India's Demonetisation Scheme: A High Stakes Move to Attack India’s Informal Economy

India’s demonetisation scheme announced at the end of 2016 is perhaps the boldest move made by Prime Minister Narendra Modi since taking office in 2014. In a surprise and globally unprecedented action, at least on this scale, the government cancelled all high value currency notes in circulation in an attempt to rein in unaccounted cash wealth, fight corruption, increase the size of formal economy and kick start India’s transition to a cashless society. Mr. Modi’s scheme is particularly bold given the Indian economy’s high dependence on cash transactions and the significant portion of legal tender affected by demonetisation, estimated at 86% of the total value of notes in circulation. While the initial public reaction was positive, public sentiments have turned critical due to the inevitable implementation issues associated with secrecy, the resulting economic hardship felt by the poorest and the growing view that the corrupt had found loopholes to evade the pain. Despite these challenges, the move provides a clear signal of the government’s intent to eliminate graft and improve transparency, and is potentially a harbinger of further reforms and measures to come. Further action is clearly needed; while demonetisation has had a significant short-term effect on the size of the underground economy and unaccounted cash, the government will need to not only follow up with aggressive action against other sources of illegal wealth, it will also need to address with the same sense of urgency the structural root causes that give rise to corruption as well as create the financial systems necessary to handle the massive inflows of capital that the formalisation of India’s economy will bring. If India can effectively channel these inflows and repair what has become a corrupt system such that capital is channelled to the most productive uses, it has the potential to accelerate GDP growth to in excess of 10% annually over the next decade and more importantly remove a corrosive influence which has damaged the nation at all levels. However, the timing for addressing these issues is urgent and the price of failure is a steep one. A failure to follow through on this bold move with the necessary follow-on actions required to quickly revive GDP growth and achieve the stated objectives may risk derailing the economic momentum that India’s economy was building prior to demonetisation by undermining the government’s credibility as an agent of reforms. Therefore, this presents the most important political challenge for Mr. Modi in the next general election due in two years’ time and one of the biggest opportunities in modern times to put India onto the right course.

Context: What The Government Did … and Why?

In November of last year, Mr. Modi, in a nationally televised address, announced that his government was demonetising all high value currency in circulation with immediate effect in an attempt to reduce the size of India’s shadow economy. Literally overnight, notes totaling 86% of the total currency in circulation (by value) were cancelled in a country where the share of cash in consumer transactions totals 68% (against 45% in China, 43% in Brazil, 20% in the U.S., and 11% in the U.K.) . The old notes were replaced with new ones, retaining their value until the end of the year but only by exchanging them at a bank, up to an initial limit of 4,000 rupees (about US$60) or by depositing them in a bank account and then using a debit card or electronic transfers for purchases. Widespread approval initially of the move quickly has given way to criticism as poor implementation and a perpetual changing in the rules led to long lines at ATMs, a sharp slowdown in cash-driven sectors (such as jewelry, real estate and automobiles), and fears of the negative economic consequences of the ensuing interruption in consumer spending drove the BSE Sensex to a six month low.

Though the government’s messaging regarding its rationale for demonetisation has shifted in response to public sentiment, at its core the move was clearly designed to curb what has become endemic corruption in India and its corrosive economic impact and reduce the size of the informal economy (c.40-45% of GDP) which has emerged due to widespread tax evasion. Corruption and tax evasion in India are of course not a new phenomenon; they are deeply rooted and have systemic origins tracing back to the early days of its independence. In order to rapidly industrialise post 1947, India adopted a socialist state-driven model of development under Prime Minister Nehru, building out its physical infrastructure, large dams and power plants, along with large industrial units through state-owned companies which were deliberately insulated from international competition. While India achieved initial developmental success, the dominance of the state and the large discretionary powers afforded to the bureaucracy stifled any outside competition and bred rampant corruption at all levels of the government, thereby constraining the private sector and productivity and resulting in the infamous “Hindu Rate” of growth of 3.5%. Simultaneously, punitive levels of taxes on the private sector and households resulted in widespread tax evasion and corruption in the country’s tax bureaucracy.

