OPINION

A permanent blot on informal sector

patnaik-new | Reuters

The fact that the demonetisation of 86 per cent of the country’s currency announced on November 8, 2016, did not achieve any of its stated objectives, is by now obvious. The Reserve Bank of India has finally admitted that 99 per cent of the demonetised currency has come back to the banking system as deposits or for exchange. Since the government’s claim that demonetisation would cripple the black economy was based on the presumption that black money operators would be too scared to bring their demonetised notes to banks, which would thus disable all such notes and deal them a huge blow, this presumption clearly has been shown to be invalid by the RBI figures, exactly as many economists had predicted at that time.

Prabhat-Patnaik Prabhat Patnaik

Likewise, the argument that demonetisation would get rid of counterfeit currency was an absurd one, to start with, anyway. Since the estimated amount of counterfeit currency in total currency was a mere 0.025 per cent, such a draconian measure was unnecessary for this purpose; besides, replacing old notes by new ones over a longer period of time could have achieved the same objective. But it also turns out that the counterfeit currency that has come into the banking system because of demonetisation is a mere 5 per cent of even this estimated amount.

As for the argument that demonetisation would encourage cashlessness, supposedly a desirable objective, coercing people away from cash transactions which are costless to cashless transactions which entail a cost, was an unjustifiable and authoritarian act anyway. With re-monetization, as numerous ground-level reports show, people are moving back into cash transactions, so that even this objective has remained elusive.

But while the stated objectives of demonetization have not been achieved, the crippling of the informal economy that it has effected is indubitable. This is a major blow to the country since the informal sector accounts for nearly 45 per cent of the Gross Domestic Product and 85 per cent of the total employment. This issue has been generally discussed using GDP data, with the 4th quarter data for 2016-17 supposedly showing that it did not much harm the economy, and the 1st quarter data for 2017-18 showing the exactly opposite. But GDP data are not the best thing to look at for this purpose, and this is quite apart from all the infirmities of the new GDP estimates.

Agriculture which employs nearly half the total work-force accounts for no more than 15 per cent of the GDP, so that a squeeze on this sector’s GDP, though it has a negligible effect on the overall growth rate, affects vast numbers of people. Besides, the impact of demonetisation on agriculture’s GDP is felt not immediately (since agriculture is not a continuous-process activity) but only over a period of time. And this time can be quite long, as the immediate response to a squeeze in the purchasing power in the hands of peasants is likely to be greater borrowing rather than a cut-back in expenditure on growing new crops. The fact that demonetisation has increased peasant indebtedness and hence contributed to an undermining of the viability of peasant agriculture is confirmed by numerous ground-level reports.

This is also the reason why the belief that re-monetization will simply mean that we shall get back to square one, and that even the adverse effect of demonetisation is only transitional, is erroneous. By raising peasants’ and petty producers’ indebtedness, it has left a permanent mark on the informal sector.

(The author is an economist and political commentator. The views expressed are his own)

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