals have left hundreds of millions short of funds, and the government has been issuing almost daily clarifications to the replacement process, aiming to help those badly affected, from farmers and hospital patients to brides-to-be, unable to marry for lack of cash to pay wedding bills. Meanwhile, according to economists, the big-time criminals and corrupt businesses who were the ostensible targets of the new policy may be least affected by its fallout.

Criticism over haphazard implementation is growing louder. Former Prime Minister Manmohan Singh of the opposition Congress party attacked the move in a rare speech last week, describing it as “a monumental management failure” and “legalized plunder of the common people.”


Comment:

Give me 50 days over scrapped notes, punish me if problems persist: Modi

Prime Minister Narendra Modi choked with emotion during an impassioned speech in Goa on Sunday as he appealed to people to give him 50 days to end their hardship after his government abolished high-value banknotes.

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“I have asked the country for just 50 days. If after December 30, there are shortcomings in my work or there are mistakes or a bad intention found in my work, I will be prepared for the punishment that the country decides for me,” he said.

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“I know what kind of powers I have taken on. I know the kind of people who will be against me now. I am looting what they had accumulated over 70 years,” Modi said in his speech at the Shama Prasad Mukherjee indoor stadium in Bambolim village near Panaji.

The Prime Minister warned of “more projects” to fight corruption to rid the country of black money and corruption, listing steps his government has already taken in the past two years.

“If any money has been looted India and left Indian shores, it is our duty to find out about it,” he said.

But what’s really remarkable is, despite the chaos, how popular the move has been. Indians are not known for their quiet suffering, often taking to the streets to protest far less sweeping political changes than these. That a measure this intrusive has been met with little more than mild grumbles is unusual, to say the least. Modi trusted his instincts that both the boldness of the move, and perhaps even the pain it introduced, would win him support. Here he has been proved right. India’s anger runs deep over ill-gotten wealth, and the cast of villains who represent it in the public mind: the bribe-taking policeman; the inexplicably wealthy politician; the real estate developer who asks for half the price of a house again in cash.


Comment: How pervasive is corruption in India?

The On The Ground Impact Of India’s ‘Earth-Shattering’ Currency Purge

“For instance, compare China and India,” Ang began. “According to the recent Global Corruption Barometer, the percentage of respondents who reported paying a bribe in the past year was 9% in China, compared to 54% in India. China’s corruption is concentrated among political elites, involving exchanges of power for large sums of money. Conversely, India has a pervasive problem of petty corruption. Petty corruption, such as police officers extorting bribes from regular citizens, almost invariably hurts the economy.”

So as a way to fight these various social and economic ills the government is attempting to cut the legs out from under them by nullifying a massive portion of its own currency.

“Psychologically, this is seen as a slap in the face of the all the cronies and the corrupt, which pleases the middle class so much,” explains Rajiv Kumar of the Centre for Policy Research think tank in New Delhi. “For once those who got rich by all the wrongs means have gotten their comeuppance, and people are delighted.”


Comment: For generations, India is plagued by “pay-for-play” at all levels of power. Any serious attempt to curb it is a welcome sign for these 1.2 billion people, even if it entails temporary inconvenience.

All this speaks to Modi’s finely-tuned populist instincts. After his landslide 2014 election, many analysts hoped the new prime Minister would rejuvenate a struggling economy by pushing structural reforms that were effective but unpopular, such as removing cumbersome labor laws or privatizing sclerotic public sector banks. He proved reluctant to do so, skirting controversial policies in favor of grand symbolic gestures, including a national campaign to sweep up India’s squalid streets.

Now, however, he has picked as the defining battle of his premiership a measure of questionable effectiveness but remarkable popularity, especially given the massive inconvenience it is still causing. If that public sentiment holds, Modi’s gutsy (and arguably reckless) move will secure a remarkable political victory.

While demonetization came as a shock, the problems of what is widely known as “black money” are only too familiar. India is one of the world’s most cash-dependent nations. Estimates suggest the grey economy accounts for between a fifth and a quarter of gross domestic product. Only a tiny fraction of workers pay income tax. Sectors such as real estate and jewelry retail, not to mention the funding of political parties, rely extensively on illicit cash.


Comment: How much does it impact residential real estate in India?

