Repercussions of India's Protracted Cash Shortage
An article published in Economics & Political Weekly (EPW), by economics researcher and teacher Anuradha Kalhan, looks at the adverse impact of India’s demonetisation policy, from employment and sales to loan paybacks and savings. It concludes financial inclusion took a particularly bad hit, and still requires action four years later.
Announced in November 2016, and eventually seeing the withdrawal of almost 86 percent of cash from circulation, the sheer scale of the policy decision, and the extended period of currency shortages, have no parallel in recent world history. Additionally, Kalhan observes, the fallout seemed to begin immediately.
A report by the Centre for Monitoring Indian Economy, a business information company based in Mumbai, suggests the ongoing decline in labour force participation rates began at the time the policy was enacted. The EPW study notes that, while demonetisation is not solely responsible, the timing indicates November 2016 was a defining moment in analysing the downward trend.
As part of the policy, the Reserve Bank of India reduced currency in circulation and kept it below its pre-November 2016 levels, thereby reducing the availability and use of cash. Eight months after the policy was announced, currency in circulation had reduced from 12 percent to nine percent of GDP. In developed nations, this figure is typically between five and eight percent, and so a rapid restoration of cash into circulation was not considered desirable, despite the damage caused.
Kalhan notes the higher cost of non-cash transactions, and the total reliance of those without bank accounts on cash had rapid repercussions. For self-employed and wage-employed tradespeople, the impact on business and sales turnover was especially serious. 52 percent of those surveyed for the study reported their sales fell after demonetisation, and nearly two percent said the decline was around 100 percent. About eight percent reported a family member had lost their job. 37 percent reported a fall in family income.
The article describes how, in the immediate aftermath of demonetisation, unpurchased fruit and vegetables rotted. Some vendors had to sell on credit. Many had to borrow more money to pay back loans, and were left unable to pay for cooking gas, hospital bills, wedding expenses and travel.
Kalhan highlights that it was the poorest suffered the worst collateral damage, and this segment of society forms the bulk of those informally employed within the cash economy. Their ability to raise credit for business purposes was greatly reduced, and many got into deeper debt—including from ‘informal sources’—in the medium term.
The article concludes that financial inclusion now requires a long-term, steady and planned pathway to employment, and notes that—after four years—there do not seem to be any shortcuts.
Cash is key to financial inclusion, and given recent figures show India’s cash in circulation continues to grow year on year, it seems set to remain a vital part of the Indian payment landscape.