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LATEST NEWS UPDATES | In fact: When the money stops -Harish Damodaran </title>
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-The Indian Express
The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.
So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs..."/>
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-The Indian Express
The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.
So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs..." />
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<h1 class="cat-box-title">In fact: When the money stops -Harish Damodaran</h1>
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Published on</span><span class="text-date"> Nov 16, 2016</span>
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<div align="justify">-The Indian Express<br /><br /><em>The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.<br /></em><br />So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs 500 and Rs 1,000 denomination currency notes have been largely felt by households, shopkeepers and other microenterprises. These economic agents have, to a limited extent, adjusted to the new situation through variations of a system, wherein purchases and sales previously made in cash are increasingly being replaced by credit transactions.<br /><br />Thus, if you have run out of small denomination notes to pay your neighbourhood presswallah or milk delivery man, it’s quite likely that they have now started providing the same services on credit. They are doing so in the belief that you would pay as and when cash in available. They, in turn, are obtaining their own basic rations from the local kirana store through credit settleable at a later date in cash. Storeowners and vegetables vendors, too, may be replenishing their stocks from suppliers willing to similarly extend these on credit.<br /><br />On the whole, then, we have a credit economy today at the level of households and microenterprises, which has, howsoever imperfectly, replaced transactions that were till the other day taking place in cash. Much of it is, of course, built on trust and faith between parties who know each other — and there is an unwritten understanding that those buying on credit will not eventually default. So, even if there isn’t enough currency available to grease the wheels of commerce, many households and neighbourhood service providers may have well figured out ways to stay afloat — so long as it doesn’t entail hospitalisation or other exigencies where large cash payments cannot be avoided.<br /><br />But when it comes to other economic agents — factories, farmers and others engaged in actual production — the reality could be different. Take Tirupur, a town in Tamil Nadu that produces some Rs 32,000 crore worth of knitwear annually, three-fourths of which is exported. Factories in this ‘knitwear capital of India’ employ an estimated 5 lakh women and men involved in fabric cutting, stitching, ironing and packing of garments, apart from related activities such as bleaching and dyeing, compacting and calendaring, printing, embroidery and button-making. Out of these 5 lakh, half or more are paid weekly wages in cash. A unit may have 1,000 employees, of whom 500 receive an average of, say, Rs 2,000 a week. It translates into weekly cash disbursements of Rs 10 lakh as wages, whereas business entities are now being allowed to withdraw just Rs 50,000 per week from their current accounts maintained with banks. While the cash withdrawal limit was even lower, at Rs 20,000, till a couple of days ago, the increase is still nowhere near what is required to pay full wages to all workers.<br /><br />What holds true for Tirupur would also apply to other industrial clusters, from Surat and Ludhiana to Panipat and Ichalkaranji. Hardly a tenth of India’s workforce comprises organised employees receiving salaries credited to their bank accounts every month. The rest are all those who get wages in cash, whether daily or weekly. That being so, if banknotes worth over 86% of the total currency in circulation are all of a sudden pulled out — officially declared to be “worthless pieces of paper” — payments to these workers would obviously stop. The reason is not because factory owners don’t want to pay, but just that there isn’t cash that will enable them to pay. Unless a substantial part of the 86% withdrawn currency is replaced by new currency — which Modi himself suggests could take 50 days — there’s no way that factories can run. Yes, households and neighbourhood kirana stores may manage by replacing cash transactions with credit, but can workers be paid salaries on credit?<br /><br />What we have witnessed so far is the first-round effects of de-monetisation. These have been mainly on households forced to restrict consumption, not for lack of incomes but for cash necessary to make purchases. But it’s the second-round effects — on production — that are still to fully unfold. If non-availability of currency makes it impossible for factory owners to pay wages, they are left with only one option: shut down their units and lay off workers. These are not familiar sights yet, unlike the serpentine queues forming in front of banks and ATM counters for almost a week now. But when that happens — which may not take too long — that’s when things can turn really serious.<br /><br />But it’s not factories alone. An average village-level dairy cooperative society in Gujarat procures 800-1,000 litres of milk daily from its farmers. At Rs 35/litre, this works out to weekly payments of Rs 2-2.5 lakh — again in cash. It raises the same question: If payments cannot be made in cash, how long will farmers continue supplying milk? One positive impact of de-monetisation could well be that it will force Tirupur’s knitwear exporters or dairy plants in Gujarat and elsewhere to put in place systems for crediting wages and payments directly into the bank accounts of their workers and farmer-suppliers. But opening and operationalising these accounts will obviously take time — just as the printing of new high-denomination currency notes and the recalibration of ATMs to handle these, will. But in the interim, as workers and farmers stop receiving payments, not only is production going to be affected, there will also be a negative feedback loop on consumption due to drying up of incomes.<br /><br />The impact of its de-monetisation decision on production at factories and farms is something that the Modi government needs to particularly worry about — even if these may not be apparent immediately. This is the time when sugar mills in Uttar Pradesh have just started crushing cane. A farmer cultivating cane in one hectare produces an average 600 quintals, which he may supply in one-trolley loads of 50 quintals each every week. Given harvesting costs of Rs 40/quintal, it means arranging Rs 2,000 of weekly cash to simply pay labourers for cutting and loading cane to his trolley. On top of this, the farmer also needs cash to buy fertiliser, seeds, pesticides and other inputs to plant wheat on the vacated sugarcane plots. Where is this cash going to come from today? And is this the time for the farmer to be in his field or spend all day at the ATM/bank counter 10 km away just for withdrawing cash?<br /><br />The conclusion is inescapable: Without cash to immediately replace the now de-monetised notes, we are in for troubles whose effects may not take too long to be known.</div>
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<br><a href="http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/" class="re" target="_blank">The Indian Express, 15 November, 2016, http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/</a><div class="clear"></div>
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LATEST NEWS UPDATES | In fact: When the money stops -Harish Damodaran </title>
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-The Indian Express
The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.
