Economy

Unprecedented Job Losses, Wage Decline in Unorganised Sector Post Demonetisation

A study in December 2016 reported 40% and 32% job losses in the age groups of 40-55 and 22-30 years respectively during the first 50 days of demonetisation.

People standing in long queues to exchange their old Rs 500 and 1000 notes and withdraw cash from the ATM in New Delhi. Credit: PTI

“…To break the grip of corruption and black money, we have decided that the 500 rupee and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight tonight that is  November 8, 2016…This step will strengthen the hands of the common man in the fight against corruption, black money, and fake currency…”
∼ Prime Minister Narendra Modi’s address on demonetisation, November 8, 2016

“…It is not about how much we gained. The objective was formalisation of the economy, attack on black money, making the system less dependent on cash, blow to terrorism. Each of these areas has received extremely positive effect due to demonetisation.”
∼ Finance minister Arun Jaitley on the impact of demonetisation, August 2017

On the night of November 8, 2016, the prime minister of India, in an unscheduled live televised address, announced the demonetisation of ‘high-valued’ bank notes of Rs 500 and Rs 1000 denominations and introduced new notes of Rs 500 and Rs 2,000 denominations. The process is not the first of its kind, but the abrupt withdrawal of a humongous amount of currency (amounting to Rs 15.44 lakh crore at the time) created panic and a wave of pessimism across the country. However, this did not turn into mass hysteria as participation in this process was projected as a patriotic step to free the country from the evils of corruption and terrorism. Since then, the slogans of ‘crusade against black money’, ‘elimination of counterfeit currencies to fight terrorism’, ‘move towards a cashless society’ and ‘formalisation of the economy’ have reverberated across the country as the vision behind demonetisation, especially in the speeches of ministers and statements of government officials. The proponents and opponents of demonetisation are still debating the merits of this dramatic move.

From December 2016 onwards, we have tracked media stories on demonetisation as well as other reports on this subject – more than 500 in all. In this article, we present a brief survey of the outcomes of demonetisation based on this unique database.

The crusade against ‘black money’ 

In November 2016, the government submitted an affidavit to the Supreme Court which projected that about Rs 10 lakh crore would come back into the system. However, the figures released by the Reserve Bank of India (RBI) on August 30, 2017 imply that Rs 15.28 lakh crore had returned into the banking system already, excluding the money collected by district central co-operative banks and deposits by financial institutions in Nepal. This is equivalent to 98.96% of the demonetised currency and it poses a serious question whether the objective of destroying black money through demonetisation has been successful or not.

Fight against ‘fake currency’

The same RBI report states that only 0.0013% of the Rs 15.4 lakh crore of demonetised currency has been detected as fake, while 638 new Rs 2000 notes have been unearthed as counterfeit as of August 2017. Moreover, in a haste to print new currencies, there were defects in the new Rs 500 notes, creating confusion among citizens. Such defects in legal tender could make counterfeiting easier.

‘Formalisation of the economy’

The formal sector in an economy can simply be defined as those firms and companies under the ambit of legal taxation who report their revenue to the tax authority. From the official report of the Income Tax department, the assessment year (AY) 2016-17 has witnessed an increase of only 1% or so in the number of effective assesses in terms of companies and firms, as compared to AY 2015-16. The government’s post-demonetisation efforts to widen the tax base as well as to strike off shell companies with illicit financial activities can be considered as a positive. However, demonetisation is believed to have eroded a significant amount of employment in the unorganised sector without giving a big push to employment opportunities in the formal sector.


Also read: Modi’s Cashless Economy Is Still a Distant Goal


Moving towards a ‘cashless society’ 

Within a couple weeks of demonetisation, the government started highlighting ‘digitalisation’ and a move towards a ‘cashless society’ as the long-term goals behind demonetisation. National Payments Corporation of India (NPCI) data, as of May 2017, show that United Payment Interface (UPI) transactions recorded a growth of 89 times between October 2016 and May 2017, while Bharat Interface for Money (BHIM) transactions more than doubled from January to May 2017. However, according to RBI data, UPI-based transactions replaced cash by around 1% only; and PayTM and other wallets witnessed a growth of just 1% of total retail payments. We can take the increase in electronic and card payments in the retail sector as a proxy for the movement towards a ‘digital economy’. Though digital (electronic and card) payments have increased in the post-demonetisation phase, digital payments have been on an upward trend 2007-08 onwards – see Figure 1.

Source: RBI website

Statistical information released by the RBI and other government websites evidently shows that demonetisation has not been very successful in meeting its official objectives. Further, the annual growth rate of GDP was 5.7% in Q2 of 2017, less than the GDP in Q1 of 2017 (6.1%) as well as below market expectations of 6.6 percent in a year of good monsoons. However, on an optimistic note, the Central Board of Direct Taxation (CBDT) has stated that the IT department is continuously tracking down unaccounted incomes. As of July 2017, it has detected over Rs 19,000 crores in black money. Finance minister Arun Jaitley also expressed confidence that demonetisation would have a positive impact on both GDP and fiscal consolidation in the long run. The higher marginal increment in digital transactions post demonetisation (Figure 1) and the hope of unearthing black incomes with the help of information technology can be read as positive aspects of the demonetisation process, but still, its short-term economic cost and probable long-term consequences cannot be ignored.