India’s liberalisation in the 1990s provided partial relief to the problem of growth, opening up more and more sectors to private and foreign investment and privatising key state assets. However, vestiges of the statist model remained, breeding a new form of crony capitalism through a political-industrial nexus, which prevented a vast majority of India’s population from participating in the benefits of economic development. This came to a head with the large scale ‘scams’ relating to the allocation of government resources between 2009-2014, which resulted in a paralysis of the government’s ability to push forward with reforms and a rapid erosion of both international and domestic confidence in the Indian system. During this period, foreign direct investment (FDI) inflows declined by 38%, the currency depreciated by 49% , and GDP growth fell to 5.6% in 2012 (from 10.3% in 2010) . It is against this backdrop that Mr. Modi was voted into power in 2014, with clean and effective government being one of the key electoral promises that secured him the largest electoral majority in 25 years.

The need to fight corruption is critical to ensuring India’s continued growth. India’s cash economy is c.1.5x larger than China and 3x larger than Brazil’s , and reducing India’s cash in circulation as a proportion of GDP in line with other large economies could channel up to 3-5% of GDP into financial savings and, provided the additional capital is allocated across productive investments, this could boost GDP growth by up to 1% . Mr. Modi’s first two years in office were spent addressing the core issues of policy paralysis and a decline in investment, launching a broad range of initiatives across including financial inclusion, infrastructure and welfare and reigniting international and domestic investor confidence in order to attract much needed capital towards India’s development requirements. This has helped India’s growth recover to the 7-8% zone. However, as pointed out many times before , India has both an opportunity and a need to create much more rapid growth (8-10% and higher) to provide the scale of economic opportunity required for its burgeoning working age population, which is expected to rise from the current 0.9 billion (out of population of 1.3bn) to 1.1 billion by 2050 (out of a population of 1.6bn) . To do this, it needs to tackle some fundamental structural issues – which include corruption, a lack of financial savings, an inefficient tax structure and a state-dominated financial system which has failed to allocate the nation’s capital effectively. In this context, demonetisation can be seen potentially as a tool that meets the key objective of reducing the size of the cash and informal economy and beginning the journey towards addressing the culture of corruption prevalent in many parts of society.

India’s Demonetisation Scorecard

In implementing such a radical (and politically risky) reform, the few members of the government involved clearly had difficult choices to make between maintaining the secrecy (and therefore the effectiveness) of the scheme and developing a comprehensive plan that might have addressed some of these issues (but surely would have led to public leak given the number of people and time such a plan would have involved). Having chosen surprise, the planning was necessarily limited and has led to poor execution by both the government and the central bank, with citizens waiting in long lines at ATMs, banks running out of small denomination currency, and people without bank accounts left with no means of conducting routine transactions, leaving some to resorting to barter for their daily needs. While there were some instances of individuals getting caught with large sums of cash, most people who had stocks of unaccounted cash, appear to have found innovative ways to convert their funds into the new currency . In response to this seemingly widespread money laundering, Mr. Modi has publicly stated that these individuals will not be able to escape investigation and will be held accountable for the illicit cash they have converted. Clearly, the level of corruption was decades in the making and taking the score too soon on the success of the fight against it would be a mistake.

