Towards a less- cash society?

  • Rs.500 & Rs.1000 Notes banned on Nov 8
  • Modi Government keen on moving towards less-cash society?

In a sudden turn of events, breaking away from tradition, Prime Minister Narendra Modi made a dramatic intervention and withdrew 86 percent of the currency notes in circulation, on the night of November 8th. Demonetization, as the move was termed, stopped considering the existing Rs. 500 and Rs 1,000 currency notes as legal tender.

Some term the move a “surgical strike” on black money, considering its extremely radical nature. The question to be asked here is:  Does this amount to a surgical strike on black money, or a surgical strike on informal economy and informal businesses? Will it eliminate black money or eradicate entrepreneurs operating informally and SMEs ( small and micro enterprises)?And on a positive note, in the long run, will it trigger a process of formalization of informal sector enterprise?

In simple terms, a doubt creeps in amidst all the hype: Will the bureaucrats in India actually ever stop taking bribes?

While demonetisation’s effectiveness in fighting corruption, counterfeiting and black money remains doubtful, it could nevertheless be seen as a  shock treatment for small businesses to fast embrace not just digital payment means, but also various digital technologies. The digital payment and settlement system and the required IT infrastructure might get established at a much faster pace with this move.

With the November 8 dramatic announcement, the country was pushed hard into  a less-cash economy scenario with least preparedness. Now for the vast majority of enterprises that are in the base of the pyramid i.e., SMEs, informal sector enterprises – which provide livelihood to 90 percent of labor force in the non-farm sector – have an uphill task ahead to float around and survive. Fast movement to a digital payment system is key to their survival.  If not, a large chunk of informal sector enterprises and SMEs may find themselves  replaced by organized sector enterprises and MNCs in this current flow.

A transparent digital payment and settlement system has the potential to make life easier for everyone. The economy may now move towards a “less-cash” economy with more digital payment options. However, those enterprises that fail to adapt to this, may go out of business. The beneficiaries would be enterprises in the organized sector. MNCs, multi-brand retail entities, e-commerce and online shops  will fill up the vacuum and replace informal sector and micro & small enterprises if they fail to shift to e-wallet and e-payment options. But how easy is this for them?

Paving the way for transition to a  ‘less- cash’ economy the union cabinet on 24 February 2016 approved various steps for promotion of payments through cards and digital means. Later on, the department of economic affairs (DEA), through its office memorandum dated 29 February 2016, ref. F. No-01/02/2015-Cy.I, brought out the detail guidelines, as approved by the cabinet, on promotion of payment through cards and digital means.  Several short term and medium term steps were also listed in the office memorandum by the DEA. A systematic implementation of the guidelines within the framework of   Vision 2018  Payment and Settlement System, a document  brought out by RBI, would have fought corruption and black money generation in a more effective manner. Then why this hurry and what prompted the PM to go ahead with this without needed preparedness? Was that political or genuine wish to fight corruption and to push India towards a fast pace adoption of digital technologies at all levels?

However are  we sufficiently prepared for a ‘less- cash’ economy as envisaged in   Vision 2018 and DEA guidelines   dated 29 February 2016?  However, there are several questions that come up. Is India’s vast majority of people and businesses, from street sellers, crores of neighborhood kirana shops to trading establishments in the rural side, ready for a sudden shift to digital transaction system.

India has a huge informal sector economy, contributing 60 percent or more to the GDP. The money that is circulating in the informal sector is not black money. They are involved in legal activities, but may be without required licenses or registrations, for which in most cases they are not responsible.

Even after several years of reforms, approaching tax administrators even for simple work used to create lots of hardship. In the event,  if there existed   more transparency and efficiency and less harassment, there could have been a higher rate of registered businesses operating in India today and less of informal sector. The unfriendly regulatory system is to be blamed for the existence of such a large number of informal businesses.

Despite much hype about simplifying and easing the business climate, nothing much has changed under Narendra Modi’s government.   India’s position in the global index of “doing business”, as per the latest report “ Doing Business: Measuring Regulatory Quality and Efficiency” by World Bank, is just 130 among 190 nations. India’s ranking reflects on the poor business environment and regulatory burden. It  tells us that license and permit raj, the disease that Rajaji named , is still prevalent. Those who voted for Narendra Modi expected a time-bound resolution of issues pertaining to enterprise climate.

However, there is a widespread feeling that Modiji has successfully eased the business climate for some of the well known industrial houses that are ‘close’ to him.  The point is that there is a strong case for enhancing the speed of addressing systemic issues causing corruption, and creating a business friendly regulatory environment for one and all.

The liquidity crunch has certainly impacted the economy, particularly exporters depending on informal sector for their sourcing. Handicrafts, handloom and rural industries are some examples. The list is endless. There is no sector that is unaffected.  With business transactions down by almost 90 percent or more enterprises are now finding it difficult to pay wages to their workers causing their exodus back to their villages from urban centres and industrial hubs. Daily wage workers who work in SMEs are affected as the enterprises they work for now faced with a challenge of continuing with business operations. Recycling sector which does a business of Rupees thousand crores or more per day has faced serious issues with this move, says the representative of an industry body. Street vendors, hawkers, traders – many of them operate  informally, but doing legal activities, have to face the pain of this shock therapy.

Yes, the King makes everything right on the right day. He can even write and create new rules on money and wealth management. But if the livelihood of millions gets extinct overnight, kingdoms can fall, for sure!

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DILIP
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DILIP

Imagine if this move was done by rahul gandhi all those criticising today would have been different people.so all the critical analysis is just a political discussion. And I believe the problem in this country is not technical issues. It is more about who is doing it. And today it is Modi. So in the name of technical criticism every one is killing the messenger( modi). For the defence of the country soldiers loose life. By the logic of of the critical analyst we should apply compulsory conscription like Israel. But in india it is acceptable, a soldiers death in… Read more »

Anonymous
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Anonymous

I am away from my parents and they are sensitized by few good Samaritans that days are coming ahead, you only save money now… sale out your gold and silvers. we are here to pay you good amount. My parents listened to them and sold silver utensils cost one lakh!
WHO ARE THESE GOOD SAMARITANS????????

Anil sharma
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Anil sharma

Now Modi Bhakts will say those who criticise his policies are all terrorists …….

Vibhuti Bhardwaj
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Vibhuti Bhardwaj

Modi knows that he can play on the Indian public’s psyche, which will swallow any grand sounding schemes with no meat to it. Modi followers have swallowed his demonisation drama hook, line and sinker and are rejoicing at the fact that all corruption in India has been rooted out.
Then again, playing the religion/community card is the last resort.

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V. N. Prasad
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V. N. Prasad

My take on the issue is that small enterprises, though hard hit now, are willing to wait for good to come out of this. Secondly, the move could force informal sector enterprises to come into mainstream. Lastly, creating an infrastructure for cash-less economy, in which provincial administration has a huge role, is a big challenge.

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