By Manimaran G V
Inflation is peaking….. The informal sector is in crisis
Increase in Cash transactions despite digitalization.
Global food shortage is predicted
Whether the above situations are interrelated and what do experts opine and offer as corrective steps?
Though one of the popular reasons for introducing the demonetization was claimed to eliminate fake and black currencies, the atmosphere was used to popularise the digital payment platforms to contain cash circulation.
The expected result must have been to contain the inflation and also to control the informal sector by restricting the cash circulation and also by encouraging the digital payments even in the informal sector.
The informal sector plays a major role in big and diversified economies like India.
An informal economy (informal sector or grey economy) is explained as the part of any economy that is not subjected to taxation or monitored by government agencies.
The informal sector constitutes a significant part of the economies in developing countries and is always branded as troublesome and tricky to manage.
However, the informal sector offers significant economic opportunities for the downtrodden and has been growing exponentially and it always remains a challenge to integrate the informal economy into the formal sector from the policy angle.
But, whether we could reap the benefits of the innovative and bold step of having implemented the demonetization policy and introducing Digital platforms parallelly?
Success may be rated to an extent of 50% as it is already explicitly expressed that the
money circulation crossed the pre-demonetisation period, but due to the effective
administrative surveillance, the presence of fake and black money might be under control.
But, the recent HSBC global research report revealed that the currency circulation is reaching its peak despite rising in digital payments.
They attribute the crisis observed in the informal sector as a reason for the increased cash circulation. The report opines that the crisis in the informal sector is pushing increasingly towards cash-based activity, especially those activities that end up falling outside
the tax net.
The cascading impact of uncontrollable inflation, which may be global phenomena in the post covid economic scenario, raises the demand for cash in hand to meet the expenses to be routed more through the informal sector and there is a tax evasion resulting in a fall of income, deficit budget and the corollary negative impact on various factors of our economy.
The report further views that if the rise in cash circulation increases, there would be a meaningful fall in banking liquidity which RBI wants to have as a measure to control inflation by hiking the repo rate.
But, it may not be helping in a big way because of the rising cash circulation in the informal
sector.
Another disturbing factor is the continuous appreciation of the USD which witnessed the ever
lowest value of INR against the dollar. This will cause the import of oil and other capital goods dearly and will further jack up the domestic price.
It is understood that the shortage of dollars in the market is primarily due to the withdrawal
of funds in the stock and debt market by the foreign portfolio investors.
Mr Michel D Patra, the Deputy Governor of RBI said in a recently attended seminar that the RBI is keenly watching the fresh low of INR to 78.33 against USD and assured of stepping in for correction at right time.
It is also opined by the environmental experts that the world will shortly face food shortage too which may be another pressure to resort to import of essential food commodities.
The only silver linings for the middle class are the hefty forex reserve of about USD 600 billion,
The BJP Government’s conviction to control the inflation and the favourable agro-climatic conditions.
We shall pin hope on the above factors to accelerate Indian Economy.
Writer .Manimaran G V is National General Secretary,Rashtriya Lok Janshakthi Party
Former Director, Canara Bank
Partner, UNMAI Financial Consultancy
Executive Editor, Motherland Voice