Therefore, while the domestic sentiment in the aftershock of demonetisation is negative, it is important to weigh the actual results to date along with the potential long-term benefits, including:

  • 97% of Currency Declared. By the end of 2016, 97% of all demonetised currency had been deposited into banks or exchanged for new ones, against initial government estimates of only 80%, and approximately US$135bn (or c.60% of the demonetised total) had been injected through new 500 and 2000 Rupee bank notes to ensure a substantial portion of the funds remain in the system. This means that most of expected illicit cash has been cycled into the system and what happens to it now remains to be seen.
  • 33% Expected Increase in the Size of the Formal Economy. Estimates show that approximately 40-45% of India’s economic activity has traditionally happened off the books in the informal sector, comprised largely of small and medium enterprises. These businesses have been able to remain viable against organized businesses primarily due to their ability to evade taxes by dealing in cash, while a complex web of indirect taxes (to be replaced by a unified goods and services tax later this year) made large scale commerce relatively uncompetitive. Demonetisation will, at least in the near term, reduce the viability of these businesses as they will cede market share to their peers in the organised sector, which has historically been able to generate higher returns on investment and growth .
  • 3m New Bank Accounts and Sharp Increase in Electronic Transactions. In a little over two months more than three million new bank accounts have been opened in India, which should contribute meaningfully to a decrease in the country’s high reliance on cash. During this period monthly debit card transactions increased to 243 million, nearly twice as high as the monthly average over the first nine months of the year, while similar spikes were observed in credit card transactions and mobile and electronic payments .
  • Banks Recapitalised with up to US$90bn. Credit growth in India had slowed down sharply as the government forced a restructuring of bank balance sheets with non-performing assets being recognized and provisioned for, resulting in total non-performing assets of c.US$90bn as of September 2016 , with the bulk of these in India’s public sector banks. Demonetisation has resulted in a c.US$120bn of deposits against which only c.US$32bn in new currency has been withdrawn, effectively providing India’s banks with nearly US$90bn of additional capital , of which a significant portion may stay in the system creating an effective recapitalization of the banking system, where large numbers of non-performing assets have made lending activities challenging.
  • 26% Growth in Tax Collections. Demonetisation, along with the government’s one time amnesty for individuals that allowed for individuals to deposit wealth in exchange for a one-time tax penalty, but no further punishment, resulted in direct and indirect tax collections since November increasing by 14% and 26% respectively, and total tax collections in November 2016 being 268% higher than in November 2015 .
  • Up to 2% Negative Near-Term Impact On GDP Growth. The removal of bank notes has driven short-term disruptions in cash-driven sectors such as real estate, jewelry and automobiles along with small and medium enterprises in the informal sectors. While it is too early to assess the actual magnitude and length of this negative impact on India’s GDP growth, estimates have ranged widely with highly-politicised figures of up to 2% . While demonetisation will certainly have a negative impact on growth for 1-2 quarters, the longer term impact is likely to be positive, with an increase in financial savings, a reduction in the size of the comparatively less productive informal sector and an improvement in the government’s fiscal position.

Given all of the above it is clear that India’s demonetisation, despite the problems in its implementation, was clearly justified and an important step in the right direction. In that sense, the negative economic impact over the short-term is an investment in future growth and in improving the quality of the national system of conduct across the board (not unlike the cost of improving environmental protection in a country where the impact of pollution has been estimated to cost 5.7% of GDP every year ). What is also clear is that there are many more steps the government will need to take to root out corruption. For one thing, most unaccounted wealth in India is in the form of physical assets such as real estate and jewelry, not cash (which by some means accounts for as little as 5% of the total ). Corruption may well be something that is stemmed if the opportunity and incentive is removed, the chance of gain is too low and/or if the fear of unpalatable reprisals is credible. If so, the Modi government may only need to focus on maintaining a series of credible initiatives to ensure that corruption does not creep back too strongly into the national system. However, if that is not the case, there is more radical thinking required on how to ensure that the system will not just revert back to its old ways after the economy is fully re-monetised.

What’s Next: The Initiative Cannot be Allowed to Fail

For the time being, India has wiped a sizeable part of the slate clean on accounted cash and should hypothetically be able to identify exactly how much cash is held by each citizen. However, demonetisation can be compared to liposuction – providing a one-time benefit that needs to be followed up with changes in behaviours to make it permanent, lest bad habits erode the gains and return India to the status quo ante bellum. This will clearly be a massive undertaking and one unprecedented in a country of India’s complexity and size.

