Two years have passed since PM Modi’S iconic speech of invalidating high denomination currency. The move, then hailed as a masterstroke to check black money, corruption, terrorism and counterfeit currency, has proved itself a failure in several respects since November 8, 2016.
Though the Reserve Bank of India delayed the process of counting and releasing data on the demonetised currency it collected, it finally completed the process last year only to declare that 99.30% percent of the demonetised 500 and 1000 rupee currency was back in the system. Of the Rs 15.41 lakh crore worth Rs 500 and Rs 1,000 notes in circulation on November 8, 2016, notes worth Rs 15.31 lakh crore have been returned. This meant that Rs 10,720 crore of the junked currency did not return to the banking system, an amount which the pending loans of the likes of Vijay Mallya and Nirav Modi could overtake.
Not only did the move prove itself to be a failure in curbing black money, it also meant added expenditure towards printing new currency. Post-demonetisation, RBI spent Rs 7,965 crore in 2016-17 on printing new Rs 500 and Rs 2,000 and other denomination notes, more than double the Rs 3,421 crore spent in the previous year. From July 2017 to June 2018, it spent another Rs 4,912 crores on printing of currency.
The largest impact of the move was the hit on micro, small and medium enterprises. This cash-based informal sector constitutes over 90% of all enterprises and account for 30% of the GDP. The sector employs over 80 million people year on year. While presenting the 2017 budget, finance minister Arun Jaitley reduced corporate tax from 30% to 25% for units with an annual turnover of less than Rs 50 crores. These businesses saw a 60% drop in the workforce after demonetisation.
And as the finance minister noted during the budget presentation, SMEs are the job creators and demonetisation rendered 60% of the people previously employed with SMEs, jobless. Many employed in the sector migrated back to villages as businesses shut down. The first sector to be hit within the category was handicraft as it relied on liquid cash for all stages.
As per the study conducted by All India Manufacturers’ Organisation (AIMO), micro-small scale industries suffered 35 percent job loss and a 50 percent dip in revenue in the first 34 days since demonetisation. It also projected a drop in employment of 60 per cent and loss in revenue of 55 per cent before March 2017. The AIMO is India’s largest organisation of manufacturers and represents over 3 lakh micro, small scale, and medium and large-scale industries engaged in manufacturing and export activities. Despite the strength of the organisation in terms of representation, the finance minister has refused to meet them post the study.
The unavailability of loans post demonetisation further deterred the sector. High interest rates coupled with lack of property to mortgage or place as collateral coupled with the hesitance on behalf of banks to provide loans to small businesses meant they couldn’t overcome the tide.
Rajiv Chawla, President of Faridabad Small Industries Association, told The Economic Times, “While demonetisation brought many small industries closer to digitalisation, the micro industries had to go through an unstable phase. They were neither prepared for it nor were they a part of the black economy to begin with. A dholwala at a wedding, a dhaba owner at the roadside, a plumber, or a daily wage earner – all of them earn in cash and are not familiar with credit cards, phone and net banking. Demonetisation brought a huge lull in their businesses.”
An increasing number of consumers left these small enterprises for stores and chains that accepted cards and online banking helping chains like Shoppers’ stop, Bigbazar and platforms like Paytm and Mobikwik to prosper.
Arun Kumar, a former professor at Centre for Economic Studies and Planning at Jawaharlal Nehru University and economist scrapped demonetisation thus, “Most of the workers in the micro industries went back to the villages. The bicycle industries in Ludhiana, the brass industry in Moradabad, the diamond industry in Surat, were all devastatingly impacted by demonetisation. Many such businesses shut down because there was no cash to pay the workers. About 1,000 units in Jamshedpur that operated as a small scale ancillary unit to big industries were closed. The unorganised sector consists 45% of GDP. You cannot bring progress without caring for them. The rate of growth went down to almost 1%.” He further notes that a shift towards a cashless or digital economy, later stated as the purpose for demonetisation by the mouths of the government and its sympathisers, would have been possible without a hard-hitting move like demonetisation.
As the sector was still recovering from the impacts of demonetisation, GST struck to further worsen the situation. “The introduction of GST led to an increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net,” says a recent study by RBI.
Arun Kumar explains in his interview with The Economic Times, “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 the 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.”
These two landmark economic reforms from last five years initially claimed to target the less transparent dealings of those at the higher end of the financial pyramid but it negatively affected the broader base. The reforms came without planning or warning and despite being proved a failure, wasn’t followed by adept damage control measures. Businesses of small and medium scale enterprises function on the predictability of the economy and are struck the hardest by even day-to-day fluctuations.
Repeated justifications, changed motives, or falsified data cannot help erase the falling conditions of the economy. Insufficient reforms to date means SMEs are still struggling. Though several enterprises have returned to pre-demonetised conditions, several more are still unemployed or battling loss.