This is a brilliant move by Modi government which has taken the fight against corruption and black money to the next level. The tax evaders will now be forced to convert their undisclosed money through legal route and the same will not go unnoticed and failure to do this means their money is worthless. So, this is indeed a masterstroke. Read more at:

http://economictimes.indiatimes.com/articleshow/55366494.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Prime Minister Narendra Modi, on Tuesday, banned the country’s largest currency bills. The ban is intended both to curb the flow of counterfeit money and to take aim at terrorist organizations that rely on unaccounted-for cash. It is also expected to help the government clean up a system that has relied on cash to pay bribes and to avoid taxes.

This move has widely been hailed on Social Media as the best effort to curb black money in the country. Most of the mainstream news and economists are also with Modi and have hailed this revolutionary and the right step in boosting the use of banking and digital payments which will be positive for the Indian Economy in the medium and long term.

Unfortunately, no one is speaking of the pain that lies ahead for the Indian Economy.

Per estimates, around 20% of Indian economy is cash based and unaccounted for. I am not sure if the term black economy is accurate to describe this section. Nevertheless, this is a huge chunk of the Indian economy and provides livelihood to a very large number of Indian population, especially those associated with Agriculture. The ban of currency notes has killed all liquidity in the hidden economy and the repercussions of this credit crisis is going to be unprecedented.

Agriculture

Let me illustrate with an example that plays every morning is every sabzi-mandi across every city and village in India. The vegetable hawker goes to the local sahukaar, gets money on interest and uses that to buy the inventory of vegetables to sell. After a hard day of work ans selling vegetables door to door, the hawker pays back the sahukaar (with interest for one day)and keeps his profit as his earnings.

A similar transaction happens across most of Indian Farmland albeit on a larger scale and a larger time horizon. At the time of crop sowing, most of the Indian farmers take credit from local money lenders and buy seeds and fertilizers. These money lenders are paid back at harvest, with interest.

With bank notes suddenly going out of circulation, most of such kind of credit has already evaporated from the market and I am not sure as to how and when it will come back because such kind of lending falls under questionable legality. These money lenders have no feasible way to convert their capital base into new currency and the agricultural markets, in my view are going to be hurt quite badly in the next few weeks/months.

Agricultural Commodities

Another sector that works mostly on cash is the commodities and futures market. I am not talking about MCX or legitimate stockists of such agricultural produce but a large number of speculators and traders who hoard food grains at the time of harvest and sell it throughout the year when the prices rise. Such speculative traders ensure smooth supply of food grains and other agricultural produce throughout the year to consumers of such commodities.

With the sudden destruction of the working capital of such hoarders and black marketeers, our country is in for a very difficult year ahead of us. With no money for purchase, the market price of the food grains are expected to crash this year with the government becoming the sole purchaser buying at minimum support price. I am not is a position to estimate anything. However, from past observations and back of the envelope calculation, I would assume such speculators make up at least 10% of the agriculture economy in India. If suddenly, demand falls by 10%, I am not sure how low these commodity prices will go and how the farmer will cope.

MSME Sector

MSME Sector consisting of 36 million units, as of today, provides employment to over 80 million persons. The Sector through more than 6,000 products contributes about 8% to GDP besides 45% to the total manufacturing output and 40% to the exports from the country. ( link

It is no secret that most of the MSME sector is a cash economy. Demonetization has sent shock waves through this economy. Most of the capital in this sector has been destroyed and an average MSME manufacturer is clueless as to how he will rebuild his/her base.Cash was oxygen for these businesses. MSME sector provides employment to a large section of industrial workers and they in turn are going to be the casualty of this sudden capital destruction.

The situation for these MSME units is equivalent to an airstrike destroying their factory. Granted, their economic activity was largely un-taxed and therefore illegal. Yet the livelihood of a very large population of India is suddenly in disarray.

Retail Sector

Lastly, I want to talk about the largest employer in urban India. Retailing in India is predominantly unorganized. According to a survey by AT Kearney, an overwhelming proportion of the Rs.400,000 crore retail markets are unorganized in India. In fact, only a Rs.20,000 crore segment of the market is organized. The sector is highly fragmented with 97% of its business being run by the unorganized retailers like the traditional family run stores and corner stores. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10% of India’s GDP. ( link

A very large percentage of a mon-and-pop retailers’ turnover is in cash. I cannot speculate how much of their business is taxed and how much of it is hidden from tax net, but I can say that the lives of these shopkeepers is about to become very interesting due to a double whammy of demonetization. Firstly, they just lost all their working capital. Secondly, most of their customers (which are working in the sectors I have touched above) are about to face severe crunch and hence their spending is about to evaporate.

In conclusion

This was not a surgical strike against black money. This is carpet bombing of a heavily populated area. In a war against black money, our Prime Minister has just nuked the livelihood of a large population of my fellow countrymen.

Yes, people who had stashed away their ill gotten gains in cash are about to loose their ill-gotten wealth and we have every right to celebrate that. Yet I am speechless at what is about to happen to my countrymen who do not count!

These hard working people, are not covered by the statistics of our economy. They have just lost everything and their suffering is yet to become apparent to all of us. I sincerely hope that I am wrong and this does not come to bear, or else, we are in for a long, harsh winter of economic deflation.