Learning To Be Penny-Wise

What Demonetisation’s doing to small businesses and households

Back in 1946, before Independence, the government had demonetised large denominations in the wake of big businessmen amassing great wealth during the Second World War. The going-to-be President of Independent India, Dr.Rajendra Prasad, had criticised the decision: “While we, Congressmen, have no sympathy with profiteers and dealers in the black market, it is not right to penalise honest people who in good faith have their savings in notes of demonetised value… A large number of people belonging to the middle and lower middle classes will be hit hard.”

70 years hence, we find ourselves in the same space of uncertainty and even a bit of mistrust, as many wonder, like Prasad did, that the new policy may have “succeeded in complicating the problems which it intended to solve.”

The Contentious Announcement

Soon after the US Presidential Election results were declared, Prime Minister Modi on November 8, in his usual vigour announced the new ambitious monetary policy which invalidated, almost overnight, 85 percent of the country’s currency in circulation.

The downside to the hasty implementation of this policy goes far beyond the statutory “minor inconveniences”, as there are people — SMEs and daily wage workers whose transactions are dependent majorly — if not entirely on cash. This includes vegetable vendors in the local mandis, local kirana stores, rikshaw pullers, peddlers who sell produce on the street, as well as professionals like carpenters and plumbers.

“Greater good” vs. immediate losses

Penny Wise: Coping with the cash crunch

Poor cash liquidity is moving customers away to big departmental stores who accept plastic money, which is a loss for both the small time vendors and customers, as supermarkets usually sell at a cost higher than the local mandi.

This has also jammed the movement of the demand-supply cycle in the local markets, as vendors lose business, find it difficult to exhaust perishable stock, and are therefore unable to buy fresh stock for further sale.

Consumers are either swiping cards in supermarkets, or using digital wallets to order essentials online. Households are additionally practicing austerity measures to preserve their change and use cash only for what is absolutely essential, till more money flows back into circulation.

Traders who do not maintain card machines suffer. Even then, there are businesses whose customers are not part of the banking system at all, or do not use cards for everyday transactions.

Take the example of Green Market. Green Market is a supermarket which operates out of a 200 sq feet area, in one of the lesser known streets of Tharamani. They have a swipe machine, but their customers are usually neighbouring residents — all from low-medium income groups who trade in cash.

Poonkuzhali, owner of Green Market, explained, “It’s almost the end of the day, and there has been no business yet. There’s a transaction of about 4000 rupees by this time on a regular day — that’s the kind of money I’ve lost today.” She adds, “Only 2 persons came with cards today. They were IT professionals who live in the PGs close-by. Maybe tomorrow there will be more of them who’ll come in with cards. People came last night and gave us 1000-rupee notes for a purchase of 100 rupees. We gave away all our change because we simply didn’t know of the announcement then.”

Then there are bigger departmental chains like Wait Rose and Nilgiris, who were even accepting 500 and 1000 notes, which further alienated small shops.

Small jewellers and electronic stores around the country are adapting to the changed economic scenario in their own ways.

Jewellers kept running transactions into the wee hours of the morning on November 9, as people tried to convert their soon to be demonetised money into gold, literally. But as the initial frenzy died down, jewellers predicted an impending slump. Selvi Pushpi, who works at a small jewellery store in Adyar, said “There won’t be many customers coming in the next six months, so we made the most of the initial rush of people who desperately wanted to safeguard their money.”

Gold has been sold at a premium as high as 50 percent of the price of the day on the night of the announcement in jewellery stores throughout the country.

Merchants dealing in electrical items, too, for example, have shown a great degree of adaptability to the situation by investing in PoS machines, or by renting them for a mere Rs.250 per month. In fact, reports suggest that banks have claimed an all-time high in demand for their PoS solutions: while Axis bank has declared a three-fold jump, HDFC Bank has said that the demand for card-swipe machines has gone up from 5000 a month to 5000 a day — all suggestive of not only a short-term adaptability measure, but also a greater trend favouring cashless transactions, which has been taking newer categories of SMEs under its ambit. Eve’s Beauty parlour in Adyar had had a card-swipe machine for a long time but it was lying defunct. Three days after the announcement, the machine was put into use.