So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs..."/>
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<h1 class="cat-box-title">In fact: When the money stops -Harish Damodaran</h1>
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<div align="justify">-The Indian Express<br /><br /><em>The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.<br /></em><br />So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs 500 and Rs 1,000 denomination currency notes have been largely felt by households, shopkeepers and other microenterprises. These economic agents have, to a limited extent, adjusted to the new situation through variations of a system, wherein purchases and sales previously made in cash are increasingly being replaced by credit transactions.<br /><br />Thus, if you have run out of small denomination notes to pay your neighbourhood presswallah or milk delivery man, it’s quite likely that they have now started providing the same services on credit. They are doing so in the belief that you would pay as and when cash in available. They, in turn, are obtaining their own basic rations from the local kirana store through credit settleable at a later date in cash. Storeowners and vegetables vendors, too, may be replenishing their stocks from suppliers willing to similarly extend these on credit.<br /><br />On the whole, then, we have a credit economy today at the level of households and microenterprises, which has, howsoever imperfectly, replaced transactions that were till the other day taking place in cash. Much of it is, of course, built on trust and faith between parties who know each other — and there is an unwritten understanding that those buying on credit will not eventually default. So, even if there isn’t enough currency available to grease the wheels of commerce, many households and neighbourhood service providers may have well figured out ways to stay afloat — so long as it doesn’t entail hospitalisation or other exigencies where large cash payments cannot be avoided.<br /><br />But when it comes to other economic agents — factories, farmers and others engaged in actual production — the reality could be different. Take Tirupur, a town in Tamil Nadu that produces some Rs 32,000 crore worth of knitwear annually, three-fourths of which is exported. Factories in this ‘knitwear capital of India’ employ an estimated 5 lakh women and men involved in fabric cutting, stitching, ironing and packing of garments, apart from related activities such as bleaching and dyeing, compacting and calendaring, printing, embroidery and button-making. Out of these 5 lakh, half or more are paid weekly wages in cash. A unit may have 1,000 employees, of whom 500 receive an average of, say, Rs 2,000 a week. It translates into weekly cash disbursements of Rs 10 lakh as wages, whereas business entities are now being allowed to withdraw just Rs 50,000 per week from their current accounts maintained with banks. While the cash withdrawal limit was even lower, at Rs 20,000, till a couple of days ago, the increase is still nowhere near what is required to pay full wages to all workers.<br /><br />What holds true for Tirupur would also apply to other industrial clusters, from Surat and Ludhiana to Panipat and Ichalkaranji. Hardly a tenth of India’s workforce comprises organised employees receiving salaries credited to their bank accounts every month. The rest are all those who get wages in cash, whether daily or weekly. That being so, if banknotes worth over 86% of the total currency in circulation are all of a sudden pulled out — officially declared to be “worthless pieces of paper” — payments to these workers would obviously stop. The reason is not because factory owners don’t want to pay, but just that there isn’t cash that will enable them to pay. Unless a substantial part of the 86% withdrawn currency is replaced by new currency — which Modi himself suggests could take 50 days — there’s no way that factories can run. Yes, households and neighbourhood kirana stores may manage by replacing cash transactions with credit, but can workers be paid salaries on credit?<br /><br />What we have witnessed so far is the first-round effects of de-monetisation. These have been mainly on households forced to restrict consumption, not for lack of incomes but for cash necessary to make purchases. But it’s the second-round effects — on production — that are still to fully unfold. If non-availability of currency makes it impossible for factory owners to pay wages, they are left with only one option: shut down their units and lay off workers. These are not familiar sights yet, unlike the serpentine queues forming in front of banks and ATM counters for almost a week now. But when that happens — which may not take too long — that’s when things can turn really serious.<br /><br />But it’s not factories alone. An average village-level dairy cooperative society in Gujarat procures 800-1,000 litres of milk daily from its farmers. At Rs 35/litre, this works out to weekly payments of Rs 2-2.5 lakh — again in cash. It raises the same question: If payments cannot be made in cash, how long will farmers continue supplying milk? One positive impact of de-monetisation could well be that it will force Tirupur’s knitwear exporters or dairy plants in Gujarat and elsewhere to put in place systems for crediting wages and payments directly into the bank accounts of their workers and farmer-suppliers. But opening and operationalising these accounts will obviously take time — just as the printing of new high-denomination currency notes and the recalibration of ATMs to handle these, will. But in the interim, as workers and farmers stop receiving payments, not only is production going to be affected, there will also be a negative feedback loop on consumption due to drying up of incomes.