Tuesday, May 30, 2017

World Bank: Demonetization has hit hard 90% of India's workers, disproportionately impacting poorer households

By Our Representative
The World Bank has raised the alarm that while “the macroeconomic impact of demonetization has been relatively limited”, the informal economy, which makes up 40% of the GDP and employing 90% of India’s workers, is “likely to have been hit especially hard”, even as regretting lack of availability of reliable data on this score.
In its report “India Development Update”, released on Monday, the report, talking of “the disproportionate impact of demonetization on India’s informal sector”, suggests that “the poor and vulnerable are more likely to work in informal sectors (farming, small retail, and construction), and are less able to move to non-cash payments.”
Calling the construction sector “an important gateway out of poverty in India”, as it has “dual effects of creating jobs at the low-end of the income distribution, and providing conditions for crowding in private investments and sustaining growth”, the report states, “Demonetization’s continued impact in FY18 is expected to be felt primarily in the construction and real estate sectors.”
According to the report, “First, informal traders and credit providers felt the brunt of the withdrawal of liquidity. If informal credit providers, who serve individuals and informal businesses, faced losses related to cash that they had not previously declared, their capital base and future ability to lend declined.”
The report says, only the formal merchants and businesses “were better able to switch to non-cash forms of payment during the liquidity crunch, thereby minimizing disruptions”, adding, at the same time, “many firms that had been reluctant to formalize” adopted digital payments, “moving a step closer to formalization.”
Suggesting this a positive development, the report says, as the informal economy accounts for 82 percent of non-agricultural employment, demonetization has this way helped promote “a reallocation of resources from the informal to the formal economy.”
“Cash transactions are still very prevalent, however”, the report says, adding, while it true that after the demonetization decision in early November 2016, there has been “a large jump in digital payments” with use of debit cards up by 92%, y/y in FY17 vs. 31 percent in FY16), the “high growth comes from a low base”.
The report says, “India’s economy was slowing down in early FY17, until the favorable monsoon started lifting the economy, but the recovery was temporarily disrupted by the government’s ‘demonetization’ initiative.”
Noting how on November 8, 2016, the government demonetized an estimated 23 billion INR 500 and INR1000 banknotes, corresponding to 86 percent of India’s currency in circulation, the report says, “Demonetization caused an immediate cash crunch, and activity in cash reliant sectors was affected. GDP growth slowed to 7.0 per cent year-on-year (y/y) during the third quarter of 2016-2017 from 7.3 percent in the first quarter.”
“As a result”, the report says, “a modest slowdown is expected in the GDP growth in FY 2016-2017 to 6.8 percent. According to the Update, growth is expected to recover in FY 2017-2018 to 7.2 percent and is projected to gradually increase to 7.7 percent in FY 2019-2020.”
“While limited data is available, demonetization may have had a disproportionate impact on poorer households, which are more likely to work in construction and informal retail”, the report says, adding “Demand for guaranteed employment up to February 2017 exceeded the full year of FY2015/2016 and rural consumption (in particular, sales of two-wheelers) contracted sharply in November. Greater data availability, especially on labor markets, is needed to better gauge the social impact of policies in the future.”

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