For those employed in the cash-intensive informal sector, even a temporary break in the set pattern of earning and saving could push them into a cycle of debt.
Bangalore: Rajith (name changed), an auto-driver in Bangalore, has taken a loan for his vehicle for which he needs to save at least Rs 200 a day in order to make his weekly payments. On an average day he makes anywhere between Rs 500-700 a day, which he would demarcate for specific purposes – Rs 200 for gas for the auto, Rs 200 for the auto loan and Rs 100 for food expenses for his household.
Any extra money would go towards his savings to pay for his children’s school fees or to make a payment on the lease for his home. Since demonetisation, however, he has been earning Rs 300 a day which just about pays for his gas and food.
He has started defaulting on his loan payments, which could have catastrophic consequences since the auto is his only source of income. On a day soon after the demonetisation announcement, Rajith agreed to take old notes from a customer – a strategy many in the cash economy adopted in order to get whatever little business they could – knowing that he would be able to spend those notes at a petrol pump. He was given an old Rs 500 note for a ride that cost Rs 150.
When he arrived at a petrol pump, they refused to sell him gas for less than Rs 500 as they were running out of change. Consequently, Rajith had to buy gas for the entire amount, with no money left over for basic food supplies or his loan repayment.
For auto drivers like Rajith – who often survive on earnings on a day-to-day basis – even one unexpected day, especially when their earnings have already taken a hit, can propel them into a cycle of debt.
Salman (name changed), another auto-driver from Bangalore, spoke about how his existing debt is starting to spiral out of control. He has taken a loan similar to that of Rajith’s for his auto and has never defaulted on it in the past year. Salman had managed to save up Rs 3,000 in old denomination notes towards November’s repayment. However, the loan collector refused to accept the old notes, and Salman ended up using this money at the bus station that was still accepting them to buy tickets for his wife to visit her native village.
To many it may seem like Salman should be able to easily move his money around and make the loan repayment once he gets the new notes – perhaps ones that were earmarked for the bus tickets in the first place – but consider, for a second, the effort expended in generating this lump sum for a need that does not seem critical.
Building a lump sum for repaying a loan, the object of which is already at your disposal – the auto – can be challenging. Therefore, once the money has been saved up, especially for a less motivating need, getting this off your hands immediately becomes absolutely critical.
Salman attempted to do this but was unsuccessful, and eventually ended up spending the money at the bus station that was still accepting his money as legal tender.
Demonetisation has given rise to a provisional system that is utilising the old denomination notes in different ways, even as they stay in circulation in the cash economy, at least until the end of December. Consequently, the poor have had to adjust their consumption patterns in ways that upset their delicate prioritisation of money, even as they continue to accept old notes in the informal cash economy that is struggling to maintain its momentum of business.
In general, employment within the cash-intensive informal economy tends to correlate with low-income levels. For an economy that still remains one of the most cash-intensive economies in the world with a cash-to-GDP ratio of 12-13% (in comparison, Brazil’s ratio of the amount of cash used in the economy is around 4%), and that employs a vast majority of its population within the informal sector –anywhere between 60-80% – demonetisation has had a significant impact.
Despite the widespread media attention on the daily trials of the poor as they attempt to navigate the abrupt contraction of the cash economy since the demonetisation announcement on November 8, there has been a relatively lesser focus on how this move can disrupt – likely in catastrophic ways – their fragile economic lives in the long run.
A welfare shock measures the change in consumption per capita that in turn provides a useful metric for vulnerability to poverty. This metric accommodates a vast majority of those who are on the edge, that is, the households or individuals that move in and out of the poverty line, or a comparably defined minimum level, when they suffer from a shock such as an illness (especially of a productive family member), theft or a natural disaster.
It is hard to overstate the nature of this fragility as what seems like a one-time discrete event can rupture the very tenuous cycle of daily cash flows – an event that can make recovery challenging if not impossible.
The poor, especially those who are daily wage earners often employed in the informal sector, are faced with a unique situation. Given their smaller, often irregular incomes, they find it harder to generate lump sums that can accommodate bigger expenses such as rent, tuition or medical fees. Such an endeavour requires constant attentiveness and effort to avoid expending whatever little money has been saved up thus far.
In general, being able to get these small savings off your hands almost immediately, or imposing a trivial barrier between you and your money, can help in protecting this money. Yet, if we think of poverty as the “tyranny of emergency,” as anthropologist Arjun Appadurai has called it, then having immediate access to this money becomes a critical factor as well. Therefore, achieving that delicate balance of distance from your savings, but not too much distance, is absolutely essential in helping the poor manage their daily cash flows – a principle that many informal (and some formal) financial arrangements will attempt to realise.
Demonetisation in a predominantly cash economy has disrupted, in many cases, this delicate balance between distance and access. Jahnavi (name changed) who works as a cook in Delhi, has no bank account. She was unable to take any time off from work to go open an account and then deposit the Rs 1,500 that she had in the old denomination notes into it because this would entail taking at least two-three days off from work.
Having borrowed money from her various employers, who will then adjust these loans against her monthly salary, Jahnavi is unable to take any time off from work for fear that her employers will think she is using demonetisation as an excuse to flee with their money. She ended up giving her money to her son’s friend who deposited it into his own bank account. However, he has not been able to take time off from his own job as a driver to go stand at a bank or an ATM to return her money. Even when he has been able to stand in the long queues, he has only been able to withdraw enough to meet his own household expenses. Jahnavi needs to pay the interest on a loan that she owes to a local moneylender and she fears she will now have to borrow more money from her employers to meet that payment, a prospect she is not entirely happy about.
Furthermore, Jahnavi is unhappy about the new Rs 2,000 note, especially now when it is in more supply than the new Rs 500 note. Since she was given her salary in the new Rs 2,000 notes, she has been forced to spend it when shopping for food and other small utilities.
She is now stuck with a sizeable amount of money in small change which tends to get spent faster and more easily than higher values notes – another impediment in generating lump sums. Jahnavi has suddenly found herself spending an extra Rs 20 here for a packet of wafers for her grandson or another 50 rupees there for a stack of pretty bangles. These are expenses she probably would have thought twice about if she had a 1000 rupee note on her instead of ten Rs 100 notes, not to mention that she would have likely used the high denomination notes to pay off her interest to the moneylender (who demands repayments in mota paisa).
Thus, due to demonetisation, Jahnavi’s money has at the same time become harder to access yet easier to spend, but in ways that are affecting her consumption choices in, perhaps, perilous ways.
With business suddenly drying up in a cash economy when there is no cash to go around, if even temporarily, and foregoing a day’s wages, or more, to queue up at banks or ATMs to access, the incomes of those employed in the cash-intensive, informal economy have certainly taken a hit.
Thus, many traders, shopkeepers, auto drivers and other market players in the cash economy have reported lower earnings in the immediate aftermath of the demonetisation move – a welfare shock in and of itself.
To add to this, the subtle and often invisible ways in which demonetisation is affecting the consumption patterns of the poor also qualifies as a welfare shock that can create deeper cycles of debt where critical expenses such as medical costs or school fees may be sacrificed, further cementing the poverty trap.