In China, which also faces massive corruption problems (and ranks equally low on the Corruptions Perceptions Index in 85th place), incoming President Xi Jinping kicked off a massive anti-corruption campaign that is now in its 5th year . While independent verification is strictly limited, the results of China’s anti-corruption efforts appear to be real, with over 100,000 people indicted to date, including over 120 high ranking officials and five national leaders. India as an open pluralist democracy would not wish to follow such a path, nor would it work. Indeed, China’s campaign has political objectives that are not applicable to India. China, unlike India’s multi-party democracy, is an authoritarian one-party state in which the campaign serves multiple purposes, including purging opposing leadership factions and restoring the legitimacy of the party’s rule. Further, China’s campaign is taking place in a closed environment without transparency or the participation of civil society, which would be impossible in India’s more open society with a vigorous and free press. Finally, given that China’s campaign is being conducted to a great extent by the party on party members, it is able to skirt due process and legal norms or use the wide-ranging powers available to it in a way that India’s democracy never could. India’s anti-corruption efforts, for better or for worse will need to take place in the context of its own culture and norms, and will accordingly likely be noisy and messy, but also reasonably transparent and non-violent.

The removal of cash from a cash-based society inevitably causes suffering. This cost falls heavily on the poor and small-scale businesses that make up the majority of the India’s population and economy. The support from these groups was initially the strongest but as the struggle to survive without cash continues, many feel the pain and are calling for relief. The government has partially responded but needs to be highly alert to the suffering of the very groups that they intend to benefit by fixing a fundamentally unfair system. Amongst the measures taken, the government provided for government-owned petrol pumps, post offices and other institutions to exchange cash, temporarily removed highway tolls, provided larger withdrawal limits to people who needed to finance wedding expenditures and made a fleet of defense jets available to transport newly-printed cash from the country’s mints to various parts of the country. Despite these relief measures, the sheer impact of demonetisation has of course provided opposition groups with the opportunity to inflict damage on the government by exploiting the suffering caused to ordinary people. As a result, public sentiment is divided into two highly polarized camps: firstly, those who believe that the government’s intent was correct but that it faltered in the implementation of the move, and is working towards resolving issues. And secondly, those who believe the entire exercise was misconceived from the very start with the short-term costs on the economy outweighing any potential long-term benefits (see inset on previous page for an illustrative example of views from different ends of the political spectrum).

Looking ahead, the answer on whether this was an appropriate move by the government will depend on whether it is able to follow-up with a comprehensive plan that addresses the core issues it was looking to address through demonetisation, and will likely need to include the following:

