What if demonetisation turns out to be a success, how will history remember Modi?

Only time will tell whether PM would turn out to be a Thatcher or Reagan for India.

 |  5-minute read |   15-12-2016
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What if demonetisation becomes a success? How will PM Narendra Modi’s triumph stand next to the league of great reformers like Ronald Regan, Deng Xiaoping, Margaret Thatcher and Manmohan Singh? 

If indeed demonetisation yields far-reaching and tangible gains, Modi will, probably, be the first modern politician who will have written a new set of cardinals for economic reforms.

Most economic reforms in recent history have emanated from an impending politico- economic crisis. On this scale, Modi stands as the first such leader who has daringly invited a crisis for the sake of reform.

Demonetisation is, obviously, a radical reset we have ever gone through before. However, it has turned India into the world’s fastest slowing economy from the fastest growing economy and brought an emerging nation to the precipice of joblessness and economic turmoil. 

India’s history helps us with only two instances of radical reforms which were identical to the magnitude of the recent demonetisation. Incidentally, both were exercised as a Hobson’s choice to deal with a crisis on hand even though their results were starkly different.

It was 6.6.66 when Indira Gandhi devalued the rupee by 35.5 per cent. Only a few months earlier, she had taken the seat of prime minister after the death of Lal Bahadur Shastri. The devaluation was done amid economic gloom, drought and political challenges.

The decision, which jolted the nation like an earthquake, was expected to bring foreign capital, funding and boost exports to help the nation escape an imminent crisis. However, the devaluation turned into a huge blunder. International assistance never turned up and the crisis deepened.

After the failure of bold rupee devaluation, Indira unleashed the draconian licence-permit raj on India’s economic governance. The MRTP Act was legislated and private banks were nationalised with the promise of taking the rich's money to the poor people.

The Dark Age of Indian economy ended only with the dawn of reforms in 1991.

margaret-embed_121516123233.jpg Only time will tell whether Modi would turn out to be a Thatcher or Reagan for India. (Photo: Reuters)

The balance of payments crisis of 1991 forced India to go for another round of rupee devaluation. Interestingly, while deciding on the devaluation, PM Narasimha Rao was haunted by the 6.6.66 blunder. The first devaluation of 7 per cent came on July 1 and the second one of 9 per cent was scheduled for July 3, 1991.

Rao was so uncomfortable with the devaluation that on the morning of July 3, he called up Manmohan Singh and directed him to cancel the second devaluation. Manmohan tried to reason with Rao, but the latter was not convinced.

Eventually, Manmohan advised then RBI governor C Rangarajan at 9.30 that morning to hold it, but it was too late. The RBI had already executed the second devaluation at 9 am.

The results of rupee devaluation under the Rao-Manmohan regime were poles apart from that of 1966. Not only did India receive foreign assistance after this radical reform but it also paved the way for foreign inflows and imports after India’s accession into the WTO in 1995.

The rupee's devaluation and successive globalisation placed India in the orbit of emerging economies and changed the face of Indian society.

On November 8 this year, when PM Modi launched demonetisation, India was, in fact, raring to leapfrog into the future after completing 25 years of stellar growth since reforms were introduced in 1991.

Across the globe, radical reforms resulted in the creation of a new middle class and greater empowerment to the people. In the US, Ronald Reagan delivered jobs growth and high consumption through reduction in government control, low inflation and encouragement to private enterprises. 

In Britain, divided between labour unions and the wealthy class, Thatcher’s package insured establishment of the free market, with the help of privatisation, inflation control and limited government. This created a new pro-Thatcher middle class in British society. 

While in China, Deng Xiaoping’s reforms were launched to increase the income of its enormous population. Deng’s reforms turned China into a global economic superpower and formed the world’s largest middle class by pulling 700 million people out of abject poverty. 

Demonetisation is India’s most radical reform since Independence. As it approaches official climax with terrible economic and dubious transparency narratives, the debate is now divided between ostensible gains and tangible losses. We can at least surmise for now that:

- Initially, this reform has disempowered people from their economic liberties.

- Modi’s political success is the result of the support of a restless middle class which is waiting for growth in employment and income. The new Indian middle class is bewilderedly excited with the schadenfreude narrative of monetary socialism while hanging between growing pain and vague hopes.

- Demonetisation may lead to greater government control on the economy.

- The political goals of this reform are visible, but a clear picture of economic benefits is yet to emerge.

Only time will tell whether Modi would turn out to be a Thatcher or Reagan for India. However, even after five years of demonetisation, if indeed India reaps economic benefits similar to what reforms in 1991 triggered, history will be written with the fact that there is no harm in disempowering people initially in order to lead them to a better future.

Also read: Can we no longer trust the Indian rupee?


Anshuman Tiwari Anshuman Tiwari @anshuman1tiwari

Editor, economic analyst, columnist, author

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