The Big Reverse

by Meera Sanyal

  Small Manufacturers

  There are many stories of how some other labour-intensive industries were affected by demonetization. Employing millions of workers, these micro and small industries were starved of working capital and forced out of business.

  A survey conducted by the All India Manufacturers Organization (AIMO),35 representing more than 3,00,000 industries engaged in manufacturing and export activities, showed that post-demonetization there was a 35 per cent drop in employment and 50 per cent drop in revenues. AIMO stated that almost all industrial activities have stopped, with the small and medium-sized enterprises being worst affected.

  Leather Manufacturers and Tanneries

  With annual manufacturing revenues exceeding `12,000 crore, the footwear industry in Agra accounts for almost 35 per cent of the total footwear exports from India and caters to 65 per cent of the domestic footwear market. There are around 10,000 footwear manufacturing units in Agra. About 30–35 per cent of Agra’s population depends on the leather footwear manufacturing industry that provides employment to nearly 5,00,000 people.

  In Quazipada, Agra, home-based micro units produce over one million pairs of shoes every day. A shoe passes through at least five to six hands before finally reaching the stores. ‘A fitter gets `20 per shoe while the one who fixes the sole gets paid `15 per pair. The one who puts the lace gets `4–5 and the man who does the pasting and stitching gets `10–15 for every pair. This is the price for a pair of rexine shoes while this gets doubled in the case of leather shoes,’ says Taj Ahmed, the owner of one such small unit. ‘Nine of my 20 workers have left the job since 8 November. The others simply sit around as I have not been able to source raw material with the limited money I have.’

  A few metres from Agra Fort is Chakki Paat, a densely populated Dalit settlement which produces tens of thousands of shoes every day. ‘Ordinarily, we would produce 200 pairs of shoes a day, but it’s now down to a few pairs; most days even less.’ Sharvan, a Dalit worker in a lace factory in Bijlighar, says, ‘The government should have thought about the poor. Hum soch mein hi aadhe huain jaa rahe hain (we are worrying ourselves to death).’

  The bigger manufacturing units are no better. About 40 km away in Unnao, processing and manufacturing units are facing similar problems due to shortage of hides. ‘Because of inability to run units,’ says Taj Alam of Kings International Pvt. Ltd., ‘our export orders are being affected and are being diverted to other countries like Indonesia, Sri Lanka, Pakistan, Bangladesh. In the past few weeks, there has already been a downfall of about 25–30 per cent in the trend of orders.’36

  Brassware Manufactures and Exporters

  The brassware export industry in Moradabad earns over $1 billion in annual revenue, making Moradabad one of the largest generators of exports of handicrafts in India. The bulk of the brass industry’s exports go to Europe, the US and Australia.

  ‘This is a very sensitive industry,’ said Prashant Garg of Gargsons Exports, one of the larger export houses in the city. ‘Our quality, the intricacy of the workmanship and our commitment, it’s dependent on all these factors. There will be shows, there will be requirements, how will these be fulfilled? The market has always run on cash and demonetization has made it difficult for us to pay the artisans.’

  Mohammed Idris is 64 years old and is busy carving intricate patterns on a brass vase. The work, he explains, is known as soda kalam. ‘I do three vases every day. Beyond that, my eyes hurt.’ For each vase, he charges `300. ‘Until 8 November, I used to finish 21 vases in a week, working on all seven days. Since then my work has been cut by more than half. Now, I work only three days a week.’37

  Secondary Steel Industry

  The secondary steel industry in India consists of an integrated supply chain starting from rolling mills, furnaces, sponge iron plants, and steel traders down to agents. The retail secondary steel market is completely dependent on cash for its business. Once the flow of cash stopped, this market stopped too.

  Sanjay Jain, President of the Raipur Iron and Steel Trade Association, explained, ‘Demonetization has led to a severe drop in business, which in turn means that manufacturing units are on the verge of shutting down. Retail trade has been hit the most, not just in Chhattisgarh, but across the country… Business has come down to just a quarter of what it was.’

  Stating that 800 participants just in the Raipur association were jobless and currently sitting on piles of stock but no cash to conduct their business, he said, ‘People have stocks of goods but there is no buyer or supplier in the market because cash is not available. The full chain is interlinked and if one part stops working, other parts start getting affected too. Even labourers cannot be paid because they don’t know banks and don’t have accounts. Daily wage labourers work on cash only and if they can’t be paid, they won’t come to work…There will be losses of at least `20 crore in the market every week till the situation normalizes.’38

  My Perspective

  The accounts reproduced in this chapter are a small fraction of the thousands of stories on the human impact of demonetization. They are illustrative, not exhaustive. The common thread running through all of the stories is the sheer despair and desperation that both individuals and business owners had to suffer.

  Demonetization did not just destroy incomes and wealth – it destroyed lives.

  Daily wage workers and casual contract labour lost their jobs overnight. Their pitifully meagre savings were forcibly impounded. Those fortunate enough to retain their jobs didn’t have much choice. They could either accept old notes and then stand in queues to exchange these notes, forfeiting another’s day wages, or work on credit, in the hope of a future, but not secure, payment.