  1. Tackling Unaccounted Wealth Across Other Asset Classes. Gold and real estate account for more than 60% of total household savings in India, and more than 50% of total illegal wealth. Actively addressing both sectors will be critical as the government looks to escalate its efforts to reduce the size of India’s shadow economy. In the case of gold, the government’s challenge will be to bring a greater share of gold transactions into the formal taxation system. The implementation of the Goods and Services Tax (GST), which looks to harmonise India’s myriad central and state levies into a single national sales tax, should go a long way towards achieving this goal, and the government should ensure that the rollout and implementation of the GST is seamless (unlike with demonetisation, it cannot use the argument of having to keep it secret). Real estate has been a natural asset to park illegal money due to the highly localised rules, combined with opaque approval processes in most parts of India, which allow government officials to demand bribes for providing permissions, and a tax framework which encourages buyers and sellers to transact in cash. Reversing this will require more transparency in approval processes (such as the single-window clearance that has been rolled out for larger public projects) and transaction records, combined with changing the tax structure to disincentivise transacting in cash.
  2. Changing the Laws to Increase Government Transparency. The only way for a government to lead a fight against corruption is to lead by example. This starts with institutionalising the anti-corruption mechanisms such as the proposed corruption ombudsman, the Jan Lokpal, which would have the powers to investigate. Despite being passed into law more than three years ago, the Jan Lokpal has yet to be set up, with government officials and activists being unable to agree on its role and reach. The government needs to end this deadlock as a priority, investing the Jan Lokpal with an effective range of investigative powers (the government will of course need to be mindful of the Chinese lesson in how far this can go). Laws pertaining to campaign finance are also in need of urgent reform. Under current laws, political parties are not required to report any contributions below INR 20,000 and money launderers and political officials have exploited this loophole repeatedly. Replacing these laws with legislation that requires political parties to disclose all sources of funding, no matter how small, is a critical step to help identify and eliminate illicit wealth in the country. Another essential enabling protection is a strong law and process regarding the protection of whistle-blowers. Current laws on the subject provide for very little protection, which serves as a disincentive to individuals coming forward and report instances of corruption willingly. Replacing or amending the current whistle-blower act with one that has strong protection mechanisms that are in line with global standards would represent an important step in India’s government leading the fight against corruption by example.
  3. Investing in and Empowering Strong Enforcement. While new laws can be made to strengthen India’s anti-corruption framework, the reality is that even the implementation of the existing anti-corruption laws remains weak. India’s Central Vigilance Commission (the CVC) is tasked with monitoring and combating governmental corruption across 5.7 million government officials, however employs only 250 people. As per international standards, the strength of this organisation should increase over one-hundredfold and the government must urgently address this resource gap (both in the anti-corruption watchdog agencies and the income tax department) to ensure the identification and prosecution of corrupt government officials. There is also a lack of capacity in the court system to prosecute corruption effectively in a time-bound manner, so as to not encourage abuse of the laws, which needs to be urgently addressed through fast-track courts or other such mechanisms, to lend credibility to the laws. Recent times have required a trial by media to gain the necessary attention. While a strong and free media is clearly important, this sets a dangerous precedent. A system in which the media needs to step in to prosecute corruption can just as easily be abused.
  4. Creating the Banking and Payment Infrastructure. The government will also need to expand both digital and physical banking infrastructure across India to continue to migrate economic activity into the formal economy. This starts with creating enough bank branches and ATMs that cash and banking services are easily accessible to all. The country today has only 18 ATMs and 13 bank branches per 100,000 people, (compared to 77 ATMs and 20 branches in a moderately developed country such as Turkey) . To raise access to 20 branches and 50 ATMs per 100,000 people, India needs to invest c.US$5.3bn , particularly in rural areas to capture a larger share of the economic transactions taking place there. In parallel, the government will need to create robust and secure infrastructure for digital payments to overcome the physical limitations imposed by its population and geography, and incentivise electronic vs. cash transactions. Systems to distribute public goods and services using electronic payments and biometric data have been successfully piloted in certain states (such as Andhra Pradesh), and a similar system is now required on a national scale.
  5. Reforming or Privatising the Public Sector Banks. Finally, the government needs to push forward with reforms to the financial system, including restructuring and eventually privatising the state-owned banks which control c.70% of the country’s deposits and have historically been drivers of poor capital allocation decisions. This is critical to ensure that the additional financial savings generated through the reduction of the underground economy are effectively deployed. State banks are no longer competitive with private banks without the guarantee of support from the government. Their officers are underpaid vs. their peers in private banks and, with archaic risk systems, are fertile grounds for officials looking to augment their official monthly income with bribes or other illegal payments. In 2016, the IMF reported that the share of non-performing assets (NPAs) in India’s banking system increased from 12.9% to 14.9%, with large (corporate) borrowers accounting for more than 85% of these bad loans , and the bad loans overwhelmingly concentrated with the public sector banks, which suggests that large corporates in India have been able to successfully take advantage of corruption within the public sector banking system. Reforming the state owned banks will therefore also directly challenge these crony capitalists who are exploiting the inherent inefficiencies of India’s public sector banks.