<br /><br />The impact of its de-monetisation decision on production at factories and farms is something that the Modi government needs to particularly worry about — even if these may not be apparent immediately. This is the time when sugar mills in Uttar Pradesh have just started crushing cane. A farmer cultivating cane in one hectare produces an average 600 quintals, which he may supply in one-trolley loads of 50 quintals each every week. Given harvesting costs of Rs 40/quintal, it means arranging Rs 2,000 of weekly cash to simply pay labourers for cutting and loading cane to his trolley. On top of this, the farmer also needs cash to buy fertiliser, seeds, pesticides and other inputs to plant wheat on the vacated sugarcane plots. Where is this cash going to come from today? And is this the time for the farmer to be in his field or spend all day at the ATM/bank counter 10 km away just for withdrawing cash?<br /><br />The conclusion is inescapable: Without cash to immediately replace the now de-monetised notes, we are in for troubles whose effects may not take too long to be known.</div>
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<br><a href="http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/" class="re" target="_blank">The Indian Express, 15 November, 2016, http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/</a><div class="clear"></div>
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LATEST NEWS UPDATES | In fact: When the money stops -Harish Damodaran </title>
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-The Indian Express
The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.
So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs..."/>
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<h1 class="cat-box-title">In fact: When the money stops -Harish Damodaran</h1>
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Published on</span><span class="text-date"> Nov 16, 2016</span>
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<div align="justify">-The Indian Express<br /><br /><em>The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.<br /></em><br />So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs 500 and Rs 1,000 denomination currency notes have been largely felt by households, shopkeepers and other microenterprises. These economic agents have, to a limited extent, adjusted to the new situation through variations of a system, wherein purchases and sales previously made in cash are increasingly being replaced by credit transactions.<br /><br />Thus, if you have run out of small denomination notes to pay your neighbourhood presswallah or milk delivery man, it’s quite likely that they have now started providing the same services on credit. They are doing so in the belief that you would pay as and when cash in available. They, in turn, are obtaining their own basic rations from the local kirana store through credit settleable at a later date in cash. Storeowners and vegetables vendors, too, may be replenishing their stocks from suppliers willing to similarly extend these on credit.<br /><br />On the whole, then, we have a credit economy today at the level of households and microenterprises, which has, howsoever imperfectly, replaced transactions that were till the other day taking place in cash. Much of it is, of course, built on trust and faith between parties who know each other — and there is an unwritten understanding that those buying on credit will not eventually default. So, even if there isn’t enough currency available to grease the wheels of commerce, many households and neighbourhood service providers may have well figured out ways to stay afloat — so long as it doesn’t entail hospitalisation or other exigencies where large cash payments cannot be avoided.<br /><br />But when it comes to other economic agents — factories, farmers and others engaged in actual production — the reality could be different. Take Tirupur, a town in Tamil Nadu that produces some Rs 32,000 crore worth of knitwear annually, three-fourths of which is exported. Factories in this ‘knitwear capital of India’ employ an estimated 5 lakh women and men involved in fabric cutting, stitching, ironing and packing of garments, apart from related activities such as bleaching and dyeing, compacting and calendaring, printing, embroidery and button-making. Out of these 5 lakh, half or more are paid weekly wages in cash. A unit may have 1,000 employees, of whom 500 receive an average of, say, Rs 2,000 a week. It translates into weekly cash disbursements of Rs 10 lakh as wages, whereas business entities are now being allowed to withdraw just Rs 50,000 per week from their current accounts maintained with banks. While the cash withdrawal limit was even lower, at Rs 20,000, till a couple of days ago, the increase is still nowhere near what is required to pay full wages to all workers.