On 12 November, four days after taking nearly 90 percent of India’s currency out of circulation overnight, Narendra Modi spoke about the measure for the first time. Talking to Indians in Japan, he was in high spirits, saying, “Our government will protect the innocent and punish the corrupt.”
He even made a joke or two at the expense of those he accuses of hoarding ‘black money’. “Some people would rather throw their money in river Ganga instead of putting it in banks. They think if not money, they will at least get blessings.”
Two weeks after the government-mandated cash crunch hit, it’s becoming apparent that every part of the economy – not just ‘hoarders of black money’ – is grinding to a halt because of the liquidity crisis.
Misunderstanding Public Anger
Across cities, ATMs lie shut, paralysed by the fact that each of over 2,00,000 machines in India need to be retrofitted with new note-dispensing cassettes, because the new Rs 500 and Rs 2,000 currency notes are different in size from the older ones.
Banks are starved of new currency notes. The manager of a south Delhi branch of a leading private bank said that he requisitioned Rs 1 crore worth of new notes on Monday but received only a tenth of that – Rs 10 lakh – which was mopped up in 30 minutes by customers.
Modi’s ministers have tried to paint public anger about ‘demonetisation’ as whingeing by privileged city-dwellers. On Monday, The Economic Times quoted Agriculture Minister Radha Mohan Singh saying, “Demonetisation does not affect 70 percent of farmers.”
This is a dangerous assertion. India’s hinterland is home to 70 percent of its population. Formal banking is thin on the ground; ATMs are non-existent. Almost all transactions, including buying necessities like fuel, edible oil, seeds, fertiliser and paying farm hands, is done in cash – most of which has disappeared.
Agriculture and Trade Badly Hit
The winter – or rabi – crop is at risk. Reports say sowing is stuck at around 60 percent of the total. Harvesting, due between December and February for different crops, could be a bigger problem. In India, 65 percent of the value of farm produce is vegetables, fruits and dairy products. These need to be sold within a week of harvesting to prevent spoilage.
But unlike grain, which can be harvested mechanically, horticulture is highly labour-intensive. “Around 80 percent of the cost of horticulture is wages. In the absence of cash, it will be impossible to pay farm workers,” says Ajay Vir Jakhar, head of Bharat Krishak Samaj, a farm lobby.
The cash crunch has dented freight carried on India’s highways. SP Singh, head of the Indian Foundation of Transport Research and Training (IFTRT), reckons that freight movement is down by 30 percent and 60 percent across various segments. “No wonder the highways are deserted today,” he says.
Large wholesale markets for produce, across India, have seen large-scale contraction of business. Traders in Azadpur and Ghazipur wholesale markets say volumes have shrunk 50 percent and 80 percent, respectively. Ghazipur, also a hub of poultry and egg business, has seen 80 percent of its traders drop out of the market.
Cash Crunch Hits Industry
In Surat, Gujarat, a textile hub, workers have been told to operate one shift only, that too three days a week. The diamond cutting and polishing business, in the same city, was already suffering from the global recession. It now has to deal with empty coffers.
Real estate, construction and retail have been hit hard, too. Most brokerages have sell orders on these sectors, as well as non-banking finance companies. To compound problems further, the government has banned rural cooperative banks and credit societies from accepting ‘demonetised’ currency, crippling the entire system. In only Maharashtra, such institutions used to supply credit worth Rs 50,000 crore.
In Maharashtra, reports ET, manual workers who are getting payments in old notes, have to exchange them at a discount of 20 percent with those who have new currency. In Kanjirapally, Kerala, hub of India’s rubber production, life in plantations has come crashing down, as there are no buyers for the freshly-tapped produce.
In western Uttar Pradesh, the cash crunch has hit sugarcane farmers. Only a few large sugar producers like Bajaj Hindustan pay farmers through banks. All others use cash, and are faced with the prospect of long delays in payment.
GDP Growth May Slow Down
In 2012, 87 percent of all transactions in India were in cash. The situation was much the same till Modi’s 8 November ‘demonetisation’ shock. Given the magnitude of the crisis – and the government’s tardy response – its effects on overall economic activity and growth could be severe.
Not many are willing to venture a guess about exactly how severe the shock will be. On 21 November, Credit Suisse published a note highlighting “sporadic disruptions”, including a sharp slowdown in real estate, and some steel mills halving their production time to 12 hours per day.
The most hard-hitting report, however, was published by Ambit Capital on 18 November. It slashed its GDP growth forecast for this year (FY17) to a mere 3.5 percent from its earlier 6.8 percent and said next year (FY18) would see only 5.8 percent growth, compared to earlier estimates of 7.3 percent.
Meanwhile, Modi has stayed away from Parliament, faced with opposition fury. On Monday, he was huddled with senior ministers, probably discussing strategy. Too bad the real fallout of this botched cash withdrawal wasn’t thought through earlier, before implementing it.
(The writer is a Delhi-based senior journalist. He can be reached at @AbheekBarman. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)