(This article was first published on 7 November 2019 and is being republished from The Quint's archives in light of the sixth anniversary of demonetisation, on 8 November 2022.)
Almost all of you who are reading this article right now belong to families who either have a business of their own, or at least one earning member works in a government or corporate office. Because, that’s how we English-speaking, English-reading people earn our daily bread. Over the past few years, most of us have also started buying things online and paying with our credit cards. And, very few of us, are stupid enough to keep our wealth stashed in cash.
But three years ago, when 86 percent of the value of all cash in India was made useless by Prime Minister Narendra Modi, we were all affected. Because, even India’s affluent 5 percent cannot live without cash. You send your domestic help to buy vegetables, you need cash. The plumber comes to fix the leaking tap, you need cash. You order food from your local restaurant, you need cash. And, of course, the maali (gardener), the garbage-collector, the dhobi (laundry man), all take their pay in cash.
What Made Demonetisation An Economic Disaster
Now, imagine how badly demonetisation would have hit you, if you were not part of India’s English-speaking few? Here are some numbers to contend with.
Out of the remaining 6, 5 work in some sort of service, and just 1 works in a factory.
One can safely say, that almost everyone working on a farm operates entirely in cash. That makes 4 out of 10. Of the remaining 6, 4 work in enterprises that employ less than 10 people, so much so, that the term ‘enterprise’ is itself a euphemism. These are mostly construction workers, shop-hands, hawkers, vendors, carpenters, plumbers, electricians, mechanics, weavers, tailors, locksmiths and piece-workers. Again, all of them, depend mostly on cash.
Three years ago, when 86 percent of the value of all cash in India was made useless by Prime Minister Narendra Modi, even India’s affluent 5 percent — who cannot live without cash — were affected.
That is what makes the Random (not Randomised) Control Trial, called demonetisation, such an unmitigated economic disaster. It was meant to flush out black-money, based on an entirely erroneous idea that unaccounted-for wealth is hoarded in cash, but in reality, it broke the back of India’s agriculture and informal sector, which employs 88 percent of the country’s workers.
IMF Chief & Other Economists On Note Ban: Before & After
Most economists had predicted that this would happen. Even those who initially welcomed the decision, now accept that it set India’s economy by a couple of years. Among them, is Harvard professor and current International Monetary Fund (IMF) Chief Economist, Gita Gopinath. Two weeks into the experiment, Ms Gopinath wrote, in a cautious, but largely appreciative blog, that “Modi’s policy intervention is bold, and the economic principles motivating it are beyond reproach.”
Three years later, in a joint paper with other senior economists, Gopinath estimates that demonetisation caused, at least, a 3 percent drop in the growth of employment, output and ‘national economic activity’, in the two months after demonetisation. Along with that, the paper estimates, that credit growth dropped by 2 percentage points because of demonetisation. The paper also argues that official GDP data might have got ‘spuriously’ inflated because economic activity moved from informal to the formal sector.
Other studies and surveys estimate that between 50 lakh to 1.1 crore jobs were lost in India, in the year after demonetisation. Removing cash from the system forced very small businesses to seek work on credit. They lost their bargaining power and had to take price cuts. Over a period of a few months, they were unable to sustain their businesses and had to shut shop. This happened across India, especially to small and micro-entrepreneurs who did job-work for larger companies.
How Note Ban Affected Ties Between Workers & Micro-Capitalists
Even within the informal sector, groups of service providers lost out to those who bought these services. Economists V Kalyan Shankar and Rohini Sahni studied the impact of demonetisation on waste-pickers and scrap-dealers who bought the waste in the Pune Municipal Corporation region. They found that the note ban was used as an excuse by the dealers to try and beat down the rates at which they bought waste. It was a move successfully resisted by the waste-pickers who were already organised in a strong union.
Studies and surveys estimate that between 50 lakh to 1.1 crore jobs were lost in India, in the year after demonetisation.
Shankar and Sahni’s study highlights how demonetisation would have affected relations between workers and micro-capitalists even in the informal sector. In the case of the waste-pickers, their organised strength helped them counter scrap-dealers, but in most places where informal workers are not unionised, demonetisation would have led to drop in wages and less work.
‘Disguised’ Unemployment: Why People Returned to Farm Jobs
Even before demonetisation, India’s real estate sector was rolling downhill. The note ban pressed the accelerator on this decline, by discouraging cash transactions. Even where work was done in white, labour-contractors simply didn’t have the cash to pay construction-workers. The result was a sharp drop in construction employment, which has continued steadily for the past three years.
Demonetisation was the first policy action which ostensibly was aimed to bring the rich down a notch or two.
The result is paradoxical. Demonetisation was supposed to dramatically increase formal jobs in India, making them better paying and more secure. The latest jobs data shows that the exact opposite has happened. Employment has dropped sharply in manufacturing and services, and increased in agriculture. CMIE’s data for May-August 2019 indicates that, compared to the same period last year, 59 lakh people have lost their jobs in factories and services and gone back to villages to work on farms.
In fact, farm employment has risen significantly between January to August this year, even though Rabi sowing was down by 4 percent compared to 2018, and Kharif sowing dropped by 1.7 percent. On top of that, real wages and real income in agriculture has either been stagnant or gone down. The only reason people are going back to farming is because they have nowhere else to go. This is nothing but ‘disguised’ unemployment.
Why Massive Disruption in Livelihoods of the Poor Hasn’t Hurt Modi & BJP
The question is, why has such a massive disruption in the livelihoods of the poor not resulted in a political setback for the Modi-BJP? The initial reason for this is that demonetisation caused a degree of what we call ‘schadenfreude’, amongst the poor. Till then, State action had usually targeted them and worked in favour of the rich and propertied. Demonetisation was the first policy action which ostensibly was aimed to bring the rich down a notch or two.
Since then, reality has bitten back. The economic slowdown has caused immense misery to the poor. Yet, one must remember that only 40-odd crore people are gainfully employed in India. Almost as many working-age men and women have no job opportunity. For them, Modi sarkar’s myriad schemes are the only way to sustain their livelihood. PM-Kisan is the latest one, and it also partially explains why so many Indians are returning to agriculture. It at least guarantees Rs 6,000, that they would otherwise not be able to make outside the farm.
Note ban was supposed to dramatically increase formal jobs in India; the latest jobs data shows that the exact opposite has happened.
This is the demonetisation conundrum. While it has weakened the Indian economy and forced the poor out of jobs, it has also increased their direct dependence on the government. In a country where a large section of mainstream media is successfully ‘manufacturing consent’, the government’s largesse is identified entirely with the persona of Narendra Modi. So, we have this paradox — the economic disaster of demonetisation is also the reason for his massive political success.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)