From the old way to the new- The impact of demonetization on SMEs

While the PM Modi’s bold step to demonetize 500 and 1000 rupee notes to counter the menace of black money, industry bodies have urged the Government to allow

The move by the Government of India, which declared that the five hundred and one thousand rupee notes will no longer be legal tender from 8th November 2016 received different responses from different sectors. The notes of one hundred, fifty, twenty, ten, five, two and one rupee remained in legal tender and remained unaffected by this decision. The measure has been taken by the Prime Minister in an attempt to address the resolve against corruption, black money and counterfeit notes. This move is expected to cleanse the formal economic system and discard black money from the same. 

While the PM Modi’s bold step to demonetize 500 and 1000 rupee notes to counter the menace of black money, industry bodies have urged the Government to allow the banks to further permit the customers to withdraw money from their current and cash credit accounts. Recognizing it as a bold decision which will hopefully yield good results in the coming days, SMEs associations have shared their MSMEs witnessed a considerable confusion and dislocation in carrying out day to day financial transactions. Currently the move has thrown the micro and small enterprises into complete confusion. Micro and small enterprises due to their nature of business have been largely dealing in cash transactions for purchases as well as other transactions. It will become difficult for them to cope in the absence of availability of ready cash in carrying their basic operations. It has also been found that the SMEs have also been facing difficulties in paying wages and salaries due to this sudden dislocation. In addition to this, a lot of SME entrepreneurs also faced problem as they are not even allowed to draw their own money from the legitimate accounts in the banks due to the restrictions placed on withdrawals.

At various forums and discussions, SMEs have strongly urged that the Government must allow or banks must be permitted to allow customers to withdraw money from their current and cash credit accounts. They are being the legal instruments for transactions between banks and industry and business, placing restrictions on such accounts for withdrawal is something that will add to the problems being faced by them. The MSMEs have insisted that the Government should take immediate steps to ensure that the normal business activities are not disrupted. The reason being there will be logistical issues involved in the supply and distribution of the new currency notes and this will cause considerable damage and loss to business operations. It was found that this problem is more acute in districts and rural areas as people depend largely on cash for their day to day transactions. Starting from running their enterprises to the payments on their purchases, most of the transactions are cash based. Moreover, the banking infrastructure in the rural India is not that strong. While the other sectors have shifted to using e-wallets and other electronic ways of making purchases, the rural population of the country is not that tech friendly and thus not very much comfortable in this immediate shift. We need to take into care that the Indian economy is still largely 80% cash based with other forms of money barely making inroads as yet.

Expert Suggestions- As per the MSME experts and consultants, the Government and the authorities should make ways to immediately take steps to improve the logistics of supply and distribution of new currency. It should  also ensure that the unnecessary restrictions and hurdles are removed forthwith in the way of legitimate transactions and regular banking operations as such restrictions will disrupt industry and business to the determinant of the national economy.

While there are a lot of short-term effects, but we need to see the long-term vision and effects. Some impacts are as follows:

  • Liquidity position will improve gradually
  • Inflationary trend will be arrested
  • With the black money coming through the banking channel, position of banks will improve
  • Foreign currency market shall stabilize
  • Manufacturing and service sector will see a significant increase
  • People will shift their focus from cash to the cashless mode of payments like digital payments, Virtual Wallets, debit and credit cards, Net banking etc.

Thus demonetization will lead the way to a cashless economy and thereby help the compliant SMEs to pursue higher growth. 

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