Poll panel has just announced acid test for Modi-nomics; may good economics win!

Does good economics equal good politics? The Election Commission of India has just set a date for a firm verdict on this question. The assembly elections announced on Wednesday could not have come at a more strategic time; the Modi government is just done with demonetisation, while it would have the record straight on its Budget plans and GST implementation before the first vote is cast.

Not that Team Modi did not foresee this coming before it pressed the PLAY button on demonetisation on November 8. On hindsight, and going by the nervousness the government has showed over the past few weeks, it does not even look like calculated risk-taking.

The distress that demonetisation caused to the citizenry and the pain it spread across different sectors of the economy have left a bitter taste, which may not go away too soon.

Not surprisingly, the Modi camp appears nervous. On December 31, Prime Minister Narendra Modi looked ill at ease, explaining and justifying his clampdown on black money, whose size the nation is still estimating. Modi doled out sops to assuage the anguish of the poor and the middle class, who would have had spent most of the previous two months, queuing up for cash at banks and ATMs; signs that the Prime Minister wants to compensate now.

But then, who has ever said demonetisation is good economics?

In their first reactions to demonetisation, almost every market expert worth his salt acclaimed the Modi government’s ‘bold move’ to cleanse the economy and cripple the parallel black economy. With the passage of time, as the market tanked in nervousness and the pain began to show, a dissident voice emerged among the same analysts; and that tribe has kept on growing with every passing day.

Economists have since debated whether demonetisation would trim India’s growth rate this year by 2 per cent or less than half. The stock market surrendered all the gains accumulated over the previous 10 months.

Unofficially, it had been estimated that some Rs 4-5 lakh crore of the cash in circulation will not come back into the system following demonetisation, as it would have got trapped in unaccounted wealth. But final numbers showed this amount may not have been more than Rs 1 lakh crore. These numbers dented confidence of the public, who are now wondering if the pain they suffered all through those 50 days was worth it.

Tax sleuths are closely examining the large deposits and are taxing them, which will eventually show up in direct tax collections. A large chunk of the fake currency notes in circulation – estimated at around Rs 400 crore – is said to have been wiped out.

Unfortunately, these numbers would go unnoticed by most of the 16 crore people, who will vote in these elections in Uttar Pradesh, Punjab, Uttarakhand, Manipur and Goa through February and March.

The broad perception getting established now is that the government might have hugely over-estimated the volume of black money in the system.

Is that what is giving Team Modi butterflies in the stomach ahead of these elections, which are bound to be seen as a referendum on its economic policies?

Prime Minister Modi does not show his nervousness easily. But his body language is changing. Of late, his tone has been more of wooing and pleading for votes, so atypical of a political leader known for talking businesslike and making a case for political mandate.

GST is good economics, but demonetisation has derailed it, as the Opposition ganged up over cash ban to hijack proceedings in Parliament, when it was supposed to vote on those all-important tax changes. States are getting jittery about the cash ban shrinking their revenues and are bargaining for every penny at the GST negotiations with the Centre, leaving the whole process in limbo.

The three years of Modi government has been known more for bold policies and bilateral diplomacy than anything else. Had demonetisation never happened, the brave act to strike terrorists on Pakistan’s soil would possibly have been its showcase in these polls.

But it’s economics above anything else this time around!

Rationalists would pray Team Modi wins these elections; not for their love for him, but because the takeaway from the election outcome would have more to it than just a five-year term. Should it lose, no government would ever dare to be bold with policies; forget the immediate pain it will cause to financial markets and the dent it will create in the confidence of foreign investors and rating agencies on India’s polity.

History shows immediate concerns matter more for the voting public than macro issues. If the 16 crore voters do not easily forget the pain of queuing up for cash, willy-nilly they might end up scripting a dark chapter in India’s economic history.