  Farmers and sellers of perishable products such as vegetables, fish and milk products were forced to watch their life’s savings waste away before their eyes.

  Small businesses across the country went bankrupt and had to shut down, even though they had full order books, employees at work and money in the bank. They went bankrupt, not because they were incompetent business people, but simply because they were deprived of their own money and had no liquidity to pay their employees and their suppliers.

  Stories of the elderly and sick who were stranded without cash, students who found themselves unable to pay fees, and the millions of Indians who suffered in myriad ways under the note ban have not been included for want of space. But their stories do matter and the distress and inconvenience they suffered were very real.

  The architects of demonetization had thoughtlessly sucked the liquidity out of a well-functioning economy and left an entire nation, and especially the poorest of poor, gasping for breath.

  In terms of the human toll it extracted, India’s 2016 demonetization sadly turned out to be a catastrophe.

  5

  The Economic Shock

  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

  – John Maynard Keynes

  For many years, I have been going to Sassoon Docks to buy fish. One gets the freshest and best variety of fish in Mumbai at this daily morning market that starts work at the crack of dawn.

  There is a bustling eco-system in this crowded fish market. Koli fishermen throw baskets of fish up from their boats which are deftly caught by auctioneers on the quayside. Fish are auctioned by numbers not weight – the smaller fish in 11s or 22s while the bigger ones may even be sold solo. Each basket is auctioned within a few minutes. Wholesale fish vendors and bulk buyers from hotels and restaurants snap up most of the fish, but they smilingly make room for retail fisherwomen and the occasional housewife. Dealings are entirely in cash and scrupulously honest. At the bottom of the food chain are women who help buyers to carry the fish from the docks to the gate in baskets that are perfectly balanced on their heads.

  Over the years, many of these women have become friends. Spotting me from a distance, one or the other invariably finds me and takes me under her wing –
helping me identify the freshest fish, bargain a little, and then carry the morning’s purchases to my car. Helped with a little seed capital and encouragement, a few of them have started tiny businesses, buying some fish at the market and selling it to regular customers in the vicinity before heading home. It has been a joy to see their confident smiles as they have embarked on the path to entrepreneurship.

  A few days after we returned from Delhi, I went to the docks. The impact of demonetization was audible in the uncharacteristic silence there, and visible in the weary desperation in the eyes of Malti, one of my women micro-entrepreneur friends.

  She summed up the economic impact of the note ban in simple words: ‘Every morning, I invest `1,000 to buy fish at the auction. During the day, I sell the fish for about `1,200–1,300. The profit of `200–300 feeds my family. And the next morning, I go back and invest `1,000 again to buy the next day’s fish. When the note ban hit us, I was stuck with the fish for two days with no buyers and no place to store it. I not only lost my income; I lost my capital, and after a few days, all my savings too.’

  The devastating human impact of India’s 2016 demonetization has been narrated in the previous chapter. Insofar as the economic impact of the demonetization was concerned, the government reluctantly acknowledged there had been some limited impact, but that this was, and would remain, only transient. Economists, both in India and abroad, had differing views on this matter, and indeed the long-term economic impact of this demonetization can only be judged fairly with the passage of time.

  This chapter analyses the data on the economic costs of the move both in the immediate short term (during the 50-day demonetization window) and in the medium term (18–20 months) post-demonetization. The latest data available as of August 2018 has been included in the analysis below.

  Immediate Economic Impact

  The immediate impact of the note ban, as anyone who experienced the shock on that day would attest, was to bring practically all economic activity in the nation to a halt. The first few days after the announcement were completely chaotic as consumers, households and businesses scrambled to get cash. Though the situation stabilized slightly in the weeks that followed, the monetary cost to the economy rose sharply.

  The Centre for Monitoring Indian Economy (CMIE)1 estimated the cost of demonetization during the cash exchange window – the 50 days between 8 November and 30 December 2016 – to be in the region of `1,28,400 crore (`1.284 trillion), as shown in Table 1 below:

  Table 1: Short-term Cost of Demonetization

  Loss by `Crores Rationale

  Business 61,500 Consumption Exp. of Households = 31 lakh crore p.a.

  Reduction in Discretionary Consumption = 50 per cent

  Impact of 50 days lower sales = 61,500 crore

  Banks 35,100 Cost of recalibration of ATMs

  Overtime salary to bank employees

  Other expenses related to collection and counting notes

  RBI 16,800 Costs of printing and transporting new notes

  Costs of counting and destroying old notes

  Households 15,000 Lost wages for standing in queues to change notes

  TOTAL 1,28,400

  Source: Research Note by Centre for Monitoring Indian Economy (CMIE), January 2017

  As per the RBI Annual Report 2017, just the cost of printing new notes was `7,965 crore in 2016–17. In addition, RBI’s domestic earnings dropped sharply as it had to pay interest of `17,426 crore for mopping up excess liquidity in the banking system following demonetization. The previous year, RBI had earned interest of `506 crore in its liquidity management operations. This additional interest cost has not been considered in the CMIE calculation.

