Demonetisation - A year later. Big trouble for the small and informal sector

Last November, Ramesh Kumar had to close his small cigarette-and-paan shop here for about four months following the note-ban. He bade his time at home, in his village, before reopening the shop in March this year.

“Everyone wanted to buy tobacco on credit. With very little cash in hand, I had neither enough to pay my suppliers nor to keep my business afloat. The situation in my village was no better but at least I did not have to worry about food,” he says recalling the post note ban days.

Ranjit Singh, a 28-year-old daily wage worker from Bihar, had to rush back to his village to exchange all the ₹500 notes he had sent to his aged parents. “I had no money to come back to Delhi. The local banks had no new currency. We took a loan from a moneylender at high rates, and I am still trying to pay it back,” he says.

For a small shop-owner and daily wager — both undocumented pillars of India’s vast informal economy — the note-ban came as a sudden, rude shock. Economic Survey-II agreed, saying demonetisation did hurt the informal economy, as it led to reverse migration and generated a rush for distress labour under the rural job guarantee scheme, MGNREGA.

From November 2016 to March 2017, demand for work under MGNREGA surged, before stabilising again, said the survey, adding that “more research is needed to disentangle all the rich and complex interactions between demonetisation and its impact on the informal sector”.

The slightly better off small enterprises also faced pressure as liquidity was sucked out, since most of them are cash-dependent.

“Initially, there were problems because of the suddenness, but now things have fallen into place. The situation eased by February-March,” says west Delhi businessman Vipin Arora, who runs Prem Nath Engineering Work, which makes machinery used in rail-cum-road trucks.

Giving a thumbs-up, Arora says: “The note-ban in a way was very good for us. Now small payments have eased, as suppliers have started accepting cheques.” Firms dealing exclusively in cash were the worst hit, he added.

The micro and tiny enterprises that depend on cash flow on a day-to-day basis, or even for new investments, were among the worst hit by the note-ban. They are dependent on the informal sector — money lenders, relatives and friends. Banks do not support them as they are considered high risk, says VS Narayanan, National Honorary Secretary, Federation of Associations of Small Industries of India.

Fund flow simply dried up for small-scale industries (SSIs), especially micro entrepreneurs who are dependent on private lending despite high interest rates. A year since, there has been no relief for such units either through the formal sector, the banks or the Centre’s MUDRA scheme.

It is important that the Centre steps in firmly to ensure banks and financial institutions implement MUDRA scheme for micro enterprises and the CGT (credit guarantee trust) scheme for SSIs, Narayanan says. These schemes provide funds without collateral and will be a lifesaver for micro and tiny units, he felt.

KV Kanakambaram, President, National Confederation of Small Industries and also the Industrial Estate Manufacturers Association, rues that innumerable fabrication units and micro and tiny enterprises have disappeared without a trace as informal lending had been curtailed without adequate support from the formal sector.

He recalled the floods of December 2015 in Tamil Nadu, which similarly wiped out a number of units. Just as they were finding their feet, demonetisation had dealt them a body blow, he said. Banks are absolutely no support as their NPA norms are too stringent. Payment delays alone would render small players’ accounts as bad assets as large companies take up to 120 days to settle suppliers’ dues.

Schemes such as the Credit Guarantee Trust Fund that promise up to ₹2 crore and the EDI are not being effectively implemented, added Kanakambaram.

“How many new entrepreneurs do you see coming up? Engineering graduates queue up outside companies willing to work for a few thousand rupees’ monthly salary. Where is entrepreneurship,” he asked.

Existing players are winding up. They are selling their lands to pay off banks and putting their feet up and idling, he said.

(With inputs from Surabhi and Aesha Datta in New Delhi)

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