Demonetization | Maleccha

What could have been a better response to stop the spread of the Coronavirus in India than the blanket imposition of lockdown? This retrospective question is important to ask, as it may help us in challenging the irrationality of the current decision-making process and also become important learning to be applied in future.

India’s first case was identified on 30th January. By the first week of February, we could have asked all foreign returned individuals to stay at home, self-quarantine and tracked their movement and imposed severe fines, if they were found moving around. Placed restrictions on international travel and provisioned thermal testing on all airports and for all passengers. Counselling all those who were returning from abroad, through phone calls.

Transparently stating the scale of spread and share that worst may happen and we should prepare for it. Immediately constituting a health and economic task force of experts, inviting ideas to deal with the pandemic and economic repercussions. Releasing nation-wide pamphlets, audio and video clipping on radio, phone and television informing everyone about the virus and ways to deal with it, including physical distancing and washing of hands and usage of masks. Asked the small and medium scale enterprises to go for large scale production of protective equipment both for health fraternity and for the general public, including buying the patent rights to manufacture testing kits and ventilators. This would have created more work and provided money. Enterprises asked to have non- essential services staff to work from home. Manufacturing staff capacity reduced to half and then to one third, in a staggered way. Norms of physical distancing observed.

Further, cancelling all large events starting from the first week of February including Namaste Trump. Reducing the number of pilgrims visiting religious sites and shrines in India and shutting down all prominent religious places by mid-February.

Start working towards a staggered lockdown, having a plan for the movement of migrant workers. Considering the scale of migration in India, whole March could have been devoted for safe transportation of migrant workers after the screening, asking them to not move around at least for a fortnight. After a month of movement, shut down the buses, trains and aeroplanes.

While all this happening, in parallel enhance the social welfare provisions. Making food and medicine, protective gear and soaps available through Public Distribution System and it should be universal. Setting up handwashing stations in the poorer neighbourhoods. Opening bank accounts for working poor on priority basis and transferring an appropriate amount of money on a weekly basis. This expansive public expenditure would have kept the aggregate demand stable. Funds gathered through Prime Minister (PM) Cares and PM and Chief Minister relief fund could have been used for this. Setting up a counselling system to deal with the lockdown, and repercussions of the lockdown like domestic violence, debt stress and abuse.

The government can’t be everywhere, the vibrant civil society and trade unions could have been asked for identifying workers for inclusion in social welfare provisions, setting up testing facilities and helping those who want to go back. An appeal for social solidarity should have been issued by the highest of the authority. Religious institutions could have been involved in using their networks to provide relief.

While doing so, expand the scale of testing and convert a part of primary health centres in all villages and cities as testing facilities. Converting all religious places, conference and convention halls, public and private schools as quarantine facilities. Once everyone is at home and in quarantine facilities, receiving social grants and food through PDS, announce the national lockdown.

The date should be announced a week in advance with clear instructions of what will be open and what will be completely shut, so as to avoid panic. And have the lockdown till we peak and flatten the curve. Whichever city and village Panchayat flattened the curve can resume economic activities at a staggering pace.

A plan for the opening of the economy prepared with some suggestive answers for uncertainty shared with the whole country so that everyone is prepared to deal with the crisis.

A national momentum created for shutting down and opening of the economy. Immediate devolution of power to state governments, municipal corporations and Zila Parishads to take the decisions. They all should have their own respective health and economy expert committees in place to help them in decision making. Setting up a secure network for video conferencing to avoid physical meetings and regular contact with all states, municipal corporations and district committees. Constant monitoring the spread of the virus at municipal, gram sabha level.

This could have been one well thought ‘chronological’ way of doing things. There could have been many others. They all would have provided better plans than this haphazard and ad-hoc decision-making process, which is exactly the opposite of rational policymaking.

Considering that Indians are docile people. They tend to toe the line. They stood quietly in the queues when demonetization happened. They followed the instructions to file taxes under the new haphazard taxation regime of Goods and Service Tax, even if it cost them more. Instead of asking them to clap and bang thalis in their balconies, light candles, they could have been instructed properly on how to be a part of the process to stop the spread of the virus. Some of these strategies were adopted by Kerala, a state which managed to flatten the curve, others could have done that too.

Two op-eds published in The Indian Express today are enough to boil your blood. One is by the member of recently constituted Economic Advisory Council, Mr. Surjit S Bhalla and the other one is by Mr. Sajjid Z. Chinoy. The op-eds force you to question what are our economists smoking these days? It must be gobar which is making them hallucinate about growth and ejaculate numbers.

