Excellent analysis of the Modi ban’s cataclysmic impact on the aam admi (common man) in India:
Published: December 16, 2016 18:43 ISTBengal famine 1770: “The British had removed a large fraction of the coinage, evidently, which destroyed the mechanism of the exchange of goods. It is difficult to buy food when there is no money.”– Richard Stevenson, historian
“Money for day to day transactions became scarce. In rural Bengal, rupees alone had amounted to two-thirds of the currency. (In Modi’s India, the banned notes amounted to over 86% – my note). Money became so dear that prices of all other goods slumped; the scarcity of money was accompanied by deflation. Artisans, weavers and workers were thrown out of work due to the slump in demand. The credit market collapsed…without credit and in the absence of traders, equalizing supply and demand became difficult and had a destabilizing effect on the economy.”
– Sashi Sivaramkrishna, In Search of Stability: Economics of Money, History of the Rupee
That was in the 18th century. Ever since the midnight of 8/9 November 2016, the economy has suffered so severe a liquidity crunch that, says the CII, the decline in daily trade is of the order of 50-70%. This is just as it was in 1770 – precisely because “the removal of a large fraction of the coinage” (86% in demonetized notes, up from two-thirds in 1770) led to “money for day to day transactions becoming scarce”!”
Owing to the prevailing uncertainty, even those with ready resources in 2016 are not entering the market, as they did not in the 18th century. Sales of high-end automobiles – usually paid for by cheque or other banking instruments – are down between 20% (Hyundai) and 38% (Mahindra). Two-wheelers are hit by 35-40%; tractor purchases have collapsed by 63%; in the labour-intensive textiles and garments sector, four lakh workers have been laid off, and 60,000 in leather. These are figures for the last three weeks of November. This is not in consequence of only demonetization but the deleterious collateral damage that demonetization has inflicted on the economy as a whole.
Leaving aside apologists for the Modi regime, most independent economists are agreed that GDP for the next two and possibly three quarters has taken such a hit that GDP growth will decline by at least one percentage point or more, with Ambit Capital estimating that GDP growth will be more than halved to 3.5% for FY 2017.
Transition costs before the restoration of normalcy is brought about have been estimated by the Centre for Monitoring Indian Economy to be in the region of Rs. 1.28 lakh crore, borne by ordinary households, commercial and manufacturing enterprises, banks, government and the RBI. Moreover, deposits of demonetized notes have already crossed Rs. 13 lakh crore of the Rs. 15 lakh crore earlier in circulation. Almost all these deposits are lilywhite, representing the hard-earned income and savings of ordinary folk. Black money held in cash has never exceeded 5-6% of the total stock of illegally held wealth. So it was always ridiculous to imagine that the menace of illegal money could be met by demonetizing so-called High Denomination Notes (HDN). The Government gave their game away when they informed to the Supreme Court that they hoped to garner 4 lakh crores through black money hoarders not depositing HND for fear of exposure. The BJP’s evident but unstated intention was to use this bonanza to announce populist schemes through the Union Budget on the eve of the Uttar Pradesh and Punjab elections. In the event, I am given to understand by reliable sources that internal estimates in the RBI show that the sterilized amount on the last day of December is unlikely to exceed Rs. 50,000 crore. Thus, there will be no bonanza for Modi to compensate the aam admi for the rough time he has been put through.
And times have been rough since Modi went on TV that dreadful night of 8/9 November. Just as the kisan and khet mazdoor were recovering from two successive years of drought, cash-dependent sales, transport, marketing and distribution of agricultural produce, especially of perishable fruits and vegetables, have suffered huge losses along the entire supply chain from the farm to the mandi and the rehriwallah. Non-availability of ready money has resulted in a staggering drop in labour employed in farm and farm-related activities. Plantation labour is not getting paid, not because plantation owners and management do not have the money to pay them, but because owners and management are unable to access their own money.
Similar is the situation in construction and real estate, the second-largest employers after agriculture, accounting for 34-45 million daily-wage jobs in an economy of jobless growth. Contractors are laying them off in droves because the contractors are denied access to their own money to pay their labour. Wage-earnings in construction have thus been slashed by 80%-90%. One prominent news magazine has a cover story portraying Real Estate as descending from “Boom to Doom”.
As for manufacturing, millions – literally millions – of small and medium enterprises have closed down. At least 60,000 microfinance companies are badly hit, repayment collections having dropped by 600 cores and disbursements having collapsed in similar measure. (See the parallel to 1770 when, to quote Sivaramkrishna, “Artisans, weavers and workers were thrown out of work due to the slump in demand.”) Urban unemployment has shot up from a little over 7% to well over 9%. As one financial analyst succinctly put it: “cash shortages (have) hampered growth of new work, buying activity and production”. (That is what Stevenson meant when he said of the shortage of money that aggravated the causes of the Bengal famine of 1770, that this “destroyed the mechanism of the exchange of goods”). As for the informal sector of the economy that employs 90% of the work-force, the renowned economist, Pronob Sen of the International Growth Centre, has bluntly stated that demonetization has “penalized” the entire informal sector and damaged it “permanently”.