Nov 20, 2016 10:45 PM IST IST | Source: Moneycontrol.com

Demonetisation: Pain to India's informal sector may be prolonged

"As a government, if it is their responsibility to go after people with black money then it is also the responsibility of the government to make sure that the roll out of this scheme is non disruptive," Sunil Kumar Sinha said.

Sidhartha Shukla
Moneycontrol

With a 'surgical strike' on India's parallel economy, the surprise ban of Rs 500 and Rs 1,000 denomination notes has brought a massive disruption in day to day life the scale of which has caught the government off-guard.

The immediate ban made 86 percent of the nation's currency in circulation a mere piece of paper from midnight of November 8, 2016.

This sudden move has hit citizens from every social and economical class but the country's informal sector, estimated to account for 45 percent of India's GDP and nearly about 80 percent of employment in a tight spot as the huge implementation or operational difficulties were not adequately factored while filing this 'big bang' reform.

Informal sector that comprises of self-employed, or who work for those who are self-employed, people like vegetable vendors, daily wage labourers, farmers, garment workers etc depends completely on cash for purchase and selling of goods.

Status of informally employed workforce (in million):
Source: www.ies.gov.in

The key segments of the economy where cash transactions play a vital role are real estate/construction, gold and the informal sectors.

"The role of cash transaction in case of real estate and gold is mostly dubious, however in case of the informal sectors it is the lifeline," a report by Ind-Ra said.

Giving an example, Sunil Kumar Sinha, Principal Economist at India Ratings & Research told Moneycontrol that small farmers that cultivate perishable items like fruits and vegetables, if asked not to send more produce to the local Mandi due to cash shortage then they will suffer as their produce will ultimately turn into waste.

It should be noted that the new Rs 2,000 note may be a legal tender but at the moment it is redundant as no one is accepting them.

"As a government, if it is their responsibility to go after people with black money then it is also the responsibility of the government to make sure that the roll out of this scheme is non disruptive," Sinha said.

There are arguments which say that demonetisation is likely to subsume a part of the informal economy in to the organised space but how, without the adequate supply of financial infrastructure will that happen is not explained.

To this Sinha said: "A number of economic activity carried out in the informal sector are viable because they operate in an environment where various government regulation including tax, that adds to the cost are not applicable on them. Therefore, if they are brought into formal set up a number of them would become unviable."

Unlike the demonetisation of Rs 1,000 note back in 1978 under Prime Minister Morarji Desai's regime, where it constituted only 1.6 percent of currency in circulation by value, the current ban has hit the broader economy harder than in 1978.

Richa Gupta of Deloitte India said that there is going to be a short term repercussion on the informal sector as banking facility is not available in all parts of the country.

She said that the informal economy is not necessarily  black economy as part of the people working in the unorganised sector also fall below the taxation level. Such people may be adversely impacted as this will disrupt their earnings.

Experts say there is a reason why the country's informal sector is as large as it is; it suffers from an accute lack of infrastructure.

When it comes to payment, urban India may find it easy to make ends meet with the help of credit/debit cards, smartphones and apps like Paytm, but out of the 1.3 billion population, India has a 28 percent internet penetration and around 353 million internet users and in rural India the penetration is just around 12.81 percent.

With no alternate source like card or e-payment, the cash economy is left stranded waiting for the government to supply new notes and recalibrate the ATMs machines.


On the whole, economists say that the decision could not have come at a worse time, considering that rural India is coming out of a drought triggered multi-year recession.

India finally had a good monsoon this year and with the Rabi cropping season here, farmers are finding it difficult to buy seeds, fertilizers and equipments.

Given that it is the onset of a new sowing season, lack of adequate liquidity may also impede the small and marginal farmers from reinvesting.

This cash crunch disables them from reaping the benefits of the monsoon we had this year and in turn hurts their earnings.

By rolling out the measure, PM Modi took a bold, risky decision. And while opinion currently seems split over whether the benefits of demonetization outweigh the near-term negatives, it remains to be seen what, if any, adverse political ramifications the move may have for the ruling BJP in case of a prolonged disruption.

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