One year of demonetisation: MSME sector is struggling for revival

A year after the note ban, the micro, small and medium enterprises (MSMEs) sector is struggling for a revival. 

Manufacturers and traders, who earlier complained of a sudden dip in sales, are now finding it difficult to compete with bigger players since the goods and services tax (GST) roll-out. “Business main taklif ho rahi hai (We are facing difficulties in doing business). Production has fallen 30-35 per cent. The GST has made it more difficult for the smaller players to stay in competition,” says Arun Agarwal, senior vice-president of Federation of Rajasthan Trade & Industry. “The other problem is that workers still want to be paid despite having opened bank accounts after demonetisation,” Agarwal complains.

The lower participation of workers was also captured by the Centre for Monitoring Indian Economy (CMIE) in its survey. The CMIE data suggest the labour participation rate (LPR) — the number of people either employed or actively looking for work — has declined substantially after demonetisation. A fall by a single percentage point in the LPR is serious for a country having a large workforce. 

The average LPR for January-October last year was 46.9 per cent. It fell to a new low of 44.8 per cent in November, when demonetisation was announced. The average LPR for January-April this year remained at 44.3 per cent, much lower than the 46.9 per cent recorded in the corresponding months a year ago. 

Besides a substantive fall in the LPR, around two million people are reported to have lost jobs in the first eight months of this year.

“Around 1.5 million people lost jobs between January and April this year, and another half a million between May and August. So around two million people have lost jobs in the current year. But we can’t say for sure whether the job loss was because of demonetisation or any other reason,” says Mahesh Vyas, managing director and chief executive officer, CMIE.

The MSME sector is considered to be the biggest employer. According to the 6th Economic Census (2013), there were 131.29 million people employed in 58.5 million establishments. Of the 131.29 million workers, the maximum (30.3 million) were employed in manufacturing units, followed by retail trade, with 27.19 million people. The livestock sector provided employment to another 19.4 million.

Another set of data from the Reserve Bank of India point to a worrying trend. The data suggest that the MSME sector has not grown after demonetisation. Credit growth has been consistently declining since November last year. For instance, in November last year, it was 3.35 per cent, against 4.85 per cent in November 2015. Similarly, in December 2016, credit growth declined 1.73 per cent, against 4.46 per cent in the corresponding month a year before. 

Sudershan Jain, president of the Ludhiana-based Knitwear and Apparel Manufacturers Association, calls demonetisation the biggest culprit behind the decline in sales. But he says, “The currency is back in circulation and people have adequate cash to meet operational requirements.” Most manufacturers and retailers say note ban has failed to serve its twin purposes of curbing black money and destroying the parallel economy.