  Mahesh Vyas, Chief Economist and CEO of CMIE, explained that this was an extremely conservative estimate and limited to only the 50-day demonetization period. He went on to add, ‘The impact of low liquidity, broken supply chains, and loss of confidence in consumers are likely to impact the economy over a longer period.’2

  Medium-term Economic Impact

  There are no similar quantified estimates on the medium-term economic costs of the note ban. However, there can be no doubt that the move resulted in a sharp contraction of economic activity across the economy, particularly affecting Micro, Small, and Medium enterprises (MSMEs) and those in the informal sector. This section puts forth the economic impact of demonetization as measured by quantifiable data, covering the period up to August 2018, on three key economic indicators, namely:

  Impact on India’s Gross Domestic Product (GDP)

  Impact on Jobs

  Impact on Investment and Savings

  Impact on India’s GDP

  The impact of demonetization on India’s GDP has been much contested and debated since its announcement.

  Manmohan Singh, former RBI Governor, Finance Minister, and Prime Minister of India and a highly-respected economist, had forecast a drop of two per cent in India’s GDP, saying, ‘In my opinion, the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sector of the economy. And my own feeling is that the national income, that is the GDP, can decline by about two per cent as a result of what has been done. This is an underestimate, not an overestimate.’3

  On the other hand, globally-acclaimed economists such as Jagdish Bhagwati, Professor of Economics, Law, and International Relations at the Columbia University, maintained that demonetization would increase growth, asserting, ‘On the effects of demonetization on growth, I should say that I was the one economist who had argued, from first principles, that demonetization would increase, not diminish, growth.’4

  Before we assess the data on this important subject, it may be helpful to understand what lies behind the GDP number itself, how the GDP is calculated, what is included, and what is not.

  Simply stated, GDP is a measure of the economic size of a country. It is viewed as the single number that is representative of the monetary value of all the finished goods and services produced within a country’s borders in a specific period of time. It is the standard indicator used globally to indicate the health of an economy.

  Though easy to define, GDP is often criticized as being a poor measure of economic welfare or even the health of the economy. For instance, GDP only measures output that is bought and sold; hence activities that have tremendous value but no price, such as the work of a housewife or the caring for an elderly parent, are not accounted for. In India, the impact of this is significant, as the entire agrarian economy that self-consumes what it produces is excluded while calculating GDP, as is much of the informal economy.

  Similarly, governmental corruption and overspending artificially inflate GDP. For example, if the government spends `500 crore for a bridge that should cost only `100 crore, GDP is inflated by `400 crore, which is actually a waste of money.

  In addition to its limitations, GDP is complex to calculate, and countries across the globe have different methods to arrive at their country’s GDP.

  In India, the GDP number is calculated and published by the Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MoSPI). The CSO collects data from various central and state government agencies and departments, and compiles this to calculate India’s GDP. Till 2015, the GDP in India was calculated using two methods. The first method was based on economic activity (at factor cost), and the second was based on expenditure (at market prices).5

  Though the GDP numbers from the two methods do not match precisely, they are usually close. The factor cost GDP helps in assessing the performance of different sectors of the economy, e.g., the performance of agriculture vs real estate, etc. The expenditure-based GDP calculations, on the other hand, offer an insight into the contribution of different parts of the economy to the GDP, e.g., domestic household consumption vs. government expenditure, etc.

  In 2015, in a major overhaul of the way India’s GDP was calculated, the CSO s
tarted measuring the country’s economic growth by Gross Value-Added (GVA)6 at basic prices, instead of measuring GDP at factor cost.

  There were several reasons given for the move from GDP to GVA. A major reason stated was that the new method had been recommended by the United Nations System of National Accounts in 2008 and this would make India’s GDP growth numbers comparable with that of developed nations.

  The base year was also shifted from 2004–05 to 2011–12. The MoSPI stated that shifting the base year to 2011–12 would enable the inclusion of many sectors such as IT, e-commerce, mobile telephony, etc., not included earlier, and this would provide a more realistic and representative picture. The new 2011–12 series would take into account the population census (2011), agriculture census (2010–11) and livestock census (2012), and incorporate the results of the most recent National Sample Surveys.7

  In a significant change, instead of using data from the Annual Survey of Industries (comprising approximately two lakh factories) to gauge activity in the manufacturing sector, the annual accounts of companies filed with the Ministry of Corporate Affairs, the MCA21, started to be used. As the MCA database covered almost five lakh companies, this was considered a more reliable indicator of corporate activity.

  The happy outcome of this change in methodology was that it lifted India’s growth rate for 2013–14 to 6.9 per cent instead of the 4.7 per cent earlier estimated! Similarly, for FY 2016–17, GDP estimates were projected at 7.6 per cent based on the new GVA methodology.

  Though there were many who criticized this as a ‘sleight of hand’, in fairness, the changes were reasonable ones. However, what makes it a legerdemain is the fact that the previous GDP estimates were not recast on these bases, making comparators or trend analysis extremely difficult. This effectively meant apples were being compared to oranges.