<br /><br />What holds true for Tirupur would also apply to other industrial clusters, from Surat and Ludhiana to Panipat and Ichalkaranji. Hardly a tenth of India’s workforce comprises organised employees receiving salaries credited to their bank accounts every month. The rest are all those who get wages in cash, whether daily or weekly. That being so, if banknotes worth over 86% of the total currency in circulation are all of a sudden pulled out — officially declared to be “worthless pieces of paper” — payments to these workers would obviously stop. The reason is not because factory owners don’t want to pay, but just that there isn’t cash that will enable them to pay. Unless a substantial part of the 86% withdrawn currency is replaced by new currency — which Modi himself suggests could take 50 days — there’s no way that factories can run. Yes, households and neighbourhood kirana stores may manage by replacing cash transactions with credit, but can workers be paid salaries on credit?<br /><br />What we have witnessed so far is the first-round effects of de-monetisation. These have been mainly on households forced to restrict consumption, not for lack of incomes but for cash necessary to make purchases. But it’s the second-round effects — on production — that are still to fully unfold. If non-availability of currency makes it impossible for factory owners to pay wages, they are left with only one option: shut down their units and lay off workers. These are not familiar sights yet, unlike the serpentine queues forming in front of banks and ATM counters for almost a week now. But when that happens — which may not take too long — that’s when things can turn really serious.<br /><br />But it’s not factories alone. An average village-level dairy cooperative society in Gujarat procures 800-1,000 litres of milk daily from its farmers. At Rs 35/litre, this works out to weekly payments of Rs 2-2.5 lakh — again in cash. It raises the same question: If payments cannot be made in cash, how long will farmers continue supplying milk? One positive impact of de-monetisation could well be that it will force Tirupur’s knitwear exporters or dairy plants in Gujarat and elsewhere to put in place systems for crediting wages and payments directly into the bank accounts of their workers and farmer-suppliers. But opening and operationalising these accounts will obviously take time — just as the printing of new high-denomination currency notes and the recalibration of ATMs to handle these, will. But in the interim, as workers and farmers stop receiving payments, not only is production going to be affected, there will also be a negative feedback loop on consumption due to drying up of incomes.<br /><br />The impact of its de-monetisation decision on production at factories and farms is something that the Modi government needs to particularly worry about — even if these may not be apparent immediately. This is the time when sugar mills in Uttar Pradesh have just started crushing cane. A farmer cultivating cane in one hectare produces an average 600 quintals, which he may supply in one-trolley loads of 50 quintals each every week. Given harvesting costs of Rs 40/quintal, it means arranging Rs 2,000 of weekly cash to simply pay labourers for cutting and loading cane to his trolley. On top of this, the farmer also needs cash to buy fertiliser, seeds, pesticides and other inputs to plant wheat on the vacated sugarcane plots. Where is this cash going to come from today? And is this the time for the farmer to be in his field or spend all day at the ATM/bank counter 10 km away just for withdrawing cash?<br /><br />The conclusion is inescapable: Without cash to immediately replace the now de-monetised notes, we are in for troubles whose effects may not take too long to be known.</div>
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<br><a href="http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/" class="re" target="_blank">The Indian Express, 15 November, 2016, http://indianexpress.com/article/explained/demonetisation-utility-bills-household-bill-4375665/</a><div class="clear"></div>
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LATEST NEWS UPDATES | In fact: When the money stops -Harish Damodaran
Published on Nov 16, 2016
Modified on Nov 16, 2016
-The Indian Express
The effects of de-monetisation will be the most acute when it spreads from consumption in households to production in factories and by farmers across the country.
So far, the effects of Prime Minister Narendra Modi’s ‘de-monetisation’ of existing Rs 500 and Rs 1,000 denomination currency notes have been largely felt by households, shopkeepers and other microenterprises. These economic agents have, to a limited extent, adjusted to the new situation through variations of a system, wherein purchases and sales previously made in cash are increasingly being replaced by credit transactions.
Thus, if you have run out of small denomination notes to pay your neighbourhood presswallah or milk delivery man, it’s quite likely that they have now started providing the same services on credit. They are doing so in the belief that you would pay as and when cash in available. They, in turn, are obtaining their own basic rations from the local kirana store through credit settleable at a later date in cash. Storeowners and vegetables vendors, too, may be replenishing their stocks from suppliers willing to similarly extend these on credit.
