Prime Minister Narendra Modi’s decision to demonetise Rs 500 notes and Rs 1,000 notes on November 8 will provide him with a huge talking point in the months before Punjab, Uttar Pradesh and Goa elect their Assemblies next year. He will depict his government as one that had the courage to battle those who possess black money as part of its endeavour to provide clean governance – a slogan that cheers most.

Yet it is hard to tell whether the cheering masses will still have a smile on their faces a week or two later. This is because much will depend on how smoothly the government is able to implement its demonetisation policy, which can be potentially destabilising.

Impact on politics

One political implication of the demonetisation policy is that it is bound to have an impact on the rivals of the BJP. In Uttar Pradesh, for instance, both the Samajwadi Party and the Bahujan Samaj Party will find their campaign plans severely affected.

This is not because Modi has introduced a new poll issue in the electoral arena, but because both the Samajwadi Party and the Bahujan Samaj Party will be strapped for financial resources with high-value currency notes being taken out of circulation.

Between the two parties, Mayawati’s Bahujan Samaj Party will be hit harder.

Unlike the Bharatiya Janata Party and the Congress, which are the beneficiaries of corporate munificence, the vibrancy of the Bahujan Samaj Party’s campaign, as is true of most state-based political outfits, depends on the money collected through donations from cadres and sympathisers, the resources of individual candidates, and funds gathered from local businessmen.

Before issuing an election ticket to a candidate, the Bahujan Samaj Party takes into account whether the potential candidate commands the financial resources to contribute to the party’s kitty, and also bankroll his or her own campaign. Each candidate gathers these funds in stacks of high-denomination notes months before the election. This stash is now worthless piles of paper.

Similarly, a chunk of donations from party cadres is made in cash, not least because it is often given spontaneously. A party such as the Bahujan Samaj Party will find it difficult to exchange these donations for the new currency notes that will be available from November 10.

As for small and medium business owners, their black money stash has been rendered useless. From now on, they will be too engaged in insulating their businesses from the possible destabilising impact of the demonetisation policy to care about politics.

In Uttar Pradesh, the Samajwadi Party, too, will take a hit, but the impact will be mitigated because it is in power. That should enable the party to convert old currency notes to new more easily than the Bahujan Samaj Party. The demonetisation policy should persuade Uttar Pradesh Chief Minister Akhilesh Yadav to acquiesce to his father, Mulayam Singh Yadav, and his party comrades, who want an alliance with the Congress. Akhilesh Yadav can’t possibly manage finances as deftly as the party’s older leaders. Amar Singh’s importance will grow.

A leader from a political party in Uttar Pradesh told this correspondent that the morning after the demonetisation policy was announced, a person approached him promising to covert Rs 10 lakh into the new currency. Such undertakings can provide respite – but just about.

In Punjab, the Akali Dal will sing praises of the Prime Minister for the demonetisation move, but its candidates will have to scramble around to raise legitimate funds. However, since their party is in power and in alliance with the BJP, it may still discover ingenious ways to tide over the resource crunch.

The Aam Aadmi Party, a strong contender in that state, claims to receive a large chunk of its resources from donors through bank transfers. But can it withdraw more than Rs 20,000 a week, as will be the rule for a while, till the government increases this limit? Its candidates will have gathered funds from relatives and Non-Resident Indian friends, which are likely to be in high-denomination notes. These contributions are now perhaps useless. AAP can hope that the demonetisation policy has hit the Akali Dal and the Congress hard. This will provide AAP a level-playing field in Punjab somewhat.

Given that there are a couple of months left for the Punjab election, and three to four months for Uttar Pradesh to go to the polls, the national parties like the BJP and Congress will benefit. They have better staying power and are well networked into the corporate sector, which favours them, not least because of the years of familiarity between them.

Impact on business

But the possible crippling of state-based players could be offset by the economic fallout of Modi’s demonetisation policy.

There are three classes of people who will experience the inimical impact of this sudden move – farmers, small and medium traders, and bureaucrats who have amassed ill-gotten wealth. No one has sympathy for the last, but they will certainly feel alienated from the BJP.

Despite the government’s push to have people open bank accounts, a large segment of rural India still prefers to keep its savings in cash, often tucked into nooks and corners of their homes. This is a social habit too deeply ingrained to have been transformed over the last 29 months. They are not accustomed to issuing cheques. To speak to them about internet banking, digital wallets or credit cards is a travesty.