The impact of demonetisation is also greatly manifest in businesses whose goods/services are dispensable in times of poor liquidity. Arunachalam, owner of a 24*7 tea stall in the food street near the Ramanujan IT City, said business had become slack in the first 2–3 days, but a week later, it is picking up again. He said, “There were almost no early morning customers. The ones who came — my regulars — asked me to serve them on credit. You can see the number of people on the road itself has reduced. On regular days, this road is so busy that you cannot spot one empty bench or stool. Now most of them are empty…”

Shravan Vasudevan, an employee at CITI, Ramanujam IT city and a regular on the food street, says, “Some of my friends actually choose to go back home after office hours now, instead of joining us here.”

Sunita Sachdeva, a home-maker and an Account Assistant, says, “Vegetable vendors and fruit sellers would accept 500 rupee notes on the condition that I bought things for the full amount. Now I’m working on reducing household expense. The queues at banks are too long, and since I am a working woman, I cannot to lose my productive hours of the day like this. So I’m finding ways to make my cash last longer — I’d now buy half the amount of milk that I usually buy.”

Although she has temporarily altered her spending pattern, she does not think it’ll stick. She says, “Since I belong to the salaried class, these cut-backs are only for the short-term. The moment currency is back in circulation, we will be back to your older spending pattern. Right now it’s a choice between standing in queues and cutting down expenses.”

An interesting pattern between borrowers and lenders, who exchange informally, is now being observed too. Creditors insist that they be paid in new currency when it arrives, whereas debtors want to pay off their loans — in the form of demonetised currency, of course, as soon as they can.

Vishesh Garg, a Chartered Accountant at Grand Thornton, Delhi calls the policy “poorly thought out. Rather than a decrease in black money, there is a shift in the black money from the black money makers to the banker, courtesy money exchange intermediaries. The businesses of jewellers, property dealers, hawala brokers will again stabilise and maybe, extend even further, thanks to the small size of our 2000 currency note. In the short term there is a total loss situation, but soon black money will be back in the system and things will be as they were.”


With employees being strapped for cash, daily or weekly wage workers, especially those in the construction and transport sector, are suffering. Workers in small factories are in the same quandary.

Uwais Javed Chaudhury, manager at logistics firm Green Roadlines, has been having trouble paying his drivers. “We have zero business right now. My trucks are on strike, gas stations have run out of diesel, and I am unable to cash-out in any whichsoever way.”

A lot of factory workers whose households ran entirely on the cash they received in-hand, have been running out of supplies.

Even as liquidity conditions improved over the week, the time lost in currency-conversion meant irrecoverable losses for the SMEs engaged in manufacturing. Jude Sannith Sujendran, journalist with CNBC TV 18 says, “Long term success of SMEs depends on their adaptability to digital methods of payment. Businesses which had been operating for years without card machines, have now started renting them out. Fin-tech firms and customers both benefit from this arrangement.”

While cash-strapped companies struggled to pay employees in one part of the country, in another, an accountancy firm in New Delhi paid its employees double their salaries. Except, it was paid in cash and not as a bank transfer, which is the usual practice. Ingenuous way of ridding oneself of black money, perhaps?

Bhooma, a waste-picker, walking past the Union Bank ATM in Adyar exasperatedly said, “Everyone’s been turning me away. Noone wants to pay money to a kabaadi right now. What should I do now? Beg?”

At a time when people with legitimate money are strapped for cash because their money was invalidated in the course of only a few hours, there are people who are having to starve and face serious losses because of lack of access to the banking system and the infrastructural fall-outs of the hurriedly-implemented policy. Therefore, the mission to remove old notes and substitute these with new ones has to be accomplished fast so that these “short-term disruptions” can be contained while they’re still short.

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