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Why Demonetisation May Not Be As Hard On The Rural Poor As You Think

20/11/2016 2:59 PM IST | Updated 23/11/2016 9:16 AM IST
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By Sanjiv Phansalkar*

Following the demonetisation of ₹500 and ₹1,000 bank notes, many tears are being shed among the urban, Anglophone and electronically connected for people who share none of these attributes. People who are not "financially included" and live in far-flung areas with inadequate banking outreach are said to be at a serious disadvantage due to this step. However, the established nexus of caste, class and power will ensure that the better off among these people will manage as well as our ilk do. Hence, it would be a good exercise to think of the impact of demonetisation on the rural poor.

The poor are more at risk from manipulation by the unscrupulous than from any crippling financial loss in the short or medium terms (with some exceptions).

The total, including eventual, impact on the rural poor has five aspects. These are: (a) the impact on their short-term future income streams, (b) the impact on their short-term expenditure streams, (c) the impact on their current money stocks, (d) the impact on such capital asset transactions which are at present incomplete and (e) impact on their lives from disinformation and due to the machinations of the ruthless people who may take advantage of their gullibility. Let us look at each of these components.

Short-term income

The rural poor and others get their short-term incomes from sale of their produce or labour. There are two classes of produce: the once in a season variety, such as grains, pulses, oilseeds, cotton, etc., and then milk, eggs, birds, vegetables, etc., which are sold far more frequently. Not more than 10% of the 240 million tonne cereals are ready for the market and, in any case, the rural poor produce barely enough to feed their families on their smallholdings. So the impact on them through this route is minor.

The impact on their income arising out of transactions in milk, vegetables, etc. would be more significant if they were to exchange these items for cash in short-time cycles. Indeed, the impact will be severe on a very small proportion of the rural poor producers who depend for their bread on vegetables such as okra sold on that day. The payment cycles for most of the others are a week or longer and presumably they will get their payments in new currency notes. Hence, the overall impact is significant.

Short-term expenditure

Aside from landless labourers and migrant wage earners, the impacts will again be small because most of the rural consumption occurs in the form of purchases made on credit. And the wages of these very poor categories seldom exceed ₹500 per day, so any impact on them will probably arise out of someone taking them for a ride.

Cash savings

The so-called "piggy bank savings" of the rural folk or, more pertinently, the savings hidden by rural woman are too small to cross the limit where they would need to worry. Considering that exchange and deposits would be possible virtually without limit for their savings, the impact is restricted only to the extent of loss of their wage earning for the period they spend in queues in front of banks. For them this would be significant, say a day's wage.

Some 30-40 million households in the rural countryside could experience a loss of ₹100 or so is my guess.

In all probability, this will be resolved via arbitrage by their moneylender or someone who will agree to stand in a queue on their behalf — my guess is that this would be in the order of half a day's wage or about ₹100 per affected household. Some 30-40 million households in the rural countryside could experience a loss of ₹100 or so is my guess. The impact would be moderate to severe.

Incomplete capital asset transactions

Large parcels of land are being purchased on a huge scale across the country for peri-urban housing, for construction of industrial sheds, for farmhouse or weekend houses and, of course, by the State for public purposes. Barring the last, transactions for most others are occurring between private individuals and the landowners. While it is possible to argue that the rural sellers of land are sufficiently savvy about the risk of hoarding cash, those in the far-flung areas perhaps might be more affected. But, on the whole, the number of people so affected is likely to run into the thousands rather than millions and there is limited moral justification for outrage if they suffer because their stash of cash is difficult to turn into legitimate funds.

Impact due to chicanery and cheating by the powerful

Stories are circulating about how locally powerful people have lent thousands to members of self-help groups free of interest, asking them in return to deposit the sums in their accounts and then repay them months later. There are stories also of unscrupulous miners and industrialists distributing large amounts of cash to loyal employees to go deposit in their accounts and return much of it later to the bosses.

It is perhaps incumbent upon well-wishers of the rural poor to caution them against the scams of the ruthless.

There will be multiple versions and variants of such ruthless behaviour. It is likely that rumours will spread about an extension of the deadline for exchange of old notes, leaving the gullible still holding on to these worthless pieces of paper on 30 December. To me this route appears to have the highest potential of negative impact on the rural poor.

To sum up, it does not appear as though demonetisation will have significant negative consequences for the rural poor. The worst damage is likely to be on those who are ill-informed and gullible and thus easy targets for manipulation by the more wily and unscrupulous people around them. It is perhaps incumbent upon well-wishers of the rural poor to warn them of these pitfalls and to caution them against the scams of the ruthless.

*Sanjiv Phansalkar is Programme Director at Tata Trusts. He was earlier a faculty member at the Institute of Rural Management Anand (IRMA). Phansalkar is a fellow of the Indian Institute of Management (IIM) Ahmedabad. The views expressed in the article are personal.

This article was first published on VillageSquare.in, a public-interest communications platform focused on rural India.

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