Taken together, these initiatives have the potential to both tackle and disincentivise corruption in a systematic manner, effectively channel savings into the financial system, and provide new channels for the deployment of capital, ultimately to put India on a high growth trajectory. A key consideration for the government will hinge on the speed and nature of execution: how hard and fast can or must these initiatives be pushed to be effective? The lessons of demonetisation’s implementation will clearly need to be internalised if the government is to avoid repeating its mistakes. However, it is important to recognize that demonetisation was a sledgehammer that has shaken the system, not so much because of its impact but because it has signaled the government’s willingness to risk political capital to tackle India’s biggest and deepest-rooted problems that their predecessors did not dare to touch. The decision the NDA government with Mr. Modi at its helm will now need to take is whether to follow up with a series of more sledgehammers, one after the other, or, having now demonstrated its commitment, a more measured pace that rolls out reforms in a coherent and integrated basis. The ultimate success or failure of reforms may well depend on these considerations.

What Good Looks Like: Accelerating the Economy to 10% Growth

The Economic Upside and Downside Scenario has Political Implications

Over the medium-to-long term, demonetisation, combined with the logical follow-on reforms outlined above, will positively impact India’s growth through three fundamental changes: (i) the rate of financial savings will increase as the country channels its savings into the financial sector as opposed to unproductive or physical assets like cash, gold and land, thereby providing more financing for fixed asset investment; (ii) a more robust domestic policy ecosystem and financial sector will likely attract more foreign investment, thereby further increasing the investment rate; and (iii) the efficiency with which India’s domestic and international capital is allocated will improve due to a greater proportion of it being intermediated by private sector financial channels towards the highest return assets (risk-adjusted). The analysis below outlines what such a growth revival could look like: India would generate an additional US$525bn of investment over the next five years, and against the current baseline GDP growth forecast from the IMF of 7.8% average GDP growth between 2017-2021, India’s GDP could grow by an average of 9.1% (with growth touching 10% by 2021) if the investment rate can increase to 36% of GDP (vs. current forecast of 33%) and capital efficiency reaches 28% (vs. current forecast of 24%) by 2021, in line with the levels the Indian economy was able to achieve in the 2005-2007 period. If India is able to sustain this trajectory, then this alone could add US$1.7 trillion to the Indian economy (vs. the baseline IMF forecast) over the next decade.

On the other hand, the penalty for not following through on demonetisation is also severe. A prolonged economic slowdown which lasts through much of 2017, combined with a tepid recovery with the economy failing to generate sustainably higher financial savings, and a state-dominated financial system which has a proven ability to mismanage assets, will likely result in a stagnation of the investment rate and capital efficiency at or around current levels, or lower. In such a scenario, India’s growth could just as easily stagnate and potentially decelerate to 7% or lower. In such a scenario, it is difficult to imagine Mr. Modi’s BJP holding on to its parliamentary majority in the 2019 election, whereas if he is able to revive growth to 8%+, then the negative sentiments against his government which have been triggered by demonetisation will likely abate considerably.

Averting Political Crises by Recouping Short Term GDP Losses

A war of words has begun and as we have seen the world over, words can unsettle politics and overthrow regimes. Many domestic and international observers feel that demonetisation is an “own goal” in a nation that was being steadily steered towards 8%+ GDP growth. Therefore, the most effective move would be to now utilize the capital in the system to rapidly revive GDP growth and recoup the loss and start accruing net benefits within a year, well in time for the next election. Although time is short, Mr. Modi can focus the follow-on reforms around some critical areas in order to help achieve this outcome, including:

