A study, co-authored by Stephan Siegel of the University of Washington Foster School of Business on the fallout of India’s demonetisation of high value bank notes on November 8, 2016, has found that the self-employed were the hardest hit financially by the move.
The Government, in a surprise announcement, withdrew bank notes of Rs 500 and Rs1000 denomination from circulation, effective at midnight. The reason given for this sudden act was to cut off the preferred currency of illegal commerce, corruption, crime, tax evasion and terror.
The study was to assess the impact of demonetisation on the urban poor in Mumbai. A survey of working families in the slums of the metropolis revealed that on an average, the working people lost income, was forced to cut spending and increase savings during the month following the step.
Siegel, who was on sabbatical at the Reserve Bank of India at that time when the nation was plunged into temporary economic chaos, decided to examine the toll of this policy on the urban poor.
Despite the turmoil and uncertainty it created, 56 % of the working poor households supported the demonetisation policy overall. Even 51 % of those who lost money reported that they approved of the policy.
He partnered with Deepa Krishnan of the SP Jain Institute of Management and Research (SPJIMR). In early December, Siegel and Krishnan sent MBA students from SPJIMR to 28 slums in order to interview the parents of kids they had mentored.
Interestingly, the survey found that despite the uncertainty it caused, most of the families expressed support for the policy—even a small majority of those who had lost income as a result.
“It is important to keep in mind that our survey is not representative of India’s population as a whole, nor is it necessarily representative of those of low socio-economic status in rural India,” says Siegel, an associate professor of finance and Evert McCabe Faculty Fellow at Foster. “Nevertheless, the results provide some initial understanding of the immediate and possibly long-term effects of the demonetisation policy on the working poor.”
The 179 families surveyed have limited education and a modest monthly income (in the range of Rs 7000-17000 or $105-254) from work as street vendors, shopkeepers, sales clerks, taxi drivers, personal drivers, tradesmen, labourers, tailors, embroiderers and maids.
The survey found that the urban poor households experienced, on an average, a 10% loss in monthly income. Service workers fared best, with only 15 % of those working as cooks, personal drivers and maids reporting income loss.
The self-employed fared worst, with 59% of shopkeepers and street vendors, and 41% of taxi drivers, labourers and tradesmen reporting significant income loss—of up to 44 % of their normal monthly income, on an average.
More than half of the households reported purchasing fewer groceries than usual, and 39 % postponed purchase decisions in November.
Households expressed a much greater expectation that they would keep their savings in a bank account rather than cash in the future, especially those headed by labourers and the self-employed.
Despite the turmoil and uncertainty it created, 56 % of the working poor households supported the demonetisation policy overall. Even 51 % of those who lost money reported that they approved of the policy.
“The biggest surprise for us,” says Siegel, “was that even people who lost income still supported the measure as they saw it as action against tax evasion and corruption.”
The policy moves India toward a cashless economy, a migration being discussed in the US and across the European Union, he adds. However, he stresses the preliminary nature of the survey that provides only a snapshot of demonetisation’s short-term fallout in low-income urban communities. He and Krishnan are working on a follow-up study that measures the financial impact on urban working poor families over a longer time period.
India is not alone in having removed currency of a particular denomination in an effort to combat corruption and crime. Demonetization policies have been used in the Soviet Union, North Korea, Ghana, Myanmar, even Great Britain and the United States, which began phasing out notes of $500 and higher in the 1940s. Earlier, on two occasions, in 1946 and 1978, India had discontinuing such problematic currency notes.
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In the present instance, Prime Minister Narendra Modi, announcing the step, had stated that it was needed to stem India’s rampant tax evasion and corruption. The 500 and 1000 rupee notes were seen as the favoured form of “black money” (unaccounted cash) that financed bribes, crime and terrorism. People stockpiled the notes to avoid paying taxes and these were the denominations most often counterfeited.
People holding legitimate and reasonable quantities of the decommissioned notes were allowed to deposit them into bank accounts or exchange for cash equivalents in other denominations. The intent of the government was to make amounts of undeclared money stashed away into worthless bits of paper.
However, by banning the busiest two notes of currency, worth about $8 and $15 respectively, effectively flushed 80% of the nation’s cash from circulation. This change was always going to be felt most acutely by the enormous population of urban working poor. For them, cash has been the main currency of compensation, consumption and savings.(Image Source:Google.com)
