From Diamonds to Dust: Small Businesses in India 5 Years after the Abandonment of Banknotes

2021-11-12 10:00:43 By : Ms. Amo Fu

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Until 8:30 pm on November 8, 2016, Muniram Yadav was happily not aware of the announcement that shocked the country thirty minutes ago. He was engrossed in his work. In a small workshop on the outskirts of Sakinaka, Mumbai, he supervised four workers in a very specific activity: polishing metal molds of different shapes with powder made of diamond powder.

The most expensive gemstones in the world leave fragments when they are cut. These fragments have their own afterlife-surprisingly, it is an ingredient in the production of everyday plastic products. If diamond powder is accidentally applied to every inch of metal molds used to make pens, light bulb holders, boxes, and kitchen utensil parts-this process is called "polishing"-these plastic products will not have their own uniqueness. luster.

Eighteen years ago, Yadav was also a daily-paid worker, polishing molds with diamond powder. Then in 2003, he poured his life savings and founded his own mold polishing company. For 13 years, he proudly watched his profit growth. He went from hiring one worker to four workers. His family was able to move from a slum with only one room to another room with two rooms in the same slum.

Then it was on the evening of November 8th five years ago.

Prime Minister Narendra Modi (Narendra Modi) announced the cancellation of all 500 rupee and 1,000 rupee banknotes, and four hours' notice that 86% of India’s currency is invalid. Citizens will only have two months to wait in long queues to exchange all waste banknotes for new banknotes, but Modi said that for the greater good, the “inconvenience” is worthwhile: it will remove all black money from the Indian economic system for the sake of "Cleaning" India for the benefit of the poor.

Has this goal been achieved? Today, Yadav neither has an opinion, nor does he want to form an opinion.

Yadav's profit, in addition to the personal income he takes home every month, has been reduced from more than 30,000 rupees per year in 2015 to less than half. His customer base has been reduced from 15 mold manufacturers to only 7. There are only two workers left in his workshop. In order to save costs, he often goes to the mold polishing machine with them.

By his side, dozens of small business owners have similar stories to tell. Since the abolition of monetization, their reduced turnover, slower growth rate, rising costs, and falling savings are worrying.

After the monetization was cancelled, the cash flow in the economy was stifled-a devastating blow to these companies that rely heavily on cash transactions. However, all business owners, including Yadav, have not attributed their decline to demonetization. Instead, they pointed to a series of shocks to the economy shortly after high-value banknotes were illegalized.

In July 2017, in protests from small traders and business owners across the country, the central government introduced a controversial goods and services tax to replace all previous indirect taxes levied on businesses. Under the new system, taxes levied on certain products and services are two to four times higher than before, and the tax rebate and tax rebate system makes the submission of monthly consumption tax a complicated and tedious process.

Subsequently, in 2018 and 2019, the central government denied a clear economic slowdown and a growing unemployment crisis. The final blow-the Covid-19 pandemic-has hit the economy twice, with a three-month national lockdown in March 2020 and multiple state lockdowns during the second wave of this year.

In October, Scroll.in tracked the value chain of the durable plastic products manufacturing industry to which Yadav belongs to understand the impact on the companies and people in it in the past five years.

The pattern that appears is clear. Those in the value chain with larger businesses see de-monetization as an episode of the past, and see the Covid-19 blockade as the only real impact on its stability. However, small businesses in the informal sector cannot separate one adverse economic event from another. For them, de-monetization marked a turning point in the decline of their financial situation. Each subsequent shock exacerbated the impact of the next shock.

This story is part of our in-depth investigation report project Common Ground. Sign up here to get fresh stories in your inbox every Wednesday.

Yadav’s “events”, or squares, are easy to miss in the hundreds of dirty, unnamed places on both sides of every street in Sakinaka. This densely populated suburb is the center of Mumbai's small industries-manufacturers of computer parts, machines, plastics, furniture, and clothing. Like Yadav, most of these business owners emerged from the working class themselves. After several years of labor experience, they organized their own grand event. Some businesses are registered as commercial establishments under the Maharashtra Store and Establishment Act. Others do not exist in government records.

