Notes Ban Shows PM Modi's Skill In Rebranding The Message

Prime Minister Narendra Modi will go into 2017 watchful but unbowed.

In what will be a busy year of state elections, economists are slashing India's growth forecasts because Prime Minister Narendra Modi's unprecedented cash clampdown is denting demand. The experiment has missed its first marker of success and the almost-daily regulatory flip flops are enraging citizens.

Yet, analysts point to the fact that India hasn't seen bloody riots of the kind witnessed in Venezuela, which followed PM Modi in banning higher-value banknotes before it reversed the move. Perhaps most importantly, a fractured opposition hasn't been able to capitalize on the social pain triggered by the world's most sweeping currency policy change in decades.

"So far there has been no successful mobilization of public opinion against demonetization," said Sanjaya Baru, New Delhi-based director at the International Institute of Strategic Studies and media adviser to Narendra Modi's predecessor, who's written books analyzing former administrations. "Though we can't say what's going to happen in the future, at least so far it would seem like Modi is on top."

The move tests PM Modi's reputation as the master of the message. He has touted the cash ban as India's strongest step against tax evasion and graft in a nation where rising economic inequality helped him sweep to power with the biggest electoral mandate in 30 years.

PM Narendra Modi on Nov. 8 banned 500 and 1,000 rupee notes, removing 86 percent of currency in circulation. With TVs beaming pictures of serpentine queues spilling out of banks and newspapers carrying stories of rural distress, he pleaded with Indians to give him until Dec. 30 to ease the strife.

Here's the impact: India's economy is projected to grow 6.5 percent October-December instead of the 7.8 percent economists had predicted earlier. Moody's Investors Service says asset quality at Indian banks -- reeling under a pile of bad loans -- will weaken. Small businesses, the biggest creators of jobs, are estimated to forfeit transactions worth $9 billion.

International observers such as former U.S. Treasury Secretary Lawrence Summers and former World Bank Chief Economist Kaushik Basu have criticized Modi's move.

"Even if consumption revives quickly on the back of remonetization, investment could remain muted for longer," said Pranjul Bhandari, Mumbai-based economist at HSBC Holdings Plc. "The output gap, that is the slack in the economy, will likely remain negative for two quarters longer than we had initially estimated, making it unattractive for investors."

Medium as Message

And while the potential impact on state polls due in 2017 is not yet clear, the subdued outlook hasn't dented the performance of Narendra Modi's party in municipal elections over the past month.

One reason could be his ability to channel his message via social media, as President-elect Donald Trump does, allowing Narendra Modi to speak directly to the public without any media filter.

"This shows the importance people attach to good governance," PM Modi tweeted on Dec. 20 of the election results.

He, however, hasn't held a single national press conference since taking office and interviews are vetted. Instead, Narendra Modi relies on public speeches and has used the medium more than 10 times since Nov. 8 to defend demonetization.

Incorruptible

Narendra Modi's speeches brim with rhetorical flourish and his bold cash clampdown became important part of his narrative as he approached the half way mark in his term early November.

"Modi presented himself as someone with fire in the belly, willing to change things in the country," said Ullekh NP, author of War Room: The People, Tactics and Technology Behind Narendra Modi's 2014 Win. "People at least for now believe his message; that he's incorruptible, that he has no family, that he's focused on the nation. But unlike an election campaign, where promises suffice, here there's prolonged hardship for people."

Support for Narendra Modi will waver if opposition parties form alliances in Uttar Pradesh, Ullekh said by phone from the key electoral state.

Shifting Goalposts

Narendra Modi's skill in rebranding has allowed him to recast his message even as massive deposits of old notes being turned in at banks robbed him of his main reason for the demonetization.

Indians have deposited 13 trillion rupees of the 15.4 trillion rupees invalidated by Narendra Modi's move, undermining the government's estimate that about 5 trillion rupees of this was unaccounted money and wouldn't reach banks.

"It seems very likely that the original aim of the demonetization drive -- forcing illicit wealth holders to come to light -- has already very nearly failed," said Vaninder Singh, an analyst at NatWest Markets, adding that this has pushed the government to change its commentary to fostering a cashless economy. "At what level of economic pain will we see an inflection in Modi's ratings? The answer depends upon how 'patriotic sacrifice' interacts with economic pain."

Political rivals allege that the shifting goalposts indicate Narendra Modi's Nov. 8 decision was never intended to target black money. Leaders from the main opposition Indian National Congress party said they'll have to hold smaller rallies in Uttar Pradesh due to the cash clampdown. The state's Chief Minister Akhilesh Yadav, from the Samajwadi Party, said he's sure to win because the lines of harassed citizens queuing up at cash machines will now shift to vote for him at polling booths.

Faith and Fear

Uttar Pradesh is due to vote by mid-May. It is India's most populous state and the biggest contributor to farm output. Elections will be held before that in four other states, including Punjab, called the 'bread basket of India.'

"Farmers are hurting," said Ajay Vir Jakhar, chairman of lobby group Farmers' Forum and grandson, son, and brother of Congress politicians. "Demonetization will have limited impact politically because opposition isn't able to take advantage of the pain."

Investors will focus on the government's first growth forecast for the year through March -- due Jan. 7 -- to assess the economic impact. Meanwhile, tax officials are raiding homes and offices across the country in a China-style crackdown on corruption, seizing bundles of currency notes and stashes of gold and jewelry.

Narendra Modi should follow his cash ban by lowering corporate and income tax rates in the budget -- likely Feb. 1 -- to encourage compliance, said analysts at Kotak Institutional Equities Ltd., adding that critics of his Nov. 8 decision are underestimating the "psychological" impact of the step.

The move "will reinforce the faith of the general population in the government's efforts to clean up the system and instill fear in a section of the society, which hitherto has had little regard for the laws of the land," they wrote in a Dec. 19 report. "Faith and fear."