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Demonetisation: Job losses mounting; MSME sector could take atleast 3 quarters to rebound

New Delhi: Demonetisation and its impact on India’s economy have been discussed in detail since 8 November, the day PM Modi made the shock announcement by invalidating over 80 percent of Indian currency. Based on their political affiliations, economists have differed widely on the impact of this step but most are unanimous on at least one point: This single move will contract one of the world’s fastest growing economies. Former PM Manmohan Singh, also an economist, had said in Parliament that demonetisation could contract the GDP by as much a 2 percent though he did not give a timeframe for this prognosis. Brokerage Ambit Capital has already created shock waves by predicting that GDP growth will fall to 5.8 percent in 2017-18 from the 7.3 percent estimated earlier.

It follows then that job creation, which has been Modi government’s biggest headache even before the demonetisation move, will slow down further as economic growth tapers off. The clearest indication of a direct link between job losses and demonetisation came from CPIM’s Sitaram Yechury, who claimed in Parliament last month that since 8 November, four lakh jobs have vanished.

 Demonetisation: Job losses mounting; MSME sector could take atleast 3 quarters to rebound


And more than 31.9 million people employed in the textile sector or “government” sectors have not been getting wages. There is no way to authenticate what Yechury said but we must remember one simple fact: an overwhelming 94 percent of India’s jobs lie in the informal sector. This means more than 9 in 10 Indians are employed here without any job security, most likely without even being paid minimum wages and almost all wages are in cash. This is the segment of the economy which has been the hardest hit after demonetisation.

Rituparna Chakraborty, Executive VP of Teamlease says it is impossible to quantify job losses this soon into the demonetisation situation. “I can say that there would be a 5-7 percent negative impact in the formal sector but it is quite impossible to fathom the impact demonetisation would have on the informal sector jobs”. She also counted out sectors where demonetisation has actually driven up hiring demand – these include digital payments, fintech and banking infrastructure. “The formal sector jobs will bounce back in 4-5 months but for the informal sector, pickup will take longer. The MSME sector has seen the maximum impact on jobs due to demonetisation and this sector could take at least three quarters to bounce back”.

A slowdown in manufacturing activity in at least the automobile sector is evident from this report which says Maruti Suzuki, Hyundai Motor, Honda Motor, Mahindra & Mahindra, Ford Motor and Renault-Nissan have scheduled shutdowns of a week to 15 days. Honda Cars India and Mahindra are suspending production for to correct inventory as demand is slow; some larger auto makers routinely shut production at year end. D L Sachdeva of All India Trade Union Congress (AITUC) says when factories fall silent, it is the casual workers who suffer since their wages are not paid and sometimes, prolonged shutdowns lead to job losses. Even in some other organised sector industries like e-commerce, cash-on-delivery accounts for two-thirds of sales and this segment has seen a massive slowdown post demonetisation.

Not just automobiles, construction and allied sectors, jewellery, textiles and real estate are some sectors where job losses, if not already happening, are imminent. B N Rai, President of the Bhartiya Mazdoor Sangh (affiliated to the BJP), had said earlier “Workers who are employed as contract labour, those working in construction and other infrastructure sectors, daily wagers and those getting wages weekly are definitely affected by this demonetisation drive. I do not have estimates but many jobs have vanished in these sectors”.

Sachdeva of AITUC says close to half the workers engaged in the MSME sector have been rendered jobless due to the ongoing cash crunch. He said this has lead to reverse migration – they are now returning to their villages – while pointing out that 2/3rd of India’s workforce or 25-30 crore workers are employed in sectors which offer only minimum wages. “If one were t o say that 20-25 percent of this workforce has lost jobs due to demonetisation, then crores of people have lost their livelihood”.

The NDA government has already been in a bind over the extremely slow pace of job creation under its tenure. In November, Labour Minister Bandaru Dattatreya said in Lok Sabha that the unemployment rate increased significantly last fiscal, from 2.2 percent in 2011-12 to 3.7 percent in 2015-16. Dattareya went on to say that employment generation was a key priority of the government and the 12th Five Year Plan projects five crore new job opportunities to be generated in the non-farm sector besides also providing skill certification to an equivalent number of people. What has the government’s job creation record been so far? In calendar 2015, only 1.35 lakh new jobs were created in the eight labour intensive sectors that the Labour Bureau was studying for its quarterly quick estimates. This compares quite poorly with even the 2014 stats, when close to 5 lakh new jobs were created, and belied the election promised or crores of new jobs being created each year.

So what about specific impact on jobs by through demonetistion? Dattaterya answered one such question in Rajya Sabha by quoting stats from the last Labour Bureau Survey for the December quarter of 2015!

In a paper titled Demonetisation: Impact on the Economy, NIPFP has said that if the extinguished cash (through demonetisation) was used as a medium of exchange in financing unaccounted income generation or income in the informal sector, “demonetisation would result in these activities closing down and a corresponding reduction in the incomes and employment associated with these activities. The spillover effect would be felt by the organised sector as well since the consumption from the incomes generated would extend to the formal sector as well.”

NIPFP cites the example of the real estate sector which is sure to be impacted by demonetistaion. “With contraction in demand from one set of agents – say agents who have earned unaccounted incomes and placed them within the real estate space – either prices within this segment would fall or transactions would cease to happen. While of itself, this would be considered a positive development and evidence of a correction in the unaccounted incomes, it could lead to a compression in investments in the construction sector which can have adverse income and employment consequences for the economy.”

This piece speaks of roughly a fifth of the almost 32 million people employed in the textile and garment sector (who are paid wages either daily or weekly) being hit. While some of them have already lost their jobs, many are apprehensive of such a fate. A majority of garment industry workers, especially in hubs like Tirupur, do not have a savings bank account as 70 percent of them are migrant workers from the north and northeastern parts of the country.

Similarly, 20-25 percent of the roughly 2.5 lakh workers in the leather industry have been adversely affected as they are daily wage workers. The industry has been hit particularly hard as 90 percent of the units are small and medium enterprises. In the jewellery sector, 15-20 percent of workers, who are paid daily, have been affected.

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Updated Date: Dec 20, 2016 16:54:08 IST

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