“Banks never provide business loans to small people like us, so I borrow money from friends to open a shop,” said Yadav, 40, a tall, expressive man with big eyes. He invested 25,000 rupees to buy two mold polishing machines, rented a 100-square-foot workshop, hired a worker, and started earning meager profits in the first few months.

For Yadav, this is a huge improvement. He only studied 5th grade in a village in the Siddharthnagar district of Uttar Pradesh, and started working as a mold polisher in Mumbai when he was a teenager. He let his three children-now 16, 14 and 11 years old-enroll in English secondary schools, believing that the industry he is engaged in will always flourish. After all, plastic products are everywhere, and they always need to be plated with diamonds on the mold to shine.

However, the years after monetization have shaken Yadav's confidence in the future for the first time.

First, demonetization itself caused Yadav's operations to almost cease for at least two months. “My business is mainly operated on cash, so when notebandi happened, most of my customers said they didn't have liquid cash for me,” he said. His client is a metal mold maker, and they want Yadav to work on credit until the cash flow returns to normal. “But the distributors from where I bought diamond powder and other raw materials did not let me buy on credit, so I had to pay for it out of my own pocket and move on,” he said.

When cash flow returned to the market, Yadav and other small business owners had to face the new goods and services tax system. Since Yadav's annual turnover is less than Rs 2 million, he does not need to register for GST to operate. "But many big clients with GST numbers don't want to do business with me anymore-they just want to deal with other people who have GST," he said.

This is mainly because of the input tax credit function of the goods and services tax, which allows traders to apply for deduction of the tax they have paid when they purchase any goods or services when submitting the tax-but they can only do so. GST registration number is carried out by the entity.

Although Yadav attributed his economic blow to demonetization, he believes that the damage caused by the goods and services tax is even greater. "It makes almost everything more expensive," Yadav said. The prices of some plastic products have doubled, while the prices of iron and other metals have also risen, affecting mold makers. The diamond powder on which Yadav’s entire business relies is now priced at 250 rupees for a 5-carat bottle-at least 100 rupees higher than the price before the banknote was scrapped.

During this period, Yadav had to fire two of his workers in order to increase the wages of the other two workers. By the time the first Covid-19 lockdown was implemented in March 2020, his business was already short of funds. He can only pay workers’ wages during the first month of the lockdown. The business did not reopen until July 2020, and Yadav almost managed to pay his shop rent (5,000 rupees a month) and electricity bills during the lockdown.

Yadav’s employees used to work at least 12 hours a day. When he reopened after the lockdown, he said, “We can only work four hours a day because the police will wander around and force us to close early.” Now, the workshop works seven hours a day, mainly because of the lack of available work. "After the notebandi, the workload has been reduced by four to five percent per year. But after the blockade, it has been reduced by another 10%."

Although Yadav was convinced that the banknote scrapping order (and later the goods and services tax) had an adverse effect on his business, at a macro level, understanding and calculating the impact of banknote scrapping on people in the informal economy has proven difficult.

In the 2016-17 economic survey, Arvind Subramanian, who was the government's chief economic adviser at the time, estimated that India's GDP was hit by 0.25 to 0.5 percentage points.

But Subramanian admitted that official data would “underestimate the overall impact, because the most affected parts of the economy-informal and cash-based-are either not included in the national income accounts, or to some extent, their The measurement is based on official industry indicators."

Generally speaking, estimates of India’s huge informal economy often assume that its internal activities will develop in tandem with the formal sector. However, shortly after the de-monetization was announced, it became clear that its influence will play different roles in the formal and informal spaces.

“Before this move, it was estimated that about 95% of transactions took place in the form of cash, so this measure effectively frozen many markets, led to a decline in demand, disrupted the supply chain, and caused significant loss of livelihoods and employment,” Economics Professor Jayati Ghosh said. At the University of Massachusetts Amherst.