Mr. Bhalla is telling us that poor benefitted the most with an increase in wages because of demonetization and introduction of Good and Services Tax.

Dear Bhalla Sahib, demonetization destroyed the backbone of poor. They didn’t have money to even enter the labor market. There are costs of mobility. One needs food to have energy. Demonetization ensured reduced mobility, access to food. People weren’t able to go to work because they had no money.

Many informal workers (garment workers) need thread and other stitching material. They had no cash to buy that material. The shopkeepers weren’t selling them on credit. This ensured that home-based workers like those engaged in stitching have no work.

Illustrations above are the tip of the iceberg.

They are enough to state that demonetization reduced the supply of labor and those who were working needed higher wages to survive and help others survive. Similarly, due to the cash crunch, they were to be paid later. The only reason as a worker you’ll wait for the wages for longer duration is the promise that you’ll be paid extra. Demand for labor was already there, but the government pursued to reduce the supply through artificial measures and here we are with so-called ‘higher wages’.
Further, you’ve not even accounted for the opportunity cost loss to those who stood in the queue to withdraw cash. Their numbers stand in thousands and millions. Leaving their work aside, they were standing in front of ATMs and banks.

Another example which is worth quoting here to demystify this higher wage narrative is the prices of recyclable plastic material. All over India, after the introduction of Goods and Services Tax (GST), scrap plastic material prices crashed. Reasons of price crash have been provided below. An interesting phenomenon emerged in Indore, the prices of recyclables rose in Indore. Prices of PET bottle went up from INR 20/kg to INR 25/kg, cardboard INR 03/kg to 05/kg. This was strange. A well-versed economist will say, ‘O dear, poor waste-pickers are benefitting from GST in Indore’. Mr. Bhalla will say ‘higher prices’- good for poor. This will be replayed multiple times without finding the reasons of price rise.

Swachh Bharat Abhiyaan in Indore has brought in private players for the door to door collection of waste, it encouraged mechanization of collection and transfer. Waste-pickers aren’t able to access the waste anymore. Waste including recyclables is reaching the landfill or prospective incineration plant. With reduced access to waste, waste-pickers can’t earn their livelihood. They have no money. An artificial scarcity of recyclable material has been created in the market resulting in rising prices as scrap dealers want material. They are reducing their own margins to look for waste. If they don’t do that they will be out of business. Did the poor benefit from the price rise? Waste-pickers are out of business and scrap dealers are reducing their margins. This case is probably a hint to help us understand the ‘increased wages’, in addition to already mentioned factors.

The informal economy suffered the most because of the government’s misadventure.

You are celebrating Goods and Service Tax (GST). The government wants to formalize the economy with the introduction of taxation reforms, where every item is taxed. GST on recyclable plastic, which was a source of income and survival for wastepickers (who form the bottom of the informal economy) is now around 18 percent. Earlier, the tax on scrap plastic was 5.5 percent. Recyclable material is in competition with virgin material. Thus, its prices have to stay lower than the prices of virgin material. The taxation cost cannot be transferred to the consumers (who in this case are manufacturers). If the cost is transferred they will move towards the virgin material. To keep the consumer base together, the suppliers have transferred the increased tax to the people lower in the supply chain. This has taken a snowball effect in cities like Mumbai and Bengaluru, where prices of recyclable material have gone down sixty percent, reducing the income of waste-pickers. Now they have to do more work for less pay.

Mr. Chinoy termed this process as formalizing of the supply chain by disruption of informal supply chains.

Does he know what disruption means particularly in this case? Disruption here means that poor have nowhere to go. There is no food in their platter, no way to take care of themselves and their families, no way to enter the labor market. Disruption of the informal supply chains will not bring ‘fair prices’, ‘fair wages’ or social protection cushion. Disruption has reduced the prices, particularly of the material sourced from informal workers, due to increased taxation cost. The much hyped disruption has destroyed the livelihood of many. This disruption is not innovation. It is enforcement of an order which is destructive for economy. Disruption in this context is destruction. The taxation cost because of this destruction has not been passed to consumers, as that will increase the price of commodities and demand for it will go down, and there will not be an equilibrium. The cost has been passed down to the poor – waste-pickers and garment workers with reduced prices of their commodities and labor. In certain instances, it may look like that this destruction has increased the wages, while the number of those benefiting from increase became very small.

Formalization means a lot of many things, and disruption is not one of them. This our dear number-crunching economists will never understand.