The excluded


Has last year’s demonetisation led to increased exclusion of the marginalised and poorest people of India?

Either the Reserve Bank of India (RBI) thinks that the demand for cash has fallen, or it believes that it should be curtailed. Eight months after demonetisation the RBI says that the re-monetisation process will not be completed. Currently, the currency in circulation is at 82.6% of the amount before 8th November, 2016, and likely to remain at that point. ATMs (Automatic Teller Machines) were running dry in the cities in May this year. The situation in cities may have improved, but reports from rural areas indicate that cash is still in short supply.

The mystery behind this decision like the decision of 8th November, 2016, remains. Some reports suggest that the decision to keep cash supply lower now is to control black economy and push people to digital transactions. There is some enigma to rationale number one, that is, control of black money, because western countries have in the past demonetised to check illegal weapons, drugs and money laundering (usually transacted in cash) by extinguishing large denomination currency in a phased manner. In India however, Rs. 500 and Rs. 1000 were removed and replaced by Rs. 500 and Rs. 2000.

The second rationale of forcing the process of digital transactions is simply untenable. The level of internet penetration is too low and skewed in favour of the well off classes. The Centre for Communication and Development Studies (CCDS) recently conducted a study in Pune, a city of three million residents, and a manufacturing and IT hub and found that it simply lacks the routers, fiber optic links and servers needed to expand access.

Hardly any public Wi-Fi spots exist, and broadband connections with faster speeds require infrastructure that is rarely found in urban India, even less so in low-income areas, and much less in rural ones. While an estimated 27% of India’s men use the internet, only 17% of India’s women do so. Being able to afford an internet-connected device is expensive in a country where an estimated 75% of the population earns less than Rs. 5,000 per month. Obviously, cash is the cheapest and for a vast majority, the easiest mode of transaction in India. So why is its use being limited? Is it only to eliminate untaxed incomes and illegal transactions of a minority?

What is perhaps more disquieting is the impact shortage of currency has had on the livelihoods of those at the bottom of the social pyramid. Petty manufacturers, vendors and traders found that their turnover shrunk, at first drastically in the months after November 2016 and then recovered, but to remain at below pre-November levels. In the immediate aftermath of 8th November, middle classes hastily shifted to large retail outlets that accepted card payments for their daily needs, thereafter only a section of that class has returned to petty vendors and traders. It took eight months for cash supply to reach normalcy in cities.

Online transactions increased after demonetisation and then fell, but they have remained above the November 2016 level. Only a section, usually the older generation and poorer have stayed with petty producers, local products and traders. GDP (Gross Domestic Product) estimates will not reflect this structural change immediately or the impact of demonetisation on this process. A larger class based survey of the impact of currency shortages on petty producers and traders is essential.

Processes that result in the exclusion of petty producing and trading classes must be analysed in the light of slow generation of jobs in the economy. If livelihoods in cities are threatened, what is the alternative for these people? The recent farmers’ agitations in various parts of India is now widely acknowledged as the consequence of long term agrarian distress, rising farming costs, fluctuating prices, followed by cash shortages caused by demonetisation. What will be the likely impact of prolonged cash shortages resulting in deflation on rural and urban economies?


Anuradha Kalhan

Anuradha Kalhan is an independent researcher. She was earlier a Fellow at NMML, Teen Murti.