Farmers are likely to press the panic button more so as they would have come into cash after having sold their harvest recently. Their woes will be compounded because banking facilities still remain inadequate in rural India. They need to procure seeds and fertiliser for the next sowing season. Their old Rs 500 and Rs 1,000 currency notes cannot buy them that.

Rural distress is now a harsh aspect of India’s reality. The demonetisation policy can aggravate their woes unless the government already has put in place a robust mechanism to alleviate their plight. Otherwise it could cause heartburn among farmers who voted for the BJP in 2014.

To gauge the mood of traders, I chose to speak to those based in Varanasi, the Prime Minister Modi's constituency. Panic and nervousness about the future were discernible in their voices. Most of them conduct a percentage of their businesses in cash, often taking recourse to under-billing, which is the act of sellers billing goods at less than the actual amount in order to save tax.

Those in possession of large cash reserves find their worth reduced to zero. It will fill them with rancour and goad them into punishing the BJP.

Social activist Ateeq Ansari, who also has a family business, said the mood in the sari industry is palpably downbeat. “For most people in Varanasi, the demonetisation policy is akin to an earthquake,” said Ansari. “They will tremble, but so will the BJP.”

Others who spoke did not wish to go on record. But each of them perceived the demonetisation policy as Modi’s way of punishing those who did not take recourse to the government’s voluntary disclosure scheme from June 1 to September 30.

“In a slowing economy, the only way to retain your profit margin is to under-bill your sales,” said an owner of a garment firm, readily accepting that what he did was illegal.

Some of them also point to the huge bank debts big businesses have incurred. There is no pressure on such defaulters, they say. Worse, when the going gets tough for them, they flee the country. Fugitive businessman Vijay Mallya was one name most cited. In case there is panic and people countenance hardships to procure the new notes, this will likely become the rhetoric of the street as well.

Even those who spoke in favour of the demonetising policy had reservations about it. Among them was Rajan Behel, the general secretary of the Banarsi Sari Association.

“It is a step in the right direction,” said Behel. “It has also been done with an eye on UP [Uttar Pradesh] elections. Considering the limits on cash withdrawals, business will be adversely affected. How do you make payments? It can destabilise us.”

In fact, Varanasi’s bania businessmen spent the night of November 8 discussing the overnight blow Modi had delivered them. They feel the hurt doubly because they have been traditionally the BJP’s diehard supporters, voting for the party even when it would muster less than 10% of votes decades ago.

Though positive about Modi’s policy, a businessman who isn’t a bania said: “Let the dust settle down. But don’t rule out the banias ganging up against the BJP. They are angry.”

This too was the sentiment in Meerut’s garments industry. “We are reeling under shock,” said an official of the garments industry association. “There are people who have been ruined overnight. They can’t go to the bank to exchange the cash because the amount is huge. Explanations will be sought. Nor will we take the old Rs 500 and Rs 1,000 currency notes from our buyers.”

But isn’t this a temporary inconvenience that will be ironed out as soon as the new Rs 500 and Rs 1,000 currency notes come into circulation from November 10?

“It will all depend on the volume of circulation,” replied the official. “Even three weeks of economic instability could impact the livelihood of an unimaginable number of people. The demonetisation policy will have a negative influence on the BJP in the UP Assembly polls.”

It will affect not only the garments industry but also the consumer durables industry. From November 11 begins a period Hindus consider auspicious for marriage. During this time, people buy gold and household goods, and service providers receive a percentage of their earnings in cash. Those who had stashed cash for their purchases might feel bitter.

Reminders of Tughlaq

Small traders, businessmen and service providers will have to embrace a new culture of conducting business. The ensuing confusion could trigger a slowdown, which, even though lasting a few weeks, could fuel anger and discontent. It all depends whether people dependent on salaries and wages are affected.

A businessman in Varanasi, Gaurav Kapoor, said that the proverbial common person could not remain insulated from poor business sentiments. “Modi’s policy reminds me of Mohammad bin Tughlaq, who introduced policies that were good in theory, but turned out disastrous in reality,” he said.

A risk-taker such as Modi, obviously, does not think he will meet the same fate as the 14th century Sultan of Delhi.

Ajaz Ashraf is a journalist in Delhi. His novel, The Hour Before Dawn, has as its backdrop the demolition of the Babri Masjid.