  1. High-ROIC Industries. International studies on the multiplier effect in various industries suggests that there are certain predictably high return-on-capital sectors, such as transport, agriculture, technology, communications and services where the incremental output associated with additional investment is higher
  2. Increasing Disposable Incomes of the Poor. Marginal propensity to consume is highest at the lower ends of the income spectrum, so tax policies, financing incentives, and other fiscal measures that provide a boost to disposable incomes of India’s rural poor will have a more direct flow-through to consumption
  3. Incentivising Banks to Resume Making Loans. With credit growth having slowed down due to the build-up of stressed assets in the system, it will be up to the banks whether to use the additional capital from demonetisation and other reform to shore up balance sheets, or to resume lending. With a large portion of the banking sector under the government’s direct control, the government can provide incentives to banks to resume lending, in particular to small and medium enterprises, subject to stricter risk-assessment measures being put in place
  4. Promoting the Creation of a Corporate Bond Market. The government can also ensure a rapid revival in credit growth by promoting the growth of India’s nascent market for corporate bonds thereby providing another avenue to channel savings into productive investment, including providing tax incentives on interest, and ensuring robust approval and regulatory mechanisms
  5. Leveraging Existing Savings and Investment. The increase in financial savings and deposits resulting from demonetisation can also be leveraged by the banks, which is a path the government should cautiously take by raising external debt financing for the banks on the back of their improved balance sheet positions following demonetisation (perhaps even looking at innovative convertible equity instruments as a path towards privatisation of the banks)

The acceleration of growth clearly will take time, but if the government acts swiftly rather than getting bogged down in the political backlash from demonetisation, a portion of the benefits will likely materialise (in the form of 8+% growth) before the 2019 general election, providing the economic tailwind that Mr. Modi will need to help retain his parliamentary majority. The success of these initiatives will not only change the country, it will also provide a blueprint that other developing economies and economies in transition which are facing similar structural issues can use to rapidly overhaul their financial sectors and accelerate their economies. There is potentially an equally large political and economic cost to failing to act or leaving these big reforms for later. If the problem is not fully gripped, India’s economy will pay a steep price, with international investor confidence undermined (leading to a decline in FDI) as structural problems come to the fore again in the absence of ongoing momentum on reforms, with growth likely to remain in the 6-7% zone. Further, if the government fails to push forward with even bolder reforms, implicitly admitting its failure, Mr. Modi will likely pay a political cost for demonetisation both immediately in the upcoming state elections, and in 2019.


For Mr. Modi, there is no time like the present. This is the promise on which he received his historic mandate, and Indian voters have proven to be unforgiving to incumbents who betray their expectations. More fundamentally, there is no time like the present for India itself, too. In its almost 70 years as an independent nation, India has been unable to fulfil its potential and effectively leverage its large and growing population, its abundance of natural resources, the high quality of its education, the entrepreneurship of its people or the advantages provided by its democratic institutions and the rule of law. The reforms and liberalisations of the 1990s created the basis for the early 2000s surge that saw India’s GDP growth rise to c.10% and then policy paralysis, corruption and mismanagement saw it fall to 5-6%. That surge provided a glimpse of what India can potentially achieve in terms of growth and development, and Mr. Modi now has an opportunity to take the economy back there in a much more sustainable manner and as a cleaner platform from which India can grow. Of course there will be challenges in following up with the tough changes required, however, it is time to double down on the bet rather than be exhausted by the problems of implementation and politics. The opposition feel that for the first time since their election defeat to Mr. Modi, they have something that offers them an opportunity to turn the tide back their way. Their prize is to turn the focus of the much-burdened poor towards the suffering caused by demonetisation, to undermine the government’s and Mr. Modi’s credibility as an agent of change and good administration, and set the grounds for a comeback in the 2019 elections.

Taking a historic perspective, this is the ‘big thing’ that Mr. Modi was meant to do, and all of his admitted successes to date may well count for little in the overall scheme of things if it is left unaddressed. Former Prime Minister Manmohan Singh is rightly seen as the architect of India’s first wave of reforms (as finance minister at the time) but is likely to be remembered more for his inability to follow up with further liberalisation and ineffectiveness to fight the corruption in his ranks when he was at the head of government. Mr. Modi has the opportunity to earn a place in the pantheon of India’s great leaders, but this will require more than launching demonetisation and eliminating bureaucracy and cutting red tape. Demonetisation followed through with a more comprehensive programme to tackle the roots of corruption and install a transparent system will determine whether India over the next decade will be unbound or remain fettered and that can be of real significance.

