Demonetisation – Why?

  1. According to an ASSOCHAM survey, demonetisation would leave quite a negative impact on SMEs, rural consumption and job creation in the immediate run.
  2. The All India Manufacturers’ Organisation (AIMO), representing over 300,000 micro, small scale, and medium and large scale industries engaged in manufacturing and export activities, in a study on the first 34 days since demonetisation, found that micro-small scale industries (MSI) suffered 35% jobs losses and a 50% dip in revenue.
  3. According to the Clothing Manufacturers Association of India (CMAI), “There was a drop of over 40 to 60 per cent in the market after demonetisation. However, while bigger brands have recovered well, smaller manufacturers and retailers, who largely deal in cash sales, have been affected more.”
  4. According to the data released by Society of Indian Automobile Manufacturers (SIAM), automobiles sales slumped by 19 percent in December. Passenger vehicles sales fell by 1.4 percent while scooters and motorcycles that form the bulk of rural household also registered 22 percent fall in the highest monthly drop.
  5. Confederation of Real Estates Developers’ Associations of India (CREDAI) and other sources in Tamil Nadu said nearly 1,000 major construction projects in Chennai and Kancheepuram districts have been hit. On an average, there will be anywhere around 100 to 200 workers at a single project.
  6. The All India Motor Transport Congress (AIMTC) has expressed how demonetisation has led to an unprecedented crisis for the trucking industry. The AIMTC, which represents almost 75 lakh truckers across the country, has reported on how the turnaround truckers time for truckers has increased as they are embarking on shorter trips. Moreover, there are still no provisions for cash payments on state highways and smaller municipal roads. The truckers are increasingly out of work as overall demand falls.
  7. As per a baseline survey conducted by the Tea Board of India, there are over 750 tea plantations in Assam employing about 65,000 workers and 273 plantations in West Bengal employing about 30,000 workers. On an average, a tea plantation needs Rs 10 lakh per week for wages to workers in cash. Demonetisation demobilized these weekly payments to tea workers despite several RBI circulars.
  8. The demonetisation announcement caused chaos in the travel and tourism industry. The sector grew at 2.8 percent last year, faster than it did worldwide (2.3 percent). It contributed to 6.3 percent of the country’s GDP and created 78 jobs for every million rupees invested, according to tourism ministry data (agriculture creates 45 jobs and manufacturing 18 for the same investment). The peak tourism season witnessed a significant hit with popular holidays destinations reporting at least 65% drop in bookings, an Assocham survey has noted. According to the findings, travel trade has reported around 40-45% drop in bookings for international tourists while business for the domestic travellers has gone down by well over 65%.
  9. India’s jewellery market, estimated at Rs 3 lakh crore, which is 85 per cent unorganised, was hit dueto  Almost 85-90 per cent of transactions in the unorganised jewellery market in India takes place in cash. Many of the small gold jewellery making units had shut shop as they could not pay wages to their employees. Thus demonetization not just affected the workers involved in this high skill employment, this move has favoured the organized big jewellery chains over the small ones.
  10. India’s Rs. 17 lakh crore agricultural and food markets, from the mandito the neighbourhood grocer, came to a standstill. Agriculture is impacted through the input-output channels as well as price and output feedback effects. Sale, transport, marketing and distribution of ready produce to wholesale centres, is mostly cash-dependent. Following demonetisation, many of these networks have operated less than their optimal capacity or have come to a standstill, depending upon location, market links and other factors. The input side is equally affected as many payments/purchases, such as seeds, fertilizers, implements and tools, are outright in cash. Prices crashed and fresh produce lay rotting. The small and marginal farmers are worst hit as they sell off their produce in the village itself. Similarly, value chains with minimal processing and direct consumer sales such as fruits and vegetables are hit. Most fresh produce is sold by small hawkers and street vendors. Since they take payment in cash and buy their wares from the mandi in cash, they are also affected severely.

The demonetization shock, as is evident in most sectors, was to wipe out small and marginal players in each sector, be it small and marginal farmers or street vendors or petty traders or even small industries and consolidate the market towards large corporations.