A Strange Experience:
I went to an SBI ATM a couple of days back, there was money in the ATM and there were only 5 people in the queue. Soon after that 3 people left the ATM without withdrawing any money because it was not giving out 50, 100 or 500 rupees notes. The remaining two people after failing to get notes of lower denominations reluctantly took out 2000 rupees notes and left. Then came my turn, fortunately I was not there to take money out but was there to just check the balance in my father’s account. But, unfortunately, the bank officials due to the huge rush caused by demonetization had not updated my dad’s pension papers so his account was empty.
This experience for me was symbolic of the utter chaos that demonetization has caused in our country.
Situation in North East India:
Everyone living in India and every region in India have been affected by the demonetization process albeit in different ways. To understand how the North East has been affected we have to first look at the macro-economic picture.
I live in the biggest city in North East India- Guwahati. But this does not mean we escape the harsh realities that afflict the entire region.
The size of the economy of North East is very small. In fact the size of the economy of the entire North East is smaller than the economy of the cities of Mumbai and Delhi individually.
Moreover, Assam which constitutes around 60% of the economy of North East India and around 70% of its population, has per capita income far below the national average.
Figure 2: Source [iii]
Also, over 90% of the employment comes from the unorganised sector which is 10% more than the National average due to the over-emphasis on primary sector in the North East.[iv]
So, most people in North East earn their daily livelihood in small denominations of cash. But what happens when there is none of that available? Simple- the common experience that people across the country have had due to demonetization namely- people spending less, postponing work that needs to be done, not employing labour, people not get paid, consumption levels being low and businesses encountering massive losses, have also been felt in the North East but to a much larger extent.
What is worse is that government’s prescription to go cashless is almost completely non-applicable in North East India because digital and Mobile phone network access is very poor. Share of E-commerce in retail for everyday needs is 2% for the entire country which is even lower in North East due to both poor physical and electronic infrastructure.[v]
A Rural Perspective:
I have witnessed recently that people who are opposed to the demonetization program usually mentions the difficulties that the farmers might face in procuring seeds. But, the Indian farmer has more or less adapted to this challenge mostly because the concept of trust is far more prevalent in rural areas than in urban areas. Farmers have sold their produce to APMCs without getting paid, with the promise from the traders that they will pay them later. Similarly, farmers have purchased seeds from seed sellers without paying them with the same promise that they will pay them latter. So, we have the emergence of a true “cashless” economy one that is based on debt.
Unfortunately, many of the promises made above will have to be broken because of the basic laws of economics. Due to good rains last quarter the agricultural sector performed well and there was increase in agricultural produce. But now their consumers do not have sufficient cash at hand to purchase these primary goods which are sending their prices tumbling down in many urban centres. So, when the traders do not get sufficient cash by selling their goods how are they going to pay the farmer back?
But “seed” is just one of the problems facing rural India. The bigger problem is “labour”. The rabi cropping and harvesting season is going on. During this time the farms in India employ large amounts of extra labour.
The rabi season is a good season for the labourers in unorganised sector in both the urban and rural areas and the labourers have an option to choose amongst them. This is because coming fresh off from the monsoon season which causes huge disruption in construction in real estate sector (one of the largest employers of unorganised labour) the autumn and the winter periods are the time when they aim to do most of their work.
Similarly in rural areas the farmers having faced difficulties like floods and silts during the monsoon season pour everything they have into the rabi season to break even. So, this results in massive employment for low income households in both rural and urban areas. But now when there is no cash at hand and when most of the unorganised sector labourers are daily wage labourers how can the employers pay them?
This problem is far worse in the North East because our population levels are very low. The entire population of North East is just 45 million. So, North East comprises of 4.5% of India’s population while occupying 8% of India’s total land mass. This makes labour a scarce and precious commodity here.
Another important element for the rural economy of North East is the tea gardens. Prime Minister Narendra Modi’s Jan Dhan Yojana might have been a great success as far as opening bank accounts were concerned in the country as a whole but it was a massive failure in the tea gardens. This was realised by the Assam government only after demonetization program was launched and a haphazard attempt by the state government to make tea garden workers open up Jan Dhan accounts has as yet not been a success and why will it be? Tea Garden workers have been daily wage earners in Assam for the past 150 years- it cannot be reversed in just a few weeks’ time.
But this has helped in the rise of a new group of thekedars or labour contractors. Many of the farmers who own their own land have at least one bank account in the name of one of their family members. So, they contact these middle men and tell them how many labourers they need to farm their land. On the other side of the spectrum, the tea garden workers desperate to earn some money will contact these middle men and let them know of their willingness to do agricultural work for some income. So, the thekedars will make it possible for the demand and supply side to merge. After the work is done the farmers will transfer the money from their account to the contractors’ account.
It might look like a good deal, but it is actually not a very good deal for the agriculturalists. The sowing and harvesting of a farm which grows crops and vegetables are vastly different from the activities in a tea garden. So, tea garden workers are far slower in completing their work than the labourers usually employed by the farmers. This means extra income for the middle men but loss for the agriculturalists. The tea garden workers’ communities are also facing a lot of uncertainties due to this new ad hoc system coming into play.
The Security Angle
Just a few days after Demonetization was announced by the Indian Govt. it began to be also promoted as a step against terrorism and insurgency as much as it was a step against Black Money. But what has happened in the insurgency hit region of North East?
The constitution calls for the Indian Government to safeguard the unique culture of the North Eastern region under its 5th and 6th schedule. So, various tribal areas in the North East are governed by independent local council bodies. Many tribes governed by these councils do not have to pay any income tax, hence the concept of “disproportionate assets” is non-applicable to them. Keep in mind the government can put tax penalties in bank deposits only if there is disparity between the source of income and the real income. But what can the government do if there is no requirement to show source of income? Nothing!
So, the insurgents and militant groups which are dominant in these areas have brought trunks of currency that they had accumulated over the years through various illegal and nefarious activities like extortion and kidnapping and made the people of these regions deposit it into their bank accounts.[vi]
But what happens to the insurgents and other militant groups which are more dominant in regions which are not governed by these local councils?
Well, immediately after demonetisation we began to hear that people were very afraid that now since the money collected from them by these violent groups have become useless- they will start using more aggressive methods to extort money from them. The government also knew this and decided to step up security measures, but to no avail. The insurgent groups showed this new aggressive stance when ULFA (I) ambushed and killed 3 Indian Army soldiers on the 19th of November 2016 and NSCN (K) killed 2 Assam Rifles soldiers and injured 7 others in another ambush on 3rd December 2016.[vii]
“But at least they are getting the Black Money back”
I don’t think so. Till now around 75% or 12 lakh crore of the 16 lakh crore demonetised currency have come back to the government. Out of these only around 2000 crore rupees have been recognised and taxed as undisclosed asset which is just 0.16% of the total amount returned.[viii]
So, where did all the black money go? I don’t know. Maybe as I wrote before (here: http://monishborah.com/2016/11/14/1380/ and here: http://monishborah.com/2016/11/09/why-did-the-government-take-out-indias-big-rupee-banknotes/ ) most of the black money is probably not in liquid assets and after all the 500 and 1000 rupee notes constitute only around 12% of the total size of India’s economy.[ix]
Also another place to look for the “missing” Black Money are the notoriously stagnant Jan Dhan accounts which from the date when demonetisation was announced till the 2nd of December 2016 has seen a sudden influx of funds amounting to nearly 50,000 crore rupees.[x]
“Only a Few days more and the situation will be back to normal”
Unfortunately the numbers in front of us belie this assumption. On the 8th of November the government had demonetised 16 lakh crore rupees. But by the 8th of December only 4 lakh crore rupees of the new currency notes have been injected into the system.[xi] So, by normal calculations it will take another 3 months more or till the 2nd week of March 2017 for the situation to normalise (optimistically).
But the situation Indian economy finds itself in due to demonetisation is actually much more severe than the government authorities are letting us know.
The 4 months that Indian economy will take to arrive at any semblance of normalisation due demonetization also constitute an entire quarter in an economic year. Now the Indian economy is growing at around 7% per annum (nominal GDP). As mentioned above the value of the demonetised currency notes is 12% of India’s economy or around 1/8th of India’s gross GDP. The destruction caused to such massive portion of the economy and the time required to recover from it, is why most experts are saying that India will lose at least 1 percentage point in the nominal GDP growth numbers.[xii] Thus demonetisation will result in India returning back the crown of “the fastest growing big economy in the world” back to China.
But what does the growth numbers have to do with the common people? Private institutions / investors be it foreign or domestic invest in various countries by looking at several things like infrastructure, human development index and growth rates. With regards to the first two factors everyone knows that India lags behind most of the world, but they were still eager to invest in India because the economy was growing rapidly. But now when the economy decelerates to 6% how eager will foreign/domestic companies and investors be to invest their precious resources in India? Not very, and at a time when the government is increasingly abdicating its role in the economic sector to the private players this could have disastrous effect on the employment numbers in our country.
None of the top economists in the world believes that demonetisation will help end corruption, black money or the shadow economy; it is only quacks amongst economists who believe that. Fortunately the economists, even though they have diverging views in many topics do not have many varying views regarding how to fight the above mentioned ills of the economy. Their prescription is very simple, which is- improve institutions to reduce transaction costs. I can explain what they mean by this but that will be a subject for another article. For now know that their prescription refers to the scholarship in the New Institutional Economics (NIE) school of thought.
NIE is rapidly becoming the most important school of thought in economics and many of the last UPA government and present NDA2’s policies show traces of it. But demonetisation stands completely opposite to NIE principles.
To get a basic idea of what their prescription meant and what this school stands for you can read Doughlass C. North’s- “Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions)”.
(This article is a follow up from this: http://monishborah.com/2016/11/14/1380/ )
[vii] See, http://www.hindustantimes.com/india-news/one-army-jawan-killed-4-injured-in-alleged-encounter-with-ulfa-i-in-assam/story-LxCNhvnP0TecCXP1kATt7M.html and http://scroll.in/latest/823243/assam-rifles-soldier-dead-8-others-injured-after-militants-ambush-convoy-in-arunachal
[viii] The Hindu, Demonetisation a Month Later, (Kolkata, 9th December 2016)
[x] The Hindu, Demonetisation a Month Later, (Kolkata, 9th December 2016)