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Resource centre on India's rural distress
 
 

Handlooms fall silent in Varanasi, $1 trillion hidden economy stalled

-Bloomberg

At the heart of the problem is the way informal businesses like the Varanasi weavers make payments.

Varanasi:
In Prime Minister Narendra Modi’s political base of Varanasi, Hinduism’s holiest city, weaver Zainul Abedin stares at the uneven mud floor of his home. Behind him, more than a dozen handlooms lie idle. Abedin is part of the collateral damage of Modi’s Nov. 8 decision to ban high-value currency notes, effectively cancelling 86 percent of cash in circulation. The move was designed to stifle corruption and tax evasion, but many of the hardest-hit are workers in India’s vast and intricate informal economy — the small businesses, shops, drivers and countless other basic industries and services that employ more than 90 percent of Indian workers.

Most are poor like Abedin, who earns Rs 250 a day, but collectively they account for almost half the economy. That’s some $1 trillion, or more than the GDP of Indonesia. “Modi’s cash ban has broken our backs,” said Abedin, 39, who makes Varanasi’s famous silk fabrics, shot with gold and silver, and says he can no longer feed his children. “We weavers won’t last if this continues for even another month.”

The cash ban is a massive gamble for Modi, who is trying to persuade ordinary Indians that they will benefit in the long run as rich tax evaders are forced to surrender hidden hordes and pay their fair share toward government spending. Uttar Pradesh — which houses Varanasi — will be the acid test to see whether he’s succeeding. The nation’s most-populous state is ground zero for India’s shadow economy, with the largest share of the nation’s estimated 60 million non-farm, unincorporated enterprises according to the latest government data.

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