Unskilled labourers worst hit by note ban: World Bank report on India

The debate on Prime Minister Narendra Modi's decision to demonetise 86% of the currency notes in November 2016 seems to have more or less settled in his favour.

Since the decision was taken, BJP registered a thumping victory in Uttar Pradesh's assembly elections and India's economy registered above 7% economic growth in the September 2016- March 2017 period.

Based on these numbers, the BJP supporters can safely argue that demonetisation hurt the intended class - those who hoard black money.

If any doubts persist, the government can show reports from International Monetary Fund and the World Bank that are all praise for Indian economy.

One such report released by the World Bank on 29 May says “fundamentals of the Indian economy remain strong, with robust economic growth, strong fiscal consolidation, low current account deficit, higher agricultural output, growing FDI, low inflation and higher wages in rural areas.” 

Praising the government on demonetisation, the report says, “Demonetisation has potential to bring positive transformation”.

Does Modi wins against his detractors?

Not really. The same report, in a passing para brings the skeleton out of the closet.

“While limited data is available, demonetisation may have had a disproportionate impact on poorer households, which are more likely to work in construction and informal retail. Demand for guaranteed employment up to February 2017 exceeded the full year of FY2015/2016 and rural consumption (in particular, sales of two-wheelers) contracted sharply in November. Greater data availability, especially on labor markets, is needed to better gauge the social impact of policies in the future.”

The real estate and the construction sector employs around 40 million people, mostly lowly paid unskilled ad semi-skilled labourers who live on the threshold of the poverty line in the country. Most of these people are migrants and work on daily wages, hence there would never be any data to how they coped with the demonetisation.

Migrants who work in the construction sector usually do not even have bank accounts, therefore these people were far worse than those seen standing in bank queues.

According to Central Statistics Organization, the Indian economy grew at 7.1% in September-December period.

In those robust growth numbers, construction and real estate grew the least at 2.7% and 3.1% respectively.

Lower manufacturing growth

According to Mint, under the latest series for calculating index for industrial production, “the average rate of growth in the last four months of the fiscal year in 2014-15 was 3.2%; in 2013-14 it was 3.7% and in 2012-13 it was a very high 9.4%.” 

However, during December 2016-March 2017, the IIP growth was merely 1.6%, indicating a decline in consumption due to demonetisation. The IIP data shows only the decline in the formal sector. If the decline in the growth of formal sector manufacturing was so sharp, the impact on the informal sector would have been bigger.

Opposition's undoing

The Opposition wanted to score against the government on the issue of demonetization. It was successful in its endeavor in the first few weeks, but once the government came out with high growth numbers followed by a victory in Uttar Pradesh, there was not much left to counter the establishment.

But the lack of data on the informal economy was always going to work in favour of the government. The informal sector accounts for an estimated 45-50 percent of output in the Indian economy, but due to unavailability of real time data on informal sector the government takes the growth in the informal sector to be the same as in the formal sector.

“The methodology employed for GDP calculation, although workable during normal times, is absolutely not valid for unusual situations (like demonetisation) for the reason that it does not have data on the informal sector that has borne the brunt of demonetisation," economist Arun Kumar, formerly professor at Jawaharlal Nehru University, told IANS in Mach 2017.

Prime Minister Narendra Modi may have successfully defended demonetisation over the past five months on the back of visible evidence in the form of formal sector growth data, but as the time passes by, with detailed studies coming out, it would become difficult to justify the sudden move of destroying 86% currency of economy.