The impact of demonetisation was immediately felt in the cash-intensive unorganised sector. The All India Manufacturers’ Organisation (AIMO), in a study of job loss in December 2016, reported 40% and 32% job losses in the age groups of 40-55 and 22-30 years respectively during the first 50 days of demonetisation. The report also stated that till December 31, 2016, 60% job losses were reported with a 47% dip in revenue in the sector of small-scale traders, shops and micro industries. Medium-scale industries with a staff strength of 300 to 700 people suffered 3% job losses and a 7% revenue loss. Large-scale industries, with 2,000-3,000 employees, suffered 2% job losses and 3% revenue dip during the same period.

According to a State Bank of India (SBI) research report for the Mumbai-Pune area released in January 2017, demonetisation had hit 69% of businesses in Mumbai, Pune and nearby areas. The construction sector and informal road-side vendors were worst hit. Fifty-five percent of construction sector workers and 71% of informal roadside vendors who responded said that business had declined by more than 50%.


Also read: After Demonetisation Took Away 1.5 Million Jobs, 73% Manufacturers Say No Hires for 3 Months


Apart from these institutional studies, media reports and field surveys also observed the adverse impact of demonetisation in the informal and unorganised sector. In a February 2017 survey of 307 casual labourers in Ranchi, average days of employment per month were reported to have fallen from 18 days to 11 days after demonetisation, a decline of 39%. The decline was a little larger for women (44%) than for men (37%). In terms of income, there was also a sharp decline (about 36%) post-demonetisation, and the drop was again a little larger for women than for men. In January 2017, the India Development Foundation organised a perception survey in 48 districts across nine states, involving over 250 respondents. Over 74% of the respondents said that production activity in the small and medium enterprises (SMEs) sector had fallen post-demonetisation, while 71% said that employment had declined. In a survey in Delhi in early 2017, the investigators asked the respondents to estimate the decline in their daily earnings during the month that followed demonetisation. The average decline turned out to be as high as 60%.

People hold their old high denomination bank notes as they stand in a queue to deposit them inside a bank in Kanpur, India, November 10, 2016. Credit: Reuters/Adnan Abidi

A January 2017 report by Crisil highlighted that as many as 41% of 1,100 of micro, small and medium enterprises (MSMEs) surveyed said their clients had shifted to cheque or electronic payments since demonetisation, yet the wage decline or job loss in the unorganised sector was on an unprecedented scale. Like most of the unorganised sector, some industries in the organised sector had also suffered due to the slowdown in consumer spending after demonetisation. The impact of demonetisation was clearly visible from the 5% contraction in production of consumer non-durables and 10.3% fall in production of durables until January 2017. The decline signaled that consumption demand in both rural and urban had been impacted. Two-wheeler sales dropped to a 16-year low in December 2016 and a Nielsen survey over 750 stores (November 2016) reported a 20-40% drop in sales of most of the fast-moving consumer goods (FMCG) goods.

A RBI staff research report in March 2017 acknowledged that demonetisation had impacted cash-intensive sectors such as automobiles, FMCG, consumer durables and real estate. However, the adverse impact, in general, was short-lived as it was felt mainly in November and December 2016. The negative impact of demonetisation was moderately subdued in January and dissipated by mid-February 2017. The Index of Industrial Production (IIP) had declined by 0.4% in December 2016 but had recovered from January onwards. The Nikkei India Services Purchasing Managers’ Index (PMI), which tracks services sector firms on a monthly basis, also recovered in January, after consecutive drops in November and December 2016. In the last one year, the economy felt two major shocks due to demonetisation and GST. Both the IIP and Nikkei indices fell during the implementation of these two policies but are showing signs of steady recovery in recent data.

Going by production data, the post-demonetisation shocks that were prominent in the industry and service sectors were hardly noticed in the agricultural sector at a macro level. For instance, estimates of food grain production for 2016-17 show a 8.7%  increase to 273 million tons. However, we should not overlook the hardships faced by farmers and agricultural labourers right after demonetisation. According to media reports, their incomes declined due to the sudden disruption of cash transactions. This is consistent with a study of mandi transactions by Nidhi Aggarwal and Sudha Narayanan, which shows a significant and sustained decline in the value of agricultural trade post-demonetisation, mainly due to price rather than quantity changes.

According to an IndiaSpend analysis reported in January 2017, tomato farmers in Karnataka and Tamil Nadu were affected the most as prices fell by 60-85%, while onion farmers in Maharashtra and Gujarat were also badly hit. In an earlier study by Nidhi Agarwal and Sudha Narayan in November 2016, the short-term decline in farm supply to the agricultural produce markets was highlighted. The striking feature was the significant variation across states. For example, aggregate soya bean and maize arrivals across mandis in Madhya Pradesh fell by about 97%. In contrast, aggregate soya bean arrivals in Maharashtra fell by 68%. Their hypothesis was that more cash-intensive mandis with limited penetration of banks or connection to urban areas were likely to be more affected.

The decline of employment in the unorganised sector (especially construction) possibly led to some reverse migration. According to Bihar’s finance minister in December 2016, 95% of migrant workers from Bihar had returned home because their employers had no money to pay their salaries. Reverse migration in Bihar and other states may have put pressure both on agricultural labour markets and MGNREGA. In key states such as Bihar, Rajasthan and Maharashtra, the total number of people who demanded and got work under the MGNREGS in November and December 2016 shows a jump over 2013-14, which was a normal monsoon year.

Figure 2. Source: RBI website

Demonetisation clearly had an adverse short-term effect on the unorganised sector and consumption demand. This is also reflected in the steady decline of the annual growth rate of GDP, quarter after quarter (Figure 2). The question remains whether the adverse effects of demonetisation will subdue or have long-term consequences.

Souparna Maji has an MA in economics from Jadavpur University. Pritam Saha is currently pursuing his MPhil in economics from Jadavpur University.