Manimaran G V
- Inflation is peaking…
- Informal sector is in crisis…
- Increase in Cash transactions despite digitalisation…
- Global food shortage is predicted…
Whether the above situations are inter related and what experts opine and offer as corrective steps?
Though one of the popular reason for introducing the demonetisation was claimed to eliminate fake and black currencies, the atmosphere was used to popularise the digital payment platforms to contain cash circulation.
The expected resultant 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 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 the 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 as 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 demonetisation policy and introducing Digital platforms parallely?
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 rise in digital payments.
They attribute on 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 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 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 that continuous appreciation of USD which witnessed the ever lowest value of INR against dollar. This will cause the import of oil and other capital goods dearly and will further jack up 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 for 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 an another pressure to resort on import of essential food commodities.
The only silver linings for the middle class are
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- the hefty forex reserve of about USD 600 billion,
- the BJP Government’s conviction to control the inflation and
- the favourable agro climatic conditions.
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