On the whole, then, we have a credit economy today at the level of households and microenterprises, which has, howsoever imperfectly, replaced transactions that were till the other day taking place in cash. Much of it is, of course, built on trust and faith between parties who know each other — and there is an unwritten understanding that those buying on credit will not eventually default. So, even if there isn’t enough currency available to grease the wheels of commerce, many households and neighbourhood service providers may have well figured out ways to stay afloat — so long as it doesn’t entail hospitalisation or other exigencies where large cash payments cannot be avoided.
But when it comes to other economic agents — factories, farmers and others engaged in actual production — the reality could be different. Take Tirupur, a town in Tamil Nadu that produces some Rs 32,000 crore worth of knitwear annually, three-fourths of which is exported. Factories in this ‘knitwear capital of India’ employ an estimated 5 lakh women and men involved in fabric cutting, stitching, ironing and packing of garments, apart from related activities such as bleaching and dyeing, compacting and calendaring, printing, embroidery and button-making. Out of these 5 lakh, half or more are paid weekly wages in cash. A unit may have 1,000 employees, of whom 500 receive an average of, say, Rs 2,000 a week. It translates into weekly cash disbursements of Rs 10 lakh as wages, whereas business entities are now being allowed to withdraw just Rs 50,000 per week from their current accounts maintained with banks. While the cash withdrawal limit was even lower, at Rs 20,000, till a couple of days ago, the increase is still nowhere near what is required to pay full wages to all workers.
What holds true for Tirupur would also apply to other industrial clusters, from Surat and Ludhiana to Panipat and Ichalkaranji. Hardly a tenth of India’s workforce comprises organised employees receiving salaries credited to their bank accounts every month. The rest are all those who get wages in cash, whether daily or weekly. That being so, if banknotes worth over 86% of the total currency in circulation are all of a sudden pulled out — officially declared to be “worthless pieces of paper” — payments to these workers would obviously stop. The reason is not because factory owners don’t want to pay, but just that there isn’t cash that will enable them to pay. Unless a substantial part of the 86% withdrawn currency is replaced by new currency — which Modi himself suggests could take 50 days — there’s no way that factories can run. Yes, households and neighbourhood kirana stores may manage by replacing cash transactions with credit, but can workers be paid salaries on credit?
What we have witnessed so far is the first-round effects of de-monetisation. These have been mainly on households forced to restrict consumption, not for lack of incomes but for cash necessary to make purchases. But it’s the second-round effects — on production — that are still to fully unfold. If non-availability of currency makes it impossible for factory owners to pay wages, they are left with only one option: shut down their units and lay off workers. These are not familiar sights yet, unlike the serpentine queues forming in front of banks and ATM counters for almost a week now. But when that happens — which may not take too long — that’s when things can turn really serious.
But it’s not factories alone. An average village-level dairy cooperative society in Gujarat procures 800-1,000 litres of milk daily from its farmers. At Rs 35/litre, this works out to weekly payments of Rs 2-2.5 lakh — again in cash. It raises the same question: If payments cannot be made in cash, how long will farmers continue supplying milk? One positive impact of de-monetisation could well be that it will force Tirupur’s knitwear exporters or dairy plants in Gujarat and elsewhere to put in place systems for crediting wages and payments directly into the bank accounts of their workers and farmer-suppliers. But opening and operationalising these accounts will obviously take time — just as the printing of new high-denomination currency notes and the recalibration of ATMs to handle these, will. But in the interim, as workers and farmers stop receiving payments, not only is production going to be affected, there will also be a negative feedback loop on consumption due to drying up of incomes.
The impact of its de-monetisation decision on production at factories and farms is something that the Modi government needs to particularly worry about — even if these may not be apparent immediately. This is the time when sugar mills in Uttar Pradesh have just started crushing cane. A farmer cultivating cane in one hectare produces an average 600 quintals, which he may supply in one-trolley loads of 50 quintals each every week. Given harvesting costs of Rs 40/quintal, it means arranging Rs 2,000 of weekly cash to simply pay labourers for cutting and loading cane to his trolley. On top of this, the farmer also needs cash to buy fertiliser, seeds, pesticides and other inputs to plant wheat on the vacated sugarcane plots. Where is this cash going to come from today? And is this the time for the farmer to be in his field or spend all day at the ATM/bank counter 10 km away just for withdrawing cash?
The conclusion is inescapable: Without cash to immediately replace the now de-monetised notes, we are in for troubles whose effects may not take too long to be known.
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