By Netra Mittal
Demonetisation has led to a wide opening for the role of digitisation of transactions due to the increased difficulty of conducting cash transactions. It will allow for greater formalisation of relationships, particularly among the business community. A formalisation of the economy is both good and bad news. Good news as it will lead to a professional approach among people in financial matters and bad as it will hit our informal economy.
For instance: the rural economy was on course for revival in 2016, but then demonetisation happened. But this effect wasn’t limited to the rural economy. It impacted the informal economy too which had already been suffering from demand deflation. Besides, demonetisation has also led to a “shift of income” from the informal sector to the formal sector, which was already in a position to lessen the shock so received from DeMo–by simply switching to digitalisation or through tax compliance. Hence, the informal sector now faces worsening of its everyday problems.
The informal economy
The informal sector economy is part of a country’s mere “survival” strategy for poor households as it plays a passive role in development. In India however, it isn’t viewed to be, an aberration to our growth. Rather, it is an integral part of the process of transition from a traditional economy to a modern economy. While it may not pay taxes and is largely dependent on cash, it provides employment opportunities to all those making an exit from the agricultural sector, which is, as we all know, over-populated. It provides the first exposure to many of these illiterate and low-skilled workers to the new economy. Most importantly, it deals with the task of re-skilling these people. Any attempt to reduce the role of the informal sector is only going to make the transition difficult for the economy. As a matter of fact, the whole impact of both demonetisation and GST, in the general sense, on the informal sector, is something unspoken.
As a result, the government has delivered blow after blow to the informal sector which can be attributed to the idea they have of formalisation for the entire economy presently. Let it be clear that an economy shifting gears to a formalised state on its own wheels is a completely different thing from taking the wheel to steer it down a road forcibly, which is a direct implication of demonetisation. This has taken its turn on the informal sector and that is what is wrong, because to those affected by it, there’s no cushion for them to get jobs anywhere else. As a result, they get thrown off the bus on way to development.
Cash vs. Digitisation
Aruna Roy of MKSS in a recent interview talked about how the DeMo move will almost finish off the informal economy. It seems ironical how this demonetisation and digitalisation is pushed forward as a positive thing for the informal sector. However, the truth is far away from that; it poses many practical problems. For example, it will force informal participants to do tedious record-keeping to show tax compliance. This also forces their entire system—small farmers, mandi owners, other wholesaler customers—to go cashless and this may not work for all, certainly not for the poor farmers struggling to pay for electricity. Much less the internet!
Besides, the sheer logistical difficulty of getting everyone on board the cashless ship is itself a herculean task. Out of the 2 billion people in the world without a bank account, India houses a quarter of them. That’s a significant proportion of the global population to leave behind on this revolution. If the lack of a bank account marginalises certain sections of the society who do not have access to these financial services, the move to a complete banking based transaction system will completely alienate them.
A long way to go
Throughout the course of demonetisation, and what the government doesn’t seem to realise, is that the informal sector has managed to survive solely by taking loans, for example, a farmer who has to sow crop takes loans from seeds or pesticides sellers due to the absence of cash, which increases their debt. And now that many of their earlier cash-paying customers have decreased, it really puts things into perspective for us. In fact, there have been reports that in the Green Revolution states, farmers practising multiple cropping have been driven into deep distress because of demonetisation and the kind of debt they’re in has a lingering effect. But there are still some measures the government can take up. They can begin with making sure that the cash shortage is overcome and by providing help to the informal sector.
As Prabhat Patnaik, economist and professor at Jawaharlal Nehru University said “All those cushions that earlier protected them have been removed; as a result, this is a sector that is now being buffeted around by the so-called market forces, which basically means being encroached upon by the large capital and the formal sector. And I think providing them succour by protecting them against such encroachments is the way to revive them and through that, the economy itself.”
It is indeed.
Featured Image Source: Monito – Money Transfer Comparison on VisualHunt.com / CC BY
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius
