No. 68, June 2017

No. 68 (June 2017)

Widening the Gulf

IV. War on the Unorganised

In his Budget speech, the Finance Minister declared that demonetisation and digitisation had “a transformative impact in terms of greater formalisation of the economy and mainstreaming of financial savings into the banking system.” (emphasis added)

He held out both a carrot and a stick to the informal sector. On the one hand, he claimed, without explanation, that “Increased digital transactions will enable small and micro enterprises to access formal credit.” At the same time, he warned them that they would be hunted down and made to pay taxes:

I place before you certain data to indicate that our direct tax collection is not commensurate with the income and consumption pattern of Indian economy.... As against 5.6 crore [56 million] informal sector individual enterprises and firms doing small business in India, the number of returns filed by this category are only 1.81 crore [18 million].

He thus conveyed the impression that there remain 36 million informal units which need to be brought under the tax net.

In March 2017, the Reserve Bank published its paper assessing the impact of last November’s demonetisation. In it, the RBI parroted the Finance Minister’s above claims, asserting again that demonetisation would bring “enormous potential medium-term benefits... in the form of reduced corruption, greater digitisation of the economy, increased flow of financial savings and greater formalisation of the economy. All of these would lead to higher GDP growth and tax revenues.” The RBI did acknowledge “some negative macroeconomic impact” of demonetisation, which it however dismissed as “transient”. Instead asserted that

demonetisation is expected to have a positive impact over the medium to long-term. In particular, there is expected to be greater formalisation of the economy with increased use of digital payments. The reduced use of cash will also lead to greater intermediation by the formal financial sector of the economy ...1

The official view, then, is that (i) ‘formalisation’ is a good thing, (ii) ‘formalisation’ consists of compelling all economic actors to become part of the formal financial sector, including through making and receiving digital payments. Once this is done, tax evasion would fall, more funds would be available to the banks, they would in turn lend these funds widely, and all this would boost economic activity, tax revenues, etc.

Actual condition of informal enterprises and their workers

The authorities’ notion that there is a gold mine of tax revenues to be extracted from the informal sector is mere nonsense, and they no doubt know this. According to National Sample Survey (NSS) data, in 2010-11 there were 57.7 million informal sector enterprises in India,2

roughly one-third each in manufacturing, trading, and services. They employed 108 million workers, or less than 2 workers per unit (most units were “Own Account Enterprises”, without hired workers). These workers were divided more or less evenly between rural and urban areas. At the all-India level, annual Gross Value Added per Worker  (GVAPW) in the rural areas was Rs 37,241 (Rs 3,103 per month), and roughly double that in the urban areas (at Rs 78,257, or Rs 6,521 per month). No doubt these are averages, and there would be some firms with higher workers and profits. However, seeing as the average figures for even urban areas are so low, there is no gold mine of taxes to be got from this sector. Rather, these figures speak of a sector where both owners and workers are struggling for subsistence.

If ‘formalisation’ is to have any positive meaning, it must mean drawing such precarious enterprises into the formal sector by strengthening them. In these vast numbers of tiny units, where the owners themselves are generally workers and have low incomes, formalisation should mean increasing the productivity, viability and stability of these units by expanding their capital base and their markets. Formalisation must also mean formalisation of the workforce by the State providing them formal and comprehensive social security, which the overwhelming majority of such enterprises are unable to afford.3

The data cited above indicate the dire need for Government support. Of the enterprises in operation for three years or more, 62 per cent were either stagnating or contracting. Indeed, the capital of such enterprises was abysmally low. Their outstanding loans and interest averaged just Rs 17,681, and their net additions to fixed capital in the preceding year amounted to just Rs 6,239. Just 2 per cent of these enterprises reported receiving any assistance from the Government; about 1 per cent received such assistance in the form of loans.4

Predatory designs
However, far from unlocking the potential productive capacity of the entire working people, the rulers are now set on a course of crushing even the people’s existing, stunted, productive capacity, in the name of ‘formalising’ the economy. The purpose of the rulers is predatory: to serve the needs of big capital, foreign and domestic.

As the 50-day period of ‘demonetisation’ proceeded, Modi and his ministers shifted the focus of their campaign from ‘black money’, and became manic evangelists for switching the entire economy from cash to digital payments. Of course, this creates large opportunities for money-making by firms such as PayTM, Reliance Jio and others waiting in the wings.5

More generally, it expands the financial sector, and gives it greater access to the meagre cash savings of the poor. And as we all know, it ties in with a whole series of authoritarian measures to track and monitor the activities of every citizen.