Not only is the situation worse for the unorganized sector, companies in the formal sector will actually benefit.

"The formal enterprises can then enter the markets that these informal enterprises have previously served," she added.

The Central Statistical Organization, which generates official Indian economic data, derives informal GDP by inferring from data measured in the formal sector. This rate is fixed and based on what Ghosh said was the last survey conducted in 2004-05.

If demonetization does shrink the informal space and expand the formal space, any calculation based on the old ratio will overestimate the activities of the unorganized sector. However, the CSO has not taken any action to update its assumptions.

Therefore, researchers seeking to understand what is happening in the informal sector try to use other measures as a proxy for economic activity.

A working paper from the National Bureau of Economic Research (authors including the author of Gita Gopinath of the International Monetary Fund) reviewed a household survey on employment and satellite data on "human-generated night light activity" and concluded Yes, the abolition order reduced economic activity by at least 2% in the quarter after the announcement.

A team at the World Bank also considers the intensity of night light as a proxy for economic activity, and specifically set out to compare the formal and informal sectors.

The World Bank report stated: "In urban areas, as well as those areas that have more financing opportunities and more generally regular wage employment, the difference between local economic growth and normal years is very small." "On the other hand, there are more informal areas. The local GDP fell by 4.7 to 7.3 percentage points."

Both studies pointed out that this effect is temporary. The sharp decline managed to correct itself within a quarter or two. However, this is when the overall economy begins to fall sharply. The country's official annual GDP growth rate for waste banknotes is 8.3%. By 2019-before the outbreak of the Covid-19 crisis-it had fallen to 4%.

Nevertheless, in the months after the monetization was cancelled, the resumption of activities led many people to believe that the impact of the move was temporary, and that the economic downturn had a lot to do with the poor introduction of India’s goods and services tax. Some people interpreted the success of the Bharatiya Janata Party in the 2017 Uttar Pradesh elections as showing that the abolition of banknotes did not have a significant negative impact on the people.

Subramanian called de-monetization "a large-scale and severe monetary shock" after leaving office, and later expressed surprise that "compared to the extent of the shock, the impact of [de-monetization] is so small."

Many of these analyses rely mainly on treating demonetization as a demand shock, which means that due to limited access to cash in those months, consumption of goods has fallen. Once the cash supply is restored, these effects will disappear.

But Giri Subramanian, an economist at the Analysis Group, used multiple surveys and company-level data to find that “companies that have more exposure to the informal sector and rely more on informal/temporary workers have been disproportionately affected on the supply side”. In other words, the blow to these companies is not the lack of demand, but the severe shortage of cash supply, which affects their ability to purchase goods and hire workers as needed. This means that they are forced to lay off some of their labor and purchase fewer materials after the bankruptcy period.

Although Giri Subramanian's analysis also pointed out that some of these effects will soon dissipate, data from other places can give us a glimpse of what is happening in the economy after the banknote ban.

According to leaked data from an official government survey, the unemployment rate reached a five-year high of 6.1% between 2017 and 2018. An analysis of survey data from the Sustainable Employment Center of Azim Premji University found that 5 million jobs were lost between 2016 and 2018, and this number began to decline after the banknotes were abolished.

Yadav purchased his diamond powder bottle from a local retail hardware store. Some are small places. For example, Ashok Patel’s 32-year-old store is hidden in the alleys of Sakinaka, without signs to distinguish it from the surrounding furniture workshops.

Like Yadav, Patel wholeheartedly believes that de-monetization is the first in a series of setbacks that make small businesses breathless. In the past five years, Patel claimed that he had seen several shops in his driveway closed, especially those owners who were burdened with unpaid loans. Although he is not in debt, his store has neither made a profit nor lost money in the past three years.

