All evidence suggest unorganised sector, SMEs worst hit by demonetisation: Arun Kumar – The Economic Times–08.11.2017

Arun Kumar is a renowned authority on the black economy. The economist taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University and had also helped former Indian Prime Minister VP Singh draft his election manifesto. Kumar has extensively written for journals and newspapers and published books on black economy, the forthcoming being ‘ Demonetisation and the Black Economy ‘, published by Penguin Random House. In an interaction with ETRise, Kumar talks about how demonetisation has been catastrophic for MSMEs and how it has not destroyed even 1% of black wealth.

 

Economic Times (ET): It is a year since demonetisation? How successful do you think was demonetisation?

Arun Kumar (AK): I believe demonetisation was an utter failure with no positive consequences. The two things that Prime Minister Narendra Modi said that demonetisation was fundamentally for – curbing black income and terrorism -had no effect of demonetisation on them. Black money and black income are two different concepts. Demonetisation cannot stop black income generation and neither can it stop terrorism. Along with that, a cashless economy or adapting to digital technology can be done without demonetisation. So, this move was not at all thought out and has been a complete disaster.

ET: Different sectors had different impact, but according to you, how did demonetisation impact SMEs in the country?

AK: MSMEs in India deal with cash to a very large extent. For their working capital or purchase of raw materials, cash is imminent for them. Demonetisation wreaked havoc in this sector. For instance, many people who live in Rain Basera in Delhi belong to the lower middle class. A balloon seller told me that his earnings dropped from Rs 250 to Rs 20 on a day. He told me that he could not even feed his children properly with that money. A small business owner said that all of his staffers migrated out of the city and he had to shut his business.

Due to demonetisation, the major impact was on the unorganised, unregistered sector as their output fell. Surveys done by the Punjab Haryana Delhi Chamber of Commerce and Industry, All India Manufactures Association, State Bank of India, EPW, NGOs and so on showed that the impact was between 50% and 80% on the small and unorganised sectors. RBI, in its report in March 2017, said that industry slowed down. There is also evidence that people in the micro and unorganised sectors went back to the villages as businesses closed.

I travelled a lot during that time. The hosiery and bicycle industries in Ludhiana, the brass industry in Moradabad, the lock industry in Aligarh, the jewellery industries in Surat and Baroda, the plantation industries in West Bengal and Kerala, they had all shut down. I went to Jamshedpur and found that 1,000 small scale units that operated as an ancillary unit to the big industries were shut. Newspapers were full of such reports at that time.

ET: Has demonetisation led to any structural changes in the way small businesses go about their business?

AK: All evidence suggested that it was the unorganised sector that was hit the worst. This is 45% of the GDP. Agriculture is 13% of GDP and it depends mostly on monsoon so even if you remove agriculture from this sector, it is still 32%, which is one third of the economy.

Now, according to economic surveys, if one third of the economy is affected to the extent of 50%, this means you have -16% rate of growth. This would mean the rate of growth for the economy for the year would 0 to -1%.

In Gwalior, I found that daily wage earners were waiting for work till 12:30 pm. Half of the day was gone and they still could not find work to do. More than half of the wholesale market shops had also not opened at 12:30 pm because there was no sale either.

The rate of growth of the economy had come down and the evidence supporting that is that the credit offtake had come down to a historic low of 60 years in the month of November-December 2016. According to CMIE data for investment of the December quarter of 2016, investment had come down to Rs 1.36 lakh crore whereas in the preceding nine quarters, the average was Rs 2.5 lakh crore.

In other words, output, investment, employment, all fell; capacity utilisation and credit offtake came down. These were all signs of recession. I call it the recessionary phase.

ET: According to the government, one aim of demonetisation was to push businesses to embrace technology and go digital. In that sense was demonetisation the correct weapon or choice to get businesses to go digital?

AK: You need financial literacy for that. Without assured electricity and infrastructure to make MSMEs and people in general feel comfortable with digitalisation, the step cannot be conceived. The scale of operation also will determine how swift SMEs can be with digitalisation. Without proper research, brainstorming and preparation, you cannot enforce digitalisation overnight.

There are other problems as well. In India, people do not trust cheques fearing that they may bounce. That is why businessmen prefer cash. Also, cyber security makes the poor people sceptical. Technology cannot be considered a weapon if the users are being forced to do so and they are in a constant state of anxiety while using it.

Although in the organised sector, we were moving towards the electronic medium, but you cannot force the pace. In a natural progression it can happen automatically, you do not need demonetisation for that. In the US some time back 62% of the population data was stolen. How do we ensure that that would not happen in India?

ET: How did demonetisation affect social issues such as police bribes, medical malpractices etc?

AK: It stopped temporarily, but not altogether. At best, such practices were postponed and later when the new currency came in the market, probably bribes were collected in bulk. The fact that India has high cash to GDP ratio, it does not mean that it is a highly corrupt country. Japan has 18% cash to GDP and is not known to be a corrupt country. Nigeria has only 1% cash to GDP ratio and is extremely corrupt. India is at 12%.

Besides, only 10% of the black income generated annually goes abroad and of the 10% also, 30% is brought back through round tripping. According to my estimation, black wealth in India is Rs 300-400 lakh crore so black money would be Rs. 3-4 lakh crore (1% of it).

So demonetisation was targeting Rs. 3-4 lakh crore by removing currency from the system and if it was successful, it still means only 1% of black wealth has been retrieved. But, we know that 99% has come back so we have not even destroyed 1% of black wealth.

ET: Many would not know that India has seen demonetisation before 2016. How is this time different from what we saw in the past?

AK: There was demonetisation in 1978 and 1946 as well. But, then the large denomination currency notes were only 0.6% of the total so if you removed only 0.6%, it had hardly any impact. In other countries demonetisation had replaced currencies like Marc, Franc, Lira with the Euro but then you had made full preparation for three years on how to go about it.

ET: GST has closely followed demonetisation and most say that has been another issue for SMEs in the country. What is your current assessment, given many provisions in GST seem to be against the informal sector of the country.

AK: The GST impact is superimposed on the impact of demonetisation. It is against the informal sector. The unorganised sector cannot cope with such a complicated tax. One nation, one tax is very good for the large scale industries, but for the small business dealings, it is local purchase and local sale. A local dealer at a market in Sikandarpur, for example, is not going to supply his products in Mumbai. So, GST makes limited sense to him. The efficiency of the large scale industries will go up because of GST so their price will come down and get them more business. That is not the case with a person who has a small scale business, so his business will be hit.

Now, even if you exempt businesses below Rs 20 lakh under GST, it is still not a favour upon the small businessman. Let us suppose, he is doing a business to business transaction, then he cannot give input credit because he is not under GST. Therefore the person buying from him will have to give reverse charge. So it is doubly expensive for the buyer who will stop doing business with small scale businesses and move to the large scale businesses. Without proper consultation, moves like GST, demonetisation etc. will continue to fail.

via All evidence suggest unorganised sector, SMEs worst hit by demonetisation: Arun Kumar – The Economic Times

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