Harish Damodaran - In fact: When the money stops
NB: The commentary on demonetisation by the governments apologists should be an eye-opener. Even in the throes of this brazen assault on everyday life, we are being sub-divided into Net-oriented categories of bhakt vs trolls, patriots and martyrs vs traitors etc. Can our government-friendly opinion-makers think about millions who are familiar neither with plastic money, nor with the hyper-nationalist vocabulary of TV patriots? They are neither bhakt nor trolls, just ordinary Indians making a living in the informal economy, in villages and small towns. Where are they to get the currency they need for every day life? Villagers trek 10 or 20 km to a bank, only to be turned away and/or asked to accept less money than they brought in demonetised notes. Lakhs of workers have returned to their villages from the small-scale sector; tens of thousands of trucks & small carriers have stopped moving. 25 people have died in the 6 days directly on account of this 'master-stroke' - some of shock, some due to exhaustion standing in queues. (The toll is 33 as reported on Nov 16; 47 on Nov 17; 55 on Nov 18). Many housewives have committed suicide and two babies died because hospitals refused to accept payment.
Millions of domestic workers, small shopkeepers, washerwomen, fish mongers, fruit and vegetable sellers & daily wage labourers are at a loss to feed their children. The PM laughs at failed wedding ceremonies yet some notorious mining magnates with BJP links can afford to spend obscene amounts - no black money there, apparently, or none that our leaders notice. Will the great 'Baba' who never tires of reminding us of the sacrifice of soldiers kindly tell us whether these dead persons are also martyrs? For what cause exactly? National glory? Modi's glory? Election strategy? Dictators are people at war with daily life, they are able neither to rest nor to allow others to live in peace, because crisis is their oxygen. There is untold misery in small Indian households today, and all we will be fed is more foolish polemic from smart economists in their own version of Wonderland. Good luck to all - DS
Millions of domestic workers, small shopkeepers, washerwomen, fish mongers, fruit and vegetable sellers & daily wage labourers are at a loss to feed their children. The PM laughs at failed wedding ceremonies yet some notorious mining magnates with BJP links can afford to spend obscene amounts - no black money there, apparently, or none that our leaders notice. Will the great 'Baba' who never tires of reminding us of the sacrifice of soldiers kindly tell us whether these dead persons are also martyrs? For what cause exactly? National glory? Modi's glory? Election strategy? Dictators are people at war with daily life, they are able neither to rest nor to allow others to live in peace, because crisis is their oxygen. There is untold misery in small Indian households today, and all we will be fed is more foolish polemic from smart economists in their own version of Wonderland. Good luck to all - DS
The effects of
de-monetisation will be the most acute when it spreads from consumption in
households to production in factories and by farmers across the country.
Why should the common
man be penalised; forced to stand in long queues to attain the new, crisp
currency notes? Especially since they cannot even spend it, as most
stores/outlets have already run out of the smaller denominations needed for
change. Even ATMs have not been stocked with Rs 100 notes, despite repeated promises.. The common man was pushed into a vortex of
confusion and anger. “Why us?” has been the common refrain. Frequent
assertions by the Finance Ministry that there was enough cash, did not find much traction either... merely printing
cash is not the same as putting cash into people's wallets. The system, unlike the banks, is not overburdened with the mad rush
to attain the new currency. Inefficacies on their end cannot be tied up with
the banks’ problems. If government is unable to supply money to the banks
because of a botched operation, then their promise to restore the cash flow is
clearly notional...The poor are now being hunted by the elite, as their empty bank accounts work perfectly as a money laundering
system – their zero-balance accounts are loaded with Rs 2.5 lakhs and then
withdrawn for a commission. Their Rs 500 notes are being traded for as little
as Rs 300 to Rs 400. This then leads to a pertinent question: Why should the
poor pay the price to divest the rich of their dirty wealth?
If you can't trace money parked in
Panama,
Target those who keep it in folds of pyjama,
If you can't scare a Vijay Mallya or a Lalit Modi,
Ensure every trader wets his vest and dhoti,
Can't stop owner of Kingfisher Airlines from flying?
Haul up drivers of autos, ricks and Bluelines,
If you can't identify and catch a thief,
Scan everyone right down to the briefs,
If you can't win polls with a surgical strike,
Let everyone experience financial strife
Target those who keep it in folds of pyjama,
If you can't scare a Vijay Mallya or a Lalit Modi,
Ensure every trader wets his vest and dhoti,
Can't stop owner of Kingfisher Airlines from flying?
Haul up drivers of autos, ricks and Bluelines,
If you can't identify and catch a thief,
Scan everyone right down to the briefs,
If you can't win polls with a surgical strike,
Let everyone experience financial strife
So far, the effects of
Prime Minister Narendra
Modi’s ‘de-monetisation’ of existing Rs 500 and Rs 1,000 denomination
currency notes have been largely felt by households, shopkeepers and other
microenterprises. These economic agents have, to a limited extent, adjusted to
the new situation through variations of a system, wherein purchases and sales
previously made in cash are increasingly being replaced by credit transactions.
Thus, if you have run
out of small denomination notes to pay your neighbourhood presswallah or milk
delivery man, it’s quite likely that they have now started providing the same
services on credit. They are doing so in the belief that you would pay as and
when cash in available. They, in turn, are obtaining their own basic rations
from the local kirana store through credit settleable at a later date in cash.
Storeowners and vegetables vendors, too, may be replenishing their stocks from
suppliers willing to similarly extend these on credit.
On the whole, then, we
have a credit economy today at the level of households and microenterprises,
which has, howsoever imperfectly, replaced transactions that were till the
other day taking place in cash. Much of it is, of course, built on trust and
faith between parties who know each other — and there is an unwritten
understanding that those buying on credit will not eventually default. So, even
if there isn’t enough currency available to grease the wheels of commerce, many
households and neighbourhood service providers may have well figured out ways
to stay afloat — so long as it doesn’t entail hospitalisation or other
exigencies where large cash payments cannot be avoided.
But when it comes to
other economic agents — factories, farmers and others engaged in actual
production — the reality could be different. Take Tirupur, a town in Tamil Nadu
that produces some Rs 32,000 crore worth of knitwear annually, three-fourths of
which is exported. Factories in this ‘knitwear capital of India’ employ an
estimated 5 lakh women and men involved in fabric cutting, stitching, ironing
and packing of garments, apart from related activities such as bleaching and
dyeing, compacting and calendaring, printing, embroidery and button-making. Out
of these 5 lakh, half or more are paid weekly wages in cash. A unit may have
1,000 employees, of whom 500 receive an average of, say, Rs 2,000 a week. It
translates into weekly cash disbursements of Rs 10 lakh as wages, whereas
business entities are now being allowed to withdraw just Rs 50,000 per week
from their current accounts maintained with banks. While the cash withdrawal
limit was even lower, at Rs 20,000, till a couple of days ago, the increase is
still nowhere near what is required to pay full wages to all workers.
What holds true for
Tirupur would also apply to other industrial clusters, from Surat and Ludhiana
to Panipat and Ichalkaranji. Hardly a tenth of India’s workforce comprises
organised employees receiving salaries credited to their bank accounts every
month. The rest are all those who get wages in cash, whether daily or weekly.
That being so, if banknotes worth over 86% of the total currency in circulation
are all of a sudden pulled out — officially declared to be “worthless pieces of
paper” — payments to these workers would obviously stop. The reason is not
because factory owners don’t want to pay, but just that there isn’t cash that
will enable them to pay. Unless a substantial part of the 86% withdrawn
currency is replaced by new currency — which Modi himself suggests could take
50 days — there’s no way that factories can run. Yes, households and
neighbourhood kirana stores may manage by replacing cash transactions with
credit, but can workers be paid salaries on credit?
What we have witnessed
so far is the first-round effects of de-monetisation. These have been mainly on
households forced to restrict consumption, not for lack of incomes but for cash
necessary to make purchases. But it’s the second-round effects — on production
— that are still to fully unfold. If non-availability of currency makes it
impossible for factory owners to pay wages, they are left with only one option:
shut down their units and lay off workers. These are not familiar sights yet,
unlike the serpentine queues forming in front of banks and ATM counters for
almost a week now. But when that happens — which may not take too long — that’s
when things can turn really serious.
But it’s not factories
alone. An average village-level dairy cooperative society in Gujarat procures
800-1,000 litres of milk daily from its farmers. At Rs 35/litre, this works out
to weekly payments of Rs 2-2.5 lakh — again in cash. It raises the same
question: If payments cannot be made in cash, how long will farmers continue
supplying milk? One positive impact of de-monetisation could well be that it
will force Tirupur’s knitwear exporters or dairy plants in Gujarat and
elsewhere to put in place systems for crediting wages and payments directly
into the bank accounts of their workers and farmer-suppliers. But opening and
operationalising these accounts will obviously take time — just as the printing
of new high-denomination currency notes and the recalibration of ATMs to handle
these, will. But in the interim, as workers and farmers stop receiving
payments, not only is production going to be affected, there will also be a
negative feedback loop on consumption due to drying up of incomes.
The impact of its
de-monetisation decision on production at factories and farms is something that
the Modi government needs to particularly worry about — even if these may not
be apparent immediately. This is the time when sugar mills in Uttar Pradesh have
just started crushing cane. A farmer cultivating cane in one hectare produces
an average 600 quintals, which he may supply in one-trolley loads of 50
quintals each every week. Given harvesting costs of Rs 40/quintal, it means
arranging Rs 2,000 of weekly cash to simply pay labourers for cutting and
loading cane to his trolley. On top of this, the farmer also needs cash to buy
fertiliser, seeds, pesticides and other inputs to plant wheat on the vacated
sugarcane plots. Where is this cash going to come from today? And is this the
time for the farmer to be in his field or spend all day at the ATM/bank counter
10 km away just for withdrawing cash?
The conclusion is
inescapable: Without cash to immediately replace the now de-monetised notes, we
are in for troubles whose effects may not take too long to be known.
