The effect of India withdrawing currency notes on informal economy

The Prime Minister of India, Narendra Modi's announcement over television on the night of November 8, 2016, withdrawing from circulation currency notes with denominations of Rs. 500 and Rs. 1000, has had a cascading effect on the economy. In this Issue Brief, M. Vijayabaskar, Associate Professor, Madras Institute of Development Studies, Chennai, maps the pathways through which demonetisation impacts the informal economy. A distinction is made between sectors and categories of labour such as the self-employed, the casually employed and the micro and small enterprises operating below the realm of formal regulation. This Issue Brief brings out the paradox of justifying demonetisation in terms of formalising financial markets even it has informalised labour markets. Finally, it also points out that there is little likelihood of the move benefiting the informal economy even in the long run.

People may, therefore, be pushed into the financial system in desperation if the government chooses to not remonetise all that has been demonetised. While this may mean 'inclusion' in a symbolic sense, it will mean little else for the large segments of those who have been excluded from access to formal employment opportunities. Given that it is the same government which has pushed for labour reforms that weaken the protection given to formal workers through 'model' reform laws passed in Rajasthan, it is hard to buy the argument that demonetisation may actually work in favour of even those currently employed in the formal segment leave alone those in the informal economy.

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