India’s informal sector is being decimated by Modi’s obsession with cashless economy

Rajat Datta

Modi supporters, and some so-called `non-aligned’ expert are gloating that demonetisation will transform India into a cashless economy. What these people don’t seem to, or don’t want to understand is that one cannot make an economy cashless by forcibly withdrawing cash from its circuits of exchange. An economy being made to use less cash is not a cashless economy, nor can it be directed into becoming one by state action.

Generally speaking, the degree and intensity of cash usage, as a physical entity of a transaction in an economy will depend on the amount of credit available as an alternative medium of transactions, maybe even be inversely proportion to each other, A cashless economy can do with using less cash physically because of the prior availability (sometimes in excess then necessary) cheap credit and value-added assets possessed by individuals, which they can access because of cheap credit.

World Bank data show how globally economies using less cash are as a rule economies with easy and cheap credit. In Sweden, paraded as an exemplar of a cashless economy, interest rates on lending are tending towards zero. In the USA and Canada lending rates are at best 3.3 and 2.8 percent respectively. In Madagascar, on the other hand, the rate is 60 percent, whereas in India they hover around 10 percent in areas like home loans. They can be higher, 15 to 18 percent, for other kinds of loans.

In the informal sector (our famous `jugaad’ sector) where credit is hardly available as sureties or collaterals can’t be easily found, lending rates can be as high as 36 percent or more. All of us who enjoy the privilege of holding credit cards should try rolling our amounts due for a month or two to see what a compounding interest of 40 percent a year looks like. No wonder there is an almost total dependency on cash usage in the informal and agricultural sectors, and hence the massive anxiety when it is/was suddenly withdrawn.

A sector which contributes 46 percent of India’s GDP, and employs 90 percent of India’s non-agricultural labour, almost entirely paid in cash wages, is all set to be decimated by this demonetisation. This will have a telescoping effect on the formal sector as it sources many of its peripherals from the informal sector.

India will literally become a `cashless’ economy. How much of that economy will actually remain a recognizable economy at all is another matter.

 

 

  • K SHESHU BABU

    In a country where large number of people dependent on ready cash, introduction of electronic mode of payment and ‘ plastic’ money is a needless gamble. This has not been considered because, the rulers want to deliberately decimate informal sector in favour of corporates and promote ‘ mall’ culture. The super markets, the grocery internet sales, the home delivery corporate firms are replacing ‘ kirana’ stores, small vendors, hawkers and pedlars, street fruit sellers, road side coffee and tea stalls,etc. The employment of poor is, in fact, being destroyed .