Thursday, November 9, 2017

Demonetisation – Impact on Businesses

Cash based business in India has been big. Usually it is referred to as Parallel Economy, but then, still, it is an Economy. It still generates livelihood for poor people. I guess the only little difference is they do not pay taxes, and, therefore, it is important to bring it in the formal economy.

Many different segments have enjoyed cash-based business. From the vegetable, milk, fruit vendors to barbers, grocery shops to Gold, Diamond & Real Estate, all have dealt in Cash. It’s a very wide segment. Not all of it goes untaxed but a considerable portion does. If you go by the assumption Bibek Debroy, Vice Chairman of Niti Aayog and Chairman of Economic Advisory Committee of PMO, made during Demonetisation, Govt expected around Rs.2.5 Lakh Crore to be untaxed Cash Business.

When Demonetisation was announced, these were first businesses to get directly affected. Customers were short of cash or had no cash, and vendors neither had Card Machines or IMPS/UPI facility.

Bigger businesses dealing in cash, like Gold, Diamond or Real Estate were flushed with demonetized currency, by people who wanted to get rid of their unaccounted wealth. In Gold and Diamond, inventory moved, and transactions could be tracked if there’s will in the department. In real estate, it was a matter of immovable asset. Nothing moved, except may be a piece of paper that listed down Unit Number, Area and Address. This was a business of faith. These players in turn moved the money to their own creditors, thereby strengthening their overall books.

Irrespective, an eye on the near future saw a gloom. Businessmen knew it that Cash is not going to be available either as revenue or as loan for a long time to come. Obviously, people began talking. Add to that the NPA issue, GST teething problems and, later, the decrease in GDP growth rate.

This has led to a widescale complaining about strain on businesses.

Shameful Time Magazine cover
Highlighting the days of Policy Paralysis
Has Demonetisation really done this to businesses?

Answer is, Yes and No.

Firstly, if people rewind their memories, there were legacy issues from Congress days itself. After the fall of Banks in America & recession in European Economies, India too had difficulties and between 2012-14, we had decline in Manufacturing, Foreign Exchange reserves were low, Inflation had reached a peak, Fiscal Deficit was high, Current Account Deficit was high, a general atmosphere in the country was not very conducive for business or economic growth. Manmohan Singh sarkaar was accused of Policy Paralysis by YashwantSingh ji in his famous Apology to Kapil Sibal, when he was still a key BJP MP and spoke on Economic Issues in Lok Sabha.


So, Demonetisation alone was not responsible for the woes that certain business classes suffered.

Demonetisation did play some role…

Now, the rising NPA Levels, Tax Evasion and Corruption in general necessitated action from Modi Sarkaar. How that action should have been timed and synchronized is a separate debate, but action was taken.

For Tax Evaders, Govt had made the intent clear from the very day after Govt assumed office when it made the SIT on Blackmoney as per Supreme Court order, later passed Blackmoney Act, then issued the IDS 2016.

Let us be clear then, if so many chances to come clean are ignored by the Cash-based businesses, then Govt also had no option but to come up with a scheme that was punishing in nature. Demonetisation was meant to hurt these businesses, not to make life comfortable for them. Even during Demonetisation, Modi Sarkaar issued IDS-2, where coming clean was the last option given to the Assessees. The deal couldn’t have better than this. Many of us on twitter were demanding this, and Govt responded.

But here, one cannot ‘accuse’ Demonetisation of hurting cash-businesses coz that was the very nature of that exercise. Its aim was to penalize those who continue the unaccounted ways of conducting businesses.

But yet, we must recognize difficulties…

Of course, here again, no amount of CSSO or RBI data can explain the position of businessmen, these are Human Stories, of crushed dreams. Of people who rose from an employee to owning their own little show and then went back to becoming employees due to multiple onslaught.

Two areas where Govt could have been careful

1.   Class War comments – That Rich people are thieves, they have taken away poor man’s money, is very dangerous idea to float in a country like ours. Last thing we want is a class war and Right Wing pushing Left Wing Agenda.
2.   Provision of Adequate Institutional Credit to Unorganised Sector – Many businesses are ineligible for adequate institutional credit cover under current prudential banking norms, due to the nature of business, risk profile etc. hence forced to take loan from cash/unorganisd market at much higher interest. Demonetisation dried that source of capital while Banks still cannot issue loans that covers their requirements adequately.

Having said that, the remonetisation exercise have been fast. The currency in Cirulation has already reached Rs.16.347 Lakh Crore. That’s about March-April 2016 levels. So after March 2018, cash availability per se may not be an issue. Govt can utilize this time for formulating a policy for financial inclusion of unorganized sector.

But Modi Govt did everything to protect the poorer category

While to the richer Cash Business category Govt gave schemes after schemes in which they could come clean, Govt ensured that poorer participants in Parallel Economy are not hurt. At least they did everything in their powers. Here are two important steps that bolster this point.

Jan Dhan Yojana
1.   Jan Dhan Yojana – Bank accounts were opened for all these poorer participants of Cash Economy. At the time of Demonetisation, this ensured that they could deposit their own cash and exchange, and ofcourse the rich tax evaders used their accounts to deposit cash, which is effectively theirs now.
2.   MUDRA – Govt launched MUDRA in 2015, thereby giving poor participants of Cash Economy like vendors & shopkeepers or other self-employed category a chance to access institutional credit cover. Again, even though Govt has a massive data on MUDRA, I would like to assess the full positive impact of this scheme after another year or so.

MUDRA



Conclusion

Demonetisation is a penal scheme. It had to have a punishing effect on businesses. Many of these businesses were already in difficulties since at least 2012. So, Demonetisation alone cannot be blamed. Govt gave ample opportunities to businessmen, they shd have utilized opportunities instead of continuing to evade. As for poorer category of Cash Economy, Govt created necessary mechanism for them to overcome this onslaught. Not only that, this category might come out lot stronger.

Amongst the business categories facing difficulties, some will perish and then reinvent themselves in new business categories, or new entrants will fill the empty space. As far as the big picture view is concerned, there may not be any void. New breed with a more organized approach is bound to rise again here.


And as far as the Formal Sector is concerned, they remained largely unaffected from Demonetisation whatsoever.

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