Impact of Demonetization on Residential Real Estate

Since Modi’s surprise announcement, the ripples have been spreading through the already disturbed sector, which has been experiencing excruciatingly slow growth in recent times.

Poor sales leading to almost flat prices, heavy liquidity challenges and high unsold inventory have all colluded to keep real estate sector away from fulfilling its potential – and provide necessary residential stability to average citizens.

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The luxury and high-end segments of residential real estate will also see a major impact from this exercise, since it is another area which has seen a lot of payments done in cash. The legal banking/financing channels have accounted for only a small part of all transactions in this space. The demonetization move is likely to result in luxury property prices dipping by as much as 25-30% as sellers struggle to offload properties to generate liquidity. This means that luxury home buyers will suddenly have a much wider bandwidth of options to choose from.

Whether Modi’s shock-and-awe effort will clear any of this up is less clear. His backers argue the move will wipe out stockpiles of dirty money, jolting illegal activity back into the formal economy. They claim the difficulties of getting cash will push millions to use digital payments, boosting e-commerce. Further unspecified anti-corruption reforms in future will then stop the same black money problems recurring all over again once new notes are in place.

Many economists are doubtful. Serious racketeers and criminals rarely keep large cash holdings, instead parking it in real estate or stashing it in banks abroad. Legitimate traders and small holders — who tend to be strong supporters of Modi — do hold stockpiles, however. “The minor entrepreneur, the shopkeeper, the farmer will be hurt by this,” says Pranjul Bhandari, an economist at HSBC in Mumbai. “And even among the bad guys, the risk is you catch the minnows, but the big fish escape. ”

Effective or not, the policy is going to force the economy to take a short-run hit. Bhandari thinks output may fall by as much 1 per cent next year. Ambit, a Mumbai-based broker, predicts a more dramatic fall, bringing growth close to zero over the next few quarters. Either way, India risks losing, albeit temporarily, its recently-won position as the world’s fastest growing major economy.

“This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades,” Harvard University’s Larry Summers wrote in a blog post this week. But all that pain, he argued, would deliver little: “Corruption will continue, albeit with slightly different arrangements.”

Given all this uncertainty, why did Modi do it? India loves a conspiracy theory, and rumors have spread that the prime minister was motivated by narrow electoral calculations. Modi’s Hindu nationalist Bharatiya Janata Party faces a run of vital regional elections over the next six months, including in Uttar Pradesh, the most populous state. All political parties rely on off-the-books money to fund campaigns and pay workers, so the BJP’s campaigns will take a hit. But given its large financial resources, the theory went, it might be better able to absorb the damage than its rivals, giving it an advantage.

There is more than a grain of truth to this, but the more important political calculation stems from anxiety over Modi’s previously wishy-washy approach to corruption. Rooting out graft was his signature campaign issue in 2014. A leader of unquestioned personal integrity, he remains seized by the issue. “Did you vote for me to abolish corruption?” he asked rhetorically during his emotional press conference earlier this month. “If you asked me, should I do it or not?” .

Despite that, until now, his record was mixed. The mega scams that besmirched India’s reputation under its previous government have stopped. But Modi has done little to demonstrate that India’s wider plague of routine bribery and endemic rule-bending is being brought under control. Earlier measures, including a black money amnesty, were low profile, and only moderately successful.

This created a risk. Rival politicians were unlikely to castigate his government for its failure to introduce disruptive structural reforms, as economists might have hoped. But those same rivals were very likely to attack the BJP for doing too little on black money, as Modi discovered when he was handed a surprise defeat by an anti-corruption party in elections in New Delhi last year. A bold, far-reaching step was needed to ram home his government’s bona fides. Demonetization was perfect.

In this, Modi’s approach closely resembled that of his counterpart Chinese President Xi Jinping, whose anti-corruption drive against corrupt officials is widely viewed as questionably effective and politically driven, but is enduringly popular with the public.

Whether that support continues in Modi’s case now depends less on whether demonetization actually works, and more on how quickly banks lines shorten and ATMs fill up. If opinion does turn, it will be a serious blow to Modi’s leadership, although not a fatal one. But given the stoic public reaction thus far, it it is more likely that Modi will be rewarded. Finally, India’s public has the Prime Minister they thought they voted for in 2014: a populist strongman taking dramatic measures on corruption. It is clear they like what they see.