India still scarred a year after Modi's demonetisation move

The cash shock hit small businesses, but some are adapting and recovering

A sign advertising Indian electronic and cellpohne-based payment system PAYTM hangs at a roadside vegetable stall in Mumbai on February 25, 2017.  / AFP PHOTO / PUNIT PARANJPE
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Vasant Atakari runs a small stall in the historic Fort area of south Mumbai – the source of livelihood that has sustained the past three generations of his family. Today, he is worried about the future of his business: selling fabrics for suits and other items of clothing in the post-demonetisation age does not guarantee food on the table.

“After demonetisation, we’ve had so many problems,” he says. “I used to sell 8,000 to 10,000 rupees a day of material. But now it’s just 1,000 rupees to 5,000 rupees a day. Sometimes I don’t even have money to eat.”

It is almost a year since India’s prime minister, Narendra Modi, announced a shock move to ban most of the cash in circulation.

There remains a significant level of scepticism from some quarters about how successful demonetisation has been.

While the intended effect was to weed out illegal money flows, many businesses are still suffering as a result of the measure, which has also slowed the pace of economic growth.

“The demonetisation caused unprecedented disruption in the economy and hardships to the people,” V K Vijayakumar, the chief investment strategist at Kochi-headquartered Geojit Financial Services, says.

On the evening of November 8 last year, Mr Modi made the announcement in a televised address that the two highest denominated banknotes – 500 rupees and 1,000 rupees – would cease to be legal as of midnight of that evening.

The aim was to try to clamp down on the widespread problem of black money in India, funds accumulated through kickbacks and corruption or cash on which no taxes were paid.


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The measure resulted in complete chaos in days to follow, Indians queued outside the banks for hours on end to exchange notes and autoteller machines were drained of cash, leaving people struggling to carry out transactions for their most basic needs.

Since an address to the nation does not happen so often in India, people started speculating about all sorts of eventualities, including war with another country, when Mr Modi’s speech was announced.

“That’s the speculation that happened when he began his speech until the time he said we were going to demonetise,” says N Chandramouli, the chief executive of TRA, a data analytics and brand insights firm in India.

“This shock is not something that this system needed. You don’t want the surprises, you want stability.”

It was crippling for the business community in general but the smaller businesses, in particular, were hit hard by the move as almost all of them depend on all cash transactions.

“About a fifth of those are either under a vulnerable state or shut down after a year of demonetisation,” says Mr Chandramouli.

Cottage industries, such as the handloom sector, handicrafts, and the leather industry, as well as small traders, were and are the worst affected, he adds.

Gold and the property market – two areas into which a lot of black money had flowed into in the past – have also been heavily affected.

Official data shows that India’s GDP slowed to a three-year low of 5.7 per cent in the quarter between April and June 2017, down from 7.9 per cent in the corresponding period a year earlier.

The IMF says the economic slowdown in the past few quarters was largely a result of disruptions from the currency exchange initiative in November 2016 and, more recently, the roll-out of India's goods and services tax.

“A large number of businesses, particularly those dependent on tax arbitrage, closed down and job losses have been huge,” says Mr Vijayakumar.

The picture going forward is not rosy either and the pain may intensify.

“It’s not yet out of the woods,” says Anil Jain, who owns a jewellery shop in the bustling Zaveri Bazaar, Mumbai’s biggest gold market. “It’s really hit the market very hard. Some jewellers in India have shut shop because of the combined impact of demonetisation and the goods and services tax.”

India's new tax, designed to streamline the country's tax systems into a single regime across different states, came into effect in July, and it proved a struggle for small businesses in particular – which in some cases were reeling from the impact of demonetisation – to transition to the new digitised system.

Mr Jain says that he has noticed a significant shift from cash payments to payment by credit and debit cards, cheques, and mobile wallets such as Paytm and Mobikwik in the wake of demonetisation.

“All the high-end products were affected in India due to demonetisation,” says Mr Jain.

“People were very averse to spending. We’re hoping that things will pick up in the next year.”

Figures from the country’s central bank, the Reserve Bank of India, suggest that demonetisation was unsuccessful in terms of wiping out black money flows and simply brought it into the formal banking system.

Some 99 per cent of the more than 15 trillion rupees of banned notes were deposited in banks, prompting some analysts to question whether demonetisation was really the right move.

“It seems like a knee-jerk overreaction to the problem – it could have been thought through better,” says Mr Chandramouli.

In the chaos of new taxation system and demonetisation, there is still something to smile about India’s economic environment, and while most struggled, there are some winners.

The World Bank this week revealed that India climbed 30 places to 100th position in its ease of doing business survey, citing a series of reforms that have been taken by Mr Modi’s government.

Digital wallet providers have experienced a surge in business following demonetisation, as India, which has long been a heavily cash dependent society, was forced to adopt digital forms of payment.

Paytm, India’s largest e-wallet firm, has recorded transaction volumes up by almost four times in the past year to US$1.6 billion, which has been heavily driven by Mr Modi’s demonetisation initiative. The digital payment revolution has really trickled down to grassroots level, with some chai walas, rickshaw drivers, and roadside vegetable sellers accepting mobile payments after demonetisation.

“Demonetisation has been really good for us and overall for the whole digital ecosystem,” says Kiran Vasireddy, the chief operating officer of Paytm’s payments business.

“I think it’s a great step towards moving our country from a very cash-centric towards cashless.”

Tushad Dubash, the director of Duville Estates, says that sentiment among India’s potential property buyers was certainly “hit very badly” by demonetisation in the short term.

But developers with “strong ethical standards” will ultimately benefit from the move because it has helped to improve transparency and confidence in the sector.

“It has set the more ethical companies apart,” he says.

While Mr Vijayakumar says demonetisation will ultimately help purge and clean up the Indian economy in the long term, Mr Atakari remains concerned about the short term and the future of his fabrics business.