Demonetisation and cash flow chaos in India

Demonetisation rupees.jpg

Over the last few months the Indian government’s demonetisation policy has caused chaos for small producers, including those that Traidcraft work with. Alistair Leadbetter looks at the reasons for the policy and explains why it has had such a huge impact on small businesses.

On the evening of November 8th 2016 the Indian Prime Minister Narendra Modi gave the Indian people four hours’ notice that all 500 [£6] and 1,000 [£12] rupee notes would be cease to be legal tender and would be replaced by new notes in 500 and 2,000 rupee denominations.  The notes being withdrawn made up about 86% of the total value of notes in circulation and 24% of the total number of notes in circulation.

Modi’s rationale was that this would thwart counterfeiting and remove ‘black money’ from circulation. Black money is the term for money that has been earned, often through criminal activity, without the appropriate taxes being paid. India’s Central Bureau of Investigation has estimated that Indians hold around 5 billion US dollars of such black money abroad; there is no estimate available of the value of such money held domestically.

People were given 50 days to exchange their old currency, and the Reserve Bank of India simply didn’t have enough notes to meet the demand. This meant huge economic upheaval.

The amount of cash in circulation dropped dramatically and, since India is predominantly a cash-based economy, many people were left unable to buy food and goods. Markets were empty and, even when there was demand, traders were unable to offer change for larger notes. Workers queued at the bank every day to exchange their old notes and so productivity slumped, hitting business earnings.

The timber and woodworking industry of the town of Saharanpur, where many of Traidcraft’s wooden products are made, provides an example of how demonetisation has been felt by ordinary people. Suppliers have been forced to sell their wood for much less than its normal price just to get cash. Workers have struggled to find work since no one has any money with which to pay them. Some businesses have reported that their work declined to a mere 10% of what it had been and that important business linkages and networks quickly crumbled, perhaps as customers went elsewhere. As timber is such a crucial part of the local economy, the impact has been felt across the region.

An employee of Noah’s Ark, a Traidcraft producer based in Saharanpur

An employee of Noah’s Ark, a Traidcraft producer based in Saharanpur

This chaotic episode has demonstrated the extent to which so much trade is reliant on the flow of cash between buyers, sellers, employers and staff. Disrupt that flow, and things fall apart quickly. That is one of the reasons why our partnership with Traidcraft producers includes committing to paying them on time and, frequently, with a percentage paid in advance.

Demonetisation has been a huge gamble by the Indian government, and it is yet to be seen whether it will ultimately achieve its aims. The one thing that is clear is that the major losers have been India’s poor: its small businesses, its workers, its artisans and its farmers.

Alistair Leadbetter is Traidcraft’s Supplier Support Coordinator.

Tom Wills