• The labour market in India has been witnessing numerous uncertainties including the problem of world recession, and growing ‘automation’ particularly in the manufacturing sector. Today major policy change like ‘demonetization’ is likely to make the employment scenario further volatile by causing uncertainties to rise in labour market.
• Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
• The opposite of demonetization is remonetisation, in which a form of payment is restored as legal tender.
• On 8th November 2016, the Government of India has announced the demonetization of all 500 and 1000 banknotes of Mahatma Gandhi Series.
• The move was taken to curb the menace of black money, fake notes and corruption by reducing the amount of cash available in the system.
Effect of Demonetization on Employment:
• The Centre for Monitoring Indian Economy has estimated that 1.5 million jobs were lost after demonetization. Alongside this loss of jobs, there has been a decline in the labour force participation rate (LPR).
• For a developing economy like India, a drop in labour participation rate is a sign of an economic slowdown.
• The All India Manufacturers’ Organization (AIMO), which represents traders and small-, medium- and large-scale industries, conducted survey and has found a drop in employment of 60 per cent and loss in revenue of 55 after demonetization last year.
• Effect on Medium and large scale industries:
a) Medium and large scale industries engaged in infrastructure projects, such as big-ticket road construction, reported a 35% cut in employment and 45% revenue loss. The industries like foreign companies, engaged in export-oriented activities reported 30% job losses and 40% revenue fall.
b) In the manufacturing sector, medium and large scale industries reported the least job-losses are 5% and took a revenue hit of 20%.
c) It is further found that labour intensive units such as food and beverage, tobacco, textile, leather, wood and jewelry employ nearly half of the total workers in the organized manufacturing sector of the economy. Given that nearly 84 percent of total factories have employment in the range of 0 to 99 are affected by the recent move of the government.
• Effect on Informal Sector:
a. The informal sector presently employs more than 80% of India’s workforce. It includes workers in small and medium industries, grocers, barbers, maids and others.
b. More than 95% of total transactions in informal sector are in cash form. The decision of sudden ‘demonetization’ therefore led the labor market dynamics changed significantly by rendering millions of informal workers exposed to increased uncertainty in employment; they resorted to ‘reverse migration’.
c. Within manufacturing, labour intensive sectors such as textiles, leather and gems and jewelry have already reported considerable job losses due to supply chain and market disruptions.
d. Demonetization is considered as a means of increasing formality in informal sector. But a 2009 OECD study on informal economies concluded that enforcing formality can be counterproductive and lead to an increase in poverty.
e. Many daily wage workers or contract workers were rendered jobless due to paucity of cash in the system. But even after re-monetization the number of new recruits has been reduced considerably as compared to pre demonetization.
f. The 2016-17 economic survey also point out the decrease in demand for MGNREGA work in the aftermath of demonetization.
• Effect on Agriculture:
a. Agriculture was expected to grow at 4% this year according to, but demonetization is likely to dent that forecast. The impact is visible in different sub-segments. Winter crops such as wheat, mustard, chickpeas are due for sowing in a fortnight. Wheat prices were already up due to low stocks and anticipated shortfall in 2015-16 output and have firmed up further as demonetization.
b. The vulnerability of the small farmers in agriculture is best exemplified by the predominance of marginal and small holdings in the country. Marginal and small holdings account for 85 per cent of the landholdings. Farmers failed to find buyers or due to dearth of cash ended up getting low prices.
• Effect on