Although Modi and his cohorts claim that making the economy cashless will make it easier to track black money, in fact it has nothing to do with curbing the black economy. It has everything to do with crushing the unorganised/informal sector, and expanding the market of the organised sector thereby.

The emergence of the Prime Minister as a frenetic salesman of digital payment modes should not be seen in isolation. Whatever be Modi’s personal contribution, it is clear that larger forces are afoot in promoting the entire digitisation-financialisation project. The drive for digitising every person in India began under the earlier NDA government, under L.K. Advani as home minister, and it was carried forward by the UPA government, with the Aadhaar scheme under IT chieftain Nandan Nilekani.

Under Modi this project has been advanced at a frenzied pace, with the opening of around 255 million Jan Dhan bank accounts (indeed, the continuity is exemplified by Nilekani’s going over to join Modi’s digi-drive). Well before the Prime Minister began appearing in advertisements for PayTM and turning his public speeches into live demonstrations of mobile money transfers, the Government had been propagating the idea that linking Jan Dhan accounts, Aadhaar ID numbers, and mobile numbers (JAM, for short) would eliminate corruption, empower the citizenry, and solve other such knotty social problems. As we described in an earlier article,6

the real point of this exercise is to eliminate various components of social infrastructure, such as ration shops or subsidised fertiliser, and replace them with ‘targeted’ transfers. The spread of the digital payments system, to the extent the Government is able to compel the poor to adopt it, will simply transfer wealth further to the corporate financial sector at the cost of the people. At the same time, far from empowering citizens, it empowers the corporate sector and the Government with a wealth of data about every person in the network.

The Government’s attempt to pummel the population into abandoning cash in favour of digital payments cannot succeed fully, given the realities of India’s economy. In the wake of demonetisation, the temporary rise in digital forms of payment has once again dipped. Indeed, one of the peculiarities of the demonetisation exercise is that the Indian economy is not even fully monetised. Production for self-consumption continues to be a sizeable part of the agrarian economy, and a large chunk of agrarian credit continues to be given in kind. Gold continues to be a major form of ‘saving’ in India, with perhaps $1 trillion worth in private hands and an annual $40 billion purchased every year.7

In 2015 the Finance Minister announced a ‘gold monetisation’ scheme, in the form of incentives for people to keep their gold in banks, which could then be lent to gold vendors. Depositors would receive a sovereign gold bond, thereby converting a physical asset to a financial one. The scheme miserably failed to attract gold deposits. If anything, the ‘demonetisation’ exercise may increase the attractiveness of gold for diverse sections.

But the measure of ‘success’ of such coercive demonetisation need not be that cash altogether disappears. To the extent the digital economy advances, it will depress the non-digital economy, i.e., the overwhelming bulk of the informal sector, which is almost entirely cash-dependent and ill-equipped to operate digitally. It will deny the latter customers, contracts, job opportunities, and so on. In this sense, the slow pace of returning cash to the economy is not incompetence; the squeeze on cash is a squeeze on the cash-dependent sectors of the economy.

Corporate backing
The corporate sector applauded demonetisation (there were hardly any dissenting voices). This endorsement is remarkable, given the fact that demonetisation has further depressed demand, in a situation of stagnant industrial growth and negative industrial investment growth. In the short term, then, demonetisation has actually reduced their revenues. One reason for such support may be that businessmen fear being associated with black money, and fear annoying the present Government; but there is another reason. They must also see some gain in the present policy regime. Indeed, when big business is pessimistic about the prospects for a general expansion, it focuses on predatory activities, whether in the form of encroaching on the land of peasants or the market shares of rivals. 

High finance, which carries the whip in today’s economy, is quite clear that the present demonetisation – like the Goods and Services Tax (GST) which is on the cards – will depress the economy in the short term. However, they hope that, over a length of time, digitisation and GST will be beneficial for large firms at the expense of the informal sector. The GST will increase the costs of small units, whether by bringing them forcibly into the tax net, or by imposing unaffordable costs of accounting and claiming tax credits (a large number of returns have to be submitted online under GST; whereas, even in urban India, less than 6 per cent of informal sector enterprises use the internet8). At the same time, the GST will bring down the costs of large firms, by allowing them to reorganise their logistics of production, storage, and transport according to their all-India requirements.

It is useful to read what financial firms say about Government policy, because, unlike politicians and officials, they are addressing wealthy investors, and hence speak quite frankly.

Thus Standard & Poor Global, in a report titled “India’s Demonetization and the GST: Short-Term Pain for Long-Term Gain”, predicts that these two measures “are likely to have a higher disruptive impact on the informal, rural and cash-based segments of the economy.9 Ambit Capital anticipates “a strong formalisation effect” between the third quarter of 2016-17 and the fourth quarter of 2018-19 on account of demonetisation and the GST: it projects that the share of the informal sector in the economy will shrink to half its present level; correspondingly, the share of the organised sector would grow by one-third.10 Motilal Oswal Securities similarly sees gains for the organised sector from GST in each segment in which there is a significant unorganised sector presence. The chief investment officer of Tata Mutual Fund says quite bluntly that demonetisation “will make India more oligopolistic in nature, where big and established businesses with reasonable cash flows will use this opportunity to strengthen their market share..."11

It should be borne in mind that the informal/unorganised sector accounted for about 393 million out of 472 million workers in 2011-12; even minus agriculture, it was 159 million. If, say, just 5 per cent of the workforce in the informal non-agricultural sector were to lose their employment, that would amount to a loss of 8 million jobs. It should be kept in mind that roughly 13 million enter the labour force every year in search of employment, of which the vast majority are compelled to join the informal sector.

A note by HDFC Securities complains that “The main reason for our politicians taking it easy on GST implementation is the fear of job losses. Specifically, whilst the formal sector (especially large-midsized companies) will benefit from GST (scale economies around manufacturing and logistics), the casualties will be the small businesses which currently fly under the radar of the taxman. The latter sector accounts for six times as many jobs as the former sector. The initial impression is that GST will ipso facto benefit the organised sector at the expense of the unorganised sector."12

In fact, the HDFC complaint is unwarranted: parliamentary parties have displayed a rare unity in advancing the GST, with senior Congress leaders such as Manmohan Singh and Chidambaram pitching in to help the BJP government.

Of course, such a shift would not take place suddenly, and generally not take the form of outright ‘job’ losses; indeed, in most cases there are not ‘jobs’ as such to be lost, but livelihoods. Rather, what would happen is a steady compression of incomes. But the ultimate result would be the same. The incomes in this sector, as we saw above, are already abysmally low, and we know from other evidence that families scrape together their livelihoods by simultaneously pursuing a number of activities; any further reduction in income would frustrate even this survival strategy.

Fragmented perceptions
However, it is precisely the fragmented (or “cleavaged”, as the Economic Survey puts it) nature of India’s economy and society that makes it difficult for each of the multiple fragments to spontaneously perceive and grasp this larger process. This is particularly so given the current weakness of class organisations of workers and peasants – organisations that at one time projected a class picture of society, one in which exploited classes were pitted against exploiting classes. Even though the membership of these organisations was a minority of the classes they represented, their political and cultural impact was far wider.

Instead, today, as individuals from these classes feel the noose tightening around their necks, they spontaneously turn to the only support available to them today: support from their family/clan networks, communities and castes. When the survival and advancement of one’s family depends on these networks, the vocal and better-connected in each such network command influence, and each individual’s worldview gets shaped accordingly. The rulers foster hopes among sections of the oppressed that they can escape their present plight through official patronage to their community or caste, even as the same powers whip up hatred for other communities.

It is also the weakness or absence of genuine class-based organisations across much of the country that enables the rulers to appropriate elements of class rhetoric, in a lumpenised form, in the service of their objectives. Witness how demonetisation, with its devastating effects on the working people, its negligible effect on black money, and its long-term benefits to the financial oligarchy, was actually projected as an attack on the wealthy. Indeed, it is characteristic of fascistic politics that, taking advantage of myths about money, it distances itself from ‘dirty’ moneybags (somehow associated with dark anti-national forces or ‘anti-national’ communities), appeals to the ‘little man’, and diverts attention from the real lords of property. The actual effectiveness of any popular exposure of the lies and myths about demonetisation, then, depends on the strength and activities of class-based movements and organisations.




1. Reserve Bank of India, “Macroeconomic Impact of Demonetisation: A Preliminary Assessment”, March 10, 2017. (back)

2. To be precise, unincorporated non-agricultural units, excluding construction. Report 549, NSS 67th Round. (back)

3.The percentage of non-agricultural workforce without social security is the same as the percentage in the informal sector. (back)

4. Report no. 546, NSS 67th Round. (back)

5. See Aseem Srivastava, “Weapon of Mass Digitisation: PM Modi’s gambit has nothing to do with black money”, (back)

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8. Report no. 546, NSS 67th Round. (back)

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