Two op-eds published in The Indian Express today are enough to boil your blood. One is by the member of recently constituted Economic Advisory Council, Mr. Surjit S Bhalla and the other one is by Mr. Sajjid Z. Chinoy. The op-eds force you to question what are our economists smoking these days? It must be gobar which is making them hallucinate about growth and ejaculate numbers.
Dear Bhalla Sahib, demonetization destroyed the backbone of poor. They didn’t have money to even enter the labor market. There are costs of mobility. One needs food to have energy. Demonetization ensured reduced mobility, access to food. People weren’t able to go to work because they had no money.
Many informal workers (garment workers) need thread and other stitching material. They had no cash to buy that material. The shopkeepers weren’t selling them on credit. This ensured that home-based workers like those engaged in stitching have no work.
Illustrations above are the tip of the iceberg.
They are enough to state that demonetization reduced the supply of labor and those who were working needed higher wages to survive and help others survive. Similarly, due to the cash crunch, they were to be paid later. The only reason as a worker you’ll wait for the wages for longer duration is the promise that you’ll be paid extra. Demand for labor was already there, but the government pursued to reduce the supply through artificial measures and here we are with so-called ‘higher wages’.
Further, you’ve not even accounted for the opportunity cost loss to those who stood in the queue to withdraw cash. Their numbers stand in thousands and millions. Leaving their work aside, they were standing in front of ATMs and banks.
Another example which is worth quoting here to demystify this higher wage narrative is the prices of recyclable plastic material. All over India, after the introduction of Goods and Services Tax (GST), scrap plastic material prices crashed. Reasons of price crash have been provided below. An interesting phenomenon emerged in Indore, the prices of recyclables rose in Indore. Prices of PET bottle went up from INR 20/kg to INR 25/kg, cardboard INR 03/kg to 05/kg. This was strange. A well-versed economist will say, ‘O dear, poor waste-pickers are benefitting from GST in Indore’. Mr. Bhalla will say ‘higher prices’- good for poor. This will be replayed multiple times without finding the reasons of price rise.
Swachh Bharat Abhiyaan in Indore has brought in private players for the door to door collection of waste, it encouraged mechanization of collection and transfer. Waste-pickers aren’t able to access the waste anymore. Waste including recyclables is reaching the landfill or prospective incineration plant. With reduced access to waste, waste-pickers can’t earn their livelihood. They have no money. An artificial scarcity of recyclable material has been created in the market resulting in rising prices as scrap dealers want material. They are reducing their own margins to look for waste. If they don’t do that they will be out of business. Did the poor benefit from the price rise? Waste-pickers are out of business and scrap dealers are reducing their margins. This case is probably a hint to help us understand the ‘increased wages’, in addition to already mentioned factors.
The informal economy suffered the most because of the government’s misadventure.
You are celebrating Goods and Service Tax (GST). The government wants to formalize the economy with the introduction of taxation reforms, where every item is taxed. GST on recyclable plastic, which was a source of income and survival for wastepickers (who form the bottom of the informal economy) is now around 18 percent. Earlier, the tax on scrap plastic was 5.5 percent. Recyclable material is in competition with virgin material. Thus, its prices have to stay lower than the prices of virgin material. The taxation cost cannot be transferred to the consumers (who in this case are manufacturers). If the cost is transferred they will move towards the virgin material. To keep the consumer base together, the suppliers have transferred the increased tax to the people lower in the supply chain. This has taken a snowball effect in cities like Mumbai and Bengaluru, where prices of recyclable material have gone down sixty percent, reducing the income of waste-pickers. Now they have to do more work for less pay.
Mr. Chinoy termed this process as formalizing of the supply chain by disruption of informal supply chains.
Does he know what disruption means particularly in this case? Disruption here means that poor have nowhere to go. There is no food in their platter, no way to take care of themselves and their families, no way to enter the labor market. Disruption of the informal supply chains will not bring ‘fair prices’, ‘fair wages’ or social protection cushion. Disruption has reduced the prices, particularly of the material sourced from informal workers, due to increased taxation cost. The much hyped disruption has destroyed the livelihood of many. This disruption is not innovation. It is enforcement of an order which is destructive for economy. Disruption in this context is destruction. The taxation cost because of this destruction has not been passed to consumers, as that will increase the price of commodities and demand for it will go down, and there will not be an equilibrium. The cost has been passed down to the poor – waste-pickers and garment workers with reduced prices of their commodities and labor. In certain instances, it may look like that this destruction has increased the wages, while the number of those benefiting from increase became very small.
Formalization means a lot of many things, and disruption is not one of them. This our dear number-crunching economists will never understand.