How Did Demonetization Hit the Economy?
Author: Thamanna Abdul Latheef 15 Jun 2018
As per the data released by the government, at least 73,000 deregistered companies deposited Rs 24,000 crore in bank accounts after demonetization that was announced on 8 November 2016. The data shows that 1.68 lakh out of 2.26 lakh companies which have been deregistered had deposited cash into their bank accounts after the announcement of demonetization of high-value currency notes.
The Ministry of Corporate Affairs had cancelled the registration of 2.26 lakh companies that had not been carrying out business activities for long suspected they were being used for illegal fund flows
Any headline jobs numbers thus need to be examined more closely. Pessimists are right when they argue that demonetization and GST caused waves of layoffs in the informal sector, which employs the bulk of Indian workers. Many were fired in the months after demonetization when employers didn’t have the cash to pay them.
The RBI cues
The RBI’s approach to the demonetization impact on the economy is bit perplexing, but the obtrusive caution is hard to ignore. In its latest bi-monthly policy review, the central bank has already cut the FY17 growth forecast to 7.1 percent from 7.6 percent, but not taking into account the full impact of demonetization shock.
The RBI indeed acknowledges that there will be ‘short-run disruptions in economic activity in cash-intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganized sector’. But the RBI’s larger assumption seems to be that there will be a recovery beyond the short-term pain of cash-crunch.
In short, the RBI has no clue at this stage what the demonetization will do to the economic growth. It primarily attributes the loss of growth momentum in the second quarter to the downward revision and to the as yet unclear effects of note ban. This means, if things turn bad, the 7.1 percent growth projection could be revised downwards even further to 6-6.5 percent.
There are indications of the severe hit to the employment in the informal sector post the government announcement of Rs 500, Rs 1,000 notes as illegal tender on 8 November. More than 90 percent of India’s workforce still earn their wages in cash. These consist of hundreds of millions of agriculture workers, construction workers and so on. The pain and suffering of these segments, which constitute the majority are not quantifiable, but no government can shun the responsibility of massive losses in the country that is a consequence of a “well thought-out”, conscious policy action, which according to RBI governor Urjit Patel, “wasn’t done in haste”.
According to a report in the Financial Express, which quotes unnamed industry officials, “As many as 4 lakh people, mostly daily wagers, may have either lost their jobs or shunned work temporarily due to the lack of payment so far, and the number is only going to grow if the cash crunch persists.”
Even the Bharatiya Mazdoor Sangh, the labour wing of BJP’s ideological parent, Rashtriya Swayamsevak Sangh has raised an alarm about the huge hit on job losses. “Under the new government, 1 lakh and 35 thousand job opportunities have been created so far but 20 lakh people have lost their jobs," Baij Nath Rai, president of the Bharatiya Mazdoor Sangh, told media. This is a serious situation indeed in a country where job creation is already a massive challenge. The onus, yet again, falls on the Modi government here.
There are no two thoughts on the intentions behind the demonetization exercise but when ultimately a cost-benefit analysis is done, and if the government finds little luck on recovery on unaccounted cash, the cost of this whole exercise will be enormous, far outweighing the gains that may include more people moving to non-cash transactions.
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