news post by Ankush on 08 Nov 2017,Wednesday
PM Narendra Modi-led government’s demonetisation move today marked its first anniversary, which it is celebrating as Anti-Black Money Day. With this move, the government banned ₹500 and ₹1,000 currency notes and released new ₹500 and ₹2,000 currency notes in the economy. It later launched BHIM app for digital transactions in a bid to promote cashless economy.
Demonetisation – a move which was initially seen as a “masterstroke” in Indian political history that would have eliminated a parallel black economy in India, has rendered itself to be a volatile, fruitless and almost fatal for most MSMEs in the country.
It has been a year of economic chaos after Prime Minister Narendra Modi’s speech November 8, 2016 led the nation into uncharted water. What we have today at the end of the year is evidence about how agriculture, banking, budget were all affected by the move and also how it did nothing to curb the black economy or control terrorism. The worst sufferers of this move, however, were the micro enterprises of the country.
Estimates suggest SMEs in India constitutes 45% of the country’s output and employs 60 million people. These businesses worth under Rs 10 crore in terms of investment in plant and machinery are mostly businesses run by families as a legacy. Most of their labour force is workers who have migrated from the interiors of the country to the cities. Coping with demonetisation was almost impossible for them.
According to the Indira Gandhi Institute of Development Research, sale of rice to rural mandis in the country had dropped to 61% and in many places winter crops last year could not even be sold because there was no cash to buy seeds.
Informal to formal
At the heart of the demonitisation was the penchant to convert the informal sector into the formal sector. In a speech in London this February, Finance Minister Arun Jaitley said “Demonetisation was a move to change the Indian normal… a new normal had to be created. A predominantly cash economy has now to be substituted with a digital economy, which will bring more money into the banking system and lead to better revenue generation; the integration of ..
To put it very simply, the informal sector represents small businesses that are generally not registered, incorporated and often outside the tax net.
According to International Labour Organization (ILO) some of the characteristic features of employment in the informal sector are lack of protection in the event of non-payment of wages, compulsory overtime or extra shifts, layoffs without notice or compensation, unsafe working conditions and the absence of social benefits such as pensions, sick pay and health insurance. It would then seem alright for the Finance Minister to want businesses to move from informal to the formal sector.
However, economics is rarely that simple and the informal sector may not be bad. There is evidence that suggest the informal sector is very important when it comes to riding out economic slowdown. When a slowdown strikes, the informal sector acts a cushion. The World Bank in one of its report has laid out the issue quite succinctly. “To further complicate things, Keith Hart, the purported coiner of the term informality (and one who did not think the sector was necessarily bad), argued that the source of our blindness-the undocumented nature of the sector- left the sector especially vulnerable to being a tabula rasa on which analysts projected their particular concerns.”
According to ILO one of the foremost reasons for the informal sector to exist in a country is because of poverty and the limited livelihood opportunities and jobs for the working poor. “Low incomes and limited access to public institutions prevent the poor from investing in skills that could boost their employability, productivity and ensure their protection from income shocks and risks,” ILO says. Another factor driving informality is the inability of the industrial sector to absorb labour in more productive jobs.
While there is a need to address the negative aspects of the informal sector, there is also a need to ensure the jobs linked to the sector are preserved. Businesses in the informal sector needs to be encouraged to join formal system, workers need to be protected and that can only happen through “comprehensive and integrated strategy cutting across a range of policy,” says ILO. Clearly, demonitisation does not seem to be the answer.
Two of the fundamental objectives of demonetisation were to curb black economy and forbid counterfeiting currency which is largely used for terrorism. The micro enterprises of the country do not have an association with both to begin with. They run on cash and one of the biggest misnomers associated with demonetisation was the presumption that cash leads to black money. The failure to distinguish among black money, black income and black wealth has led to catastrophic results in the MSME sector. It led to unemployment, farmer protests, a growing social divide, postponement of weddings, unable to pay healthcare bills, and so much more.
The damage has been done. On what the road ahead for the people as well as the MSMEs of the country is, R Gopalakrishnan, an Executive Director at Tata Sons, says, “If you study the case history of successful and unsuccessful change/ transformation, there is considerable weightage to how the change is implemented, at least as much as the idea of what the change is. Demonetisation, GST and such concepts are undoubtedly transformative as ideas, but that is only the potential. The potential energy needs to be converted into kinetic energy. The political squabbles and babble are noise. Focused action to solve issues is the signal that the public must watch for.”