Mr. Modi has launched a high stakes bid to change the nature of Indian society. Having raised the nation in two years from very shallow waters, he has steered the nation into a storm. This is “Big History” in the making. The success of this one programme lays the foundation for a new culture in the nation that is more closely aligned with its core values, one that allows the individual to lead their lives without enduring or mastering a system of corruption. This is also an opportunity for Mr. Modi to make his mark in India’s history. Mr. Modi’s past, embroiled in the scandal of sectarian violence, could well be overshadowed by a present in which he placed the nation on a much stronger and more noble footing. Given the phenomenon of corruption is also a global one, Mr. Modi stands to have provided a historic example to the world. He has said he is willing to stake his life and political future on the success of it. If it is to not come to that, it is now all about executing the plan and navigating the nation through the storm.


1. Source: CLSA Research, as reported in the Business Standard (14-Nov-2016)

2. Today, India ranks 80th on Tranparency International’s Global Corruption Perceptions Index, below such countries as Panama and Indonesia, and corruption is estimated to directly cost India 1.5% of GDP each year (source: Dev Kar, The Drivers and Dynamics of Illicit Financial Flows from India 1948-2008)

3. The period saw multiple large-scale corruption scandals involving senior government officials including the “2G Scam” (a purported loss of US$5bn to the exchequer through the corrupt allocation of telecom spectrum), the “Coal Scam” (US$28bn of coal assets discretionarily allocated as opposed to sold through auctions), source: Comptroller and Auditor General of India

4. Between Aug-2011 and Aug-2013, Source: CapitalIQ

5. Source: IMF World Economic Outlook Database, Oct-2016

6. Source: LiveMint, Central Banks of respective countries, refers to ratio of currency in circulation to annual nominal GDP

7. Source: GPC Analysis, please refer to the Sign leader from Aug-2016, Financial Reforms in India: Restructuring the Nation’s Financial Machine for Double-Digit Growth

8. Please refer to the Sign Leader from June 2016 (India’s Steady Pace of Change: The NDA Government at Two Years) for a detailed report card on the Modi government and an overview of the various schemes introduced in its first two years

9. Please refer to earlier Signs including India Wide Open: Transforming India Now for 2040 (Feb 2012), 12% Growth Agenda: A Blueprint for the New Government (Mar 2014), India Has to Create Big Waves to Succeed (Apr 2015), Realising India’s Demographic Dividend: The People Determine Success (Feb 2016) along with several sector specific pieces on agriculture, manufacturing, financial services and others in the Sign Archives

10. Source: UN Population Database, UN Department of Economic and Social Affairs

11. For example, there have been reports of cases of bank managers converting large sums on a preferential basis for a ‘fee’, cash being divided across hundreds of bank accounts to avoid attracting attention and others, along with a host of other more clever schemes.

12. Source: Reserve Bank of India

13. Source: Ambit Capital Research, Nov-2016; Ambit expect the size of the informal economy to reduce to 20% by 2019 as a result

14. Source: LiveMint, How India Coped with Demonetisation, 16-Jan-2016

15. Source: India Ministry of Finance report to Parliament

16. Based on data from Reserve Bank of India as of Jan-2016

17. Source: Forbes India

18. This estimate was put forward by former Prime Minister Manmohan Singh in a rebuttal to the government in Parliament

19. Source: World Bank estimate

20. Source: Based on data from income tax probes in 2016, less than 5% of the total ill-gotten assets were in the form of cash, as reported in the Hindustan Times (12-Nov-2016)

21. Please refer to the Sign Leader from Mar-2016, The Logic Underlying President Xi’s Anti-Corruption Campaign

22. Source: Yes Bank

23. The annual cost of setting up and operating a bank branch in India is c.US$40,000, while the cost of setting up an ATM in India is US$4,500; Source: GPC estimates

24. Source: International Monetary Fund