note demonetisation

Demonetisation isn't an inconvenience for poor people – it risks causing a welfare shock

The 'Economy' doesn’t lend, trickle to the poor – or do anything to ease the shock.

I want to make one thing clear. There is a difference between “short-term inconvenience” or pain or difficulty, however you want to call it, and a welfare shock.

Take a very simple empiric: 80% of families in India that are above the poverty line in one year and then fall below it in another, do so because of one illness, to one family member, in one year. Let that sink in please: one, one, one. That’s it. (see Aniruddh Krishna’s excellent “One Illness Away” to read more).

This is the reality of the vulnerability of what is so dismissively called the “cash economy”.

You can replace illness with wedding or funeral and the story still holds. Welfare shocks, as they are called, break cycles of very tenuous security and small economic gains, pushing families back into cycles of debt and depleted savings. They do it because we don’t have enough public welfare protections to guard against small risks and life events – domestic savings are the only floor.

The thing about demonetisation done in this way, where no planning accounts for the “short-term” contraction of the cash economy in a place where 60%-80% of workers work informally, half get paid in cash, and one in every five of them work in cash on daily/weekly wages (see Reserve Bank of India, National Sample Survey data, or the report by theNational Commission for Enterprises in the Unorganised Sector) then you aren’t pushing a “short-term inconvenience,” you risk causing a welfare shock.

Do the maths: daily wage workers weigh the opportunity cost of lost wages and risk to continued work (skipping even a day risks not being called back to work with the same contractor) against access to usable cash. This happens for two or three days. Then you need to spend. You borrow, and a new cycle of small debt begins. If in the middle of this, one small other thing happens – just one, say an illness, a puncture in your rickshaw, a sudden off-cycle bribe to the cops for your thela or cart – and you can’t use your savings, then the debt cycle worsens, or you forego other expenditures like food or school fees.

This is not “inconvenience”.

The risk here is that demonetisation will do exactly what illness, accident, eviction, funeral, and drought do to poor families. If you think just faulty implementation can’t do that, you are ignoring how thin the line between stability and crisis is for too many working people in this country.

So debate all you want about whether or not this will hit black money (and let me be honest that I am currently neither convinced by the sell or the critique on that count but that’s for another time), but what makes this move unconscionable for me is that there is no concern whatsoever to think about the consequences for a dominantly small cash economy. Let alone medium-term implications for the Micro, Small and Medium Enterprises sector, mid-size employment, and trade but the very real impoverishment effects of short-term crises.

Real risks

I don’t think it is accidental that we did not think the implementation through at all. The implementation seems to reflect the actual exercise at play when you hear Finance Minister Arun Jaitley speak.

Recently, he “regretted hardships” and “advised the public to be patient as the move will have larger benefits for the economy in long term.” In the short run, he said, some “obvious” disruption will be caused. “But once the money is available both in the system and more so in the banking system, the advantages of that to the economy and businesses will be far more. The capacity of the banks with all this additional capital to lend and support businesses is going to be far higher. And therefore medium term and long term advantages to the economy as against this temporary inconvenience or disruption, are far too many,” he said here.

He’s possibly right. The “Economy” of banks, deposits and formal lending will benefit, and do so enormously. The catch is: this is not the economic lifeworld where the shock is. The National Housing Bank says that 75% of all housing loans, to take one example, in the country given by financial institution are above Rs 10 lacs. The “Economy” doesn’t lend, or trickle, to the poor – or ease the shock. You want to connect these two economies, fine. Doing it through coercive deposit exercises will have a short-term effect at best. All the reasons why the poor don’t bank or transact in the formal economy will not change just because you pushed them through the doors this one time. Is chemotherapy really sound economic policy?

That said, let us also challenge any easy critique. There is a need to hit black money. It has real costs, many of them on equity as well as on growth. Some part of any plan to do so will be punitive and have collateral damage. But that is precisely why thinking through what to do must begin itself from the very real risks it poses and to take seriously the current nature and structure of our economies, not the “Economy.”

How to do that is a conversation we must have, if only to not let a welfare shock be described as an “inconvenience”. We are still to see the real impacts – even short-term – of this move, but what it signals for our priorities and approaches to economic change is worrying.

This article first appeared on Kafila.

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