Unlike large corporations with separate marketing budgets, Patel claims that stores like him rely heavily on trusting relationships between his customers and the wholesalers he buys from. This trust allows him to make wholesale purchases through udhaar or credit when needed. However, in the years after demonetization, this trust has gradually been eroded.

"Today, no one can allow udhaar," Patel said. "I understand why, but when someone I have known for 20 years suddenly says,'pehle paisa, baad mein maal', I still feel very sad." Money first, goods later.

In contrast, a large hardware store opened by a traditionally wealthy family was dismissive of the impact of banknotes and subsequent years. The store called Laxmi Hardware has a history of nearly 40 years and sells more than 140,000 industrial hardware products, including diamond powder, to meet the needs of local companies in Sakinaka.

"Notebandi and the goods and services tax are good for the country. They help clear the black money," said Deepak Jain, the son of Laxmi Hardware's owner and one of its founders. "They did not affect our business at all, but the blockade did."

Since the beginning of the Covid-19 pandemic, Jain claims that his store turnover has decreased by 50%-an unprecedented amount in his experience. "But it didn't affect our family's savings or family expenses at all," said Jaen, whose children go to international schools and plan to study abroad. "I don't know anyone whose family life has been affected by the lockdown."

Despite such wide-ranging claims, Jain also admitted that the blockade had an adverse effect on several local businesses. "Many stores in the area were temporarily or permanently closed during the lockdown, so we lost customers," Jain said. "In fact, many metal processing plants have moved to Surat and other places in Gujarat, because the things there are very cheap."

Yadav has also witnessed this transformation: at least two of his mold maker customers have now moved their operations to Gujarat, where everything from rent to electricity is cheaper than Mumbai.

Jain buys 5-carat industrial diamond powder bottles from wholesalers in Mumbai and Gujarat. One such wholesaler is Soham Industrial Diamonds, a Surat-based company founded 21 years ago by 62-year-old Gowardhan Gajipara. Like the Jains, Gajpara’s annual turnover reaches tens of millions of rupees, and he does not think that the waste of money is a negative turning point for the economy.

Gagipala said on the phone: "We are a white company that does not trade in cash, so we are not affected by these policies." "In fact, it is best for all companies to stop using cash and accept goods and services tax. They can benefit."

During the pandemic, when his company closed for six months, Gajipura had enough savings to cover office rent and employee salaries throughout the period. "This is a loss of my personal savings, but I have no debt and my family budget has not been affected, so I don't think it is a loss," he said.

Gajipara sells natural and synthetic diamond powders, and he sources them from small diamond polishers in Surat. Scroll.in contacted several of them to ask for their views on the impact of the past five years, but only one business owner agreed to have a brief conversation.

"Look, we are Chhote Dhandhe Wale, small businessmen," the diamond polisher said, requesting anonymity. "I'm afraid to talk about these issues. It's best to ask Dashang."

At the other end of the plastics value chain, the situation is no different: Small businesses have been more affected than large businesses in the years of economic shocks that began with the use of banknotes.

Take Mahadev Industries, a major manufacturer of plastic kitchen products in Mumbai, for example. The company has nearly 50 employees. If the abolition of monetization or GST causes any temporary problems in its operations, the company representative will not admit it.

The company’s manager, Bhupendra Purohit, said: “We are only affected by the lockdown, just like everyone else.” “We were able to pay all employees when jobs were closed during the lockdown. Now Business has resumed."

One of the moldmakers dealing with Mahadev Industries is Dasrath Pradhan, who is also one of Yadav's customers. Like Yadav, Pradhan also has a single workshop in Sakinaka, where seven workers cut steel and iron blocks and make molds for small and medium-sized plastic products. It can take up to six weeks to make molds for all parts of the hybrid mill series​​​

Plastic manufacturing is a huge industry in Mumbai, and Pradan claims that his business-and his competitors-have grown in the past five years. "But the growth rate is much slower than before," said Pradan, 42, who opened his own studio in 2005.

Within six weeks after the monetization was cancelled, Pradhan's customer-a manufacturer of plastic products-was unable to pay him his due. After the introduction of the goods and services tax, inflation began to hit his industry and reached its peak in mid-2020. For example, before the goods and services tax, the price of steel blocks increased by only 4 or 5 rupees per kilogram per year. In the past year, their prices have soared by 70 rupees per kilogram.

Faizan Shah, a wholesaler that sells metal blocks to moldmakers like Pradhan, has also been working hard to deal with the impact of this shock. "The money that could buy 10 tons of iron a few years ago can only buy 8 tons, so my profits have been stagnant," said Shah, who described his 20-year business in the suburbs of Mumbai as medium-scale. "Since the abolition of monetization, the government has dropped different bombs on us, and my business has never had a chance to stabilize properly."

Although Shah believes in accepting things he cannot control and learning to "adapt" to changes in the economic situation, he is angry with the way he strikes. "Why does Modi always make a major announcement at the last minute before midnight?" He said, not only announcing the de-monetization, but also the March 2020 blockade. "How should anyone prepare and arrange, such as ensuring that customers pay what they owe you before everything closes?"

If the impact on small and large business owners is different in the years after the abolition of monetization, the impact on their personal finances is obviously disproportionate.

Despite the pandemic, big businessmen like Deepak Jain and Gowardhan Gajipara are still able to run their own families as they did before November 2016. Their lifestyle or There is no change or compromise in desire.

Others have shaken to their core.

One of Patel's daughters works with him in their shop, while his two sons work in the hardware workshop. During the 2020 lockdown, their wages were cut in half. "Except for the food we eat, we have to cut expenses on everything. Who would have thought that such a moment would come?"

Rajesh Shivale, another small entrepreneur in Sakinaka, was unable to pay his children's school fees in the past year, and his family gave up grand festivals and annual holidays outside of Mumbai. "Even without Covid-19, we would have to give up these expenses because our business has stagnated since the demonetization itself," said the 40-year-old man, who runs two small businesses with his family. enterprise. wife.

The first started in 2005 as a cylindrical grinding workshop-a process to ensure that metal molds made by people like Dasrath Pradhan are accurately measured and aligned. The other is the textile dyeing workshop opened by Shivales with the help of bank commercial loans shortly after the abolition of monetization-they are still struggling to repay the loan.

Despite the blow to his business, Shivale believes that the Modi government has succeeded in controlling corruption and improving India's image abroad.

Muniram Yadav and his wife Deepa, in their two-bedroom slum home in Sakinaka, are saddened by their savings, which have gradually depleted after the abolition of monetization, but are now almost completely wiped out by the pandemic. "We had to buy three additional mobile phones with data packets for my child's online course. During this period, we had to pay their full tuition fee, which is 36,000 rupees per year," Dipa said. "At the same time, basic dals and vegetables are too expensive. We used to eat lamb matcha three or four times a week, but now we only eat meat on special occasions."

Yadav described the child's education as his only remaining "savings" for the future. "They are the only hope," he said.

But at the bottom of the value chain, the workers in the Yadav workshop do not even have such hope.

“Before using notebandi, I used to earn 12,000 rupees a month and can easily save 8,000 rupees from it,” said Shiv Charan Yadav, a 30-year-old worker from Balrampur District, Uttar Pradesh, who started working with Muniram Yadav in Mumbai at 15. Years old. As inflation increased, the money Shiv Charan could send to elderly parents, wives and young children in his village began to decrease. "Now, even if I can earn 18,000 rupees a month, I can hardly save 3,000 rupees for my family."

Just as he carefully scrubbed diamond powder on a mold in a small plastic bucket, Shiv Charan's hopes seemed to be reduced to ashes. "I don't know what the future holds for people like us."

All photos taken by Aarefa Johari.

This report was completed with the support of the "Report for the World" initiative of The GroundTruth Project.

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