Informal economy feels the most note ban jitters in Q4

GDP growth slows for fourth straight quarter

India’s economic growth slowed for fourth consecutive quarter in the three months ended March. The slowdown would have been more severe if the impact of demonetisation on the informal economy was taken into account, say economists. 

“The informal sector is still in a lot of trouble,” said Pronab Sen, former chief statistician of India. 

The estimates of Gross Value Added (GVA) released by the Central Statistics Office (CSO) are largely based on the corporate sector. As such they do not accurately capture the impact of demonetisation on the informal economy — which experts believe was even more badly hit after the note ban. 

Given the paucity of data on the informal economy, it is difficult to gauge the true extent of the impact of the note ban on that part of the economy. One way to gauge the impact is to look at the microfinance sector, which could serve as a proxy, although limited in nature, for the informal economy.

Data from microfinance institutions (MFIs) analysed by CARE Ratings show that at the aggregate state level, cumulative collection efficiencies fell to 89.3 per cent in November, when demonetisation was announced, from a high of 99 per cent earlier. The minimum collection efficiency in November was 60.6 per cent. 

The pain is evident from the fact that even after remonetisation gathered pace in the fourth quarter of FY17, collection efficiency in the sample only improved marginally to 90.6 per cent in March. 

While collections should have improved across the board, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra and Tamil Nadu saw a declining trend. “While MFIs do reflect to some extent what is happening in the informal sector, it is just the tip of the iceberg,” said Sen. 

The situation in Uttar Pradesh, Maharashtra, Madhya Pradesh and Karnataka was worse. CARE’s analysis shows in Uttar Pradesh, 32.3 per cent of the portfolio was at risk in March, as payments had not been made for more than 30 days. In Maharashtra the figure was 31 per cent. 

Other experts agreed. “There was weakness in the MFI segment even prior to demonetisation. That got magnified post November 8,” said Mithilendu Jha, associate director, India Ratings (Ind-Ra). “The farmer could not reap the benefits of a good monsoon because of demonetisation.” 

Maharashtra, Karnataka, Madhya Pradesh, Gujarat and Uttar Pradesh, together contribute 90 per cent of default inthe stressed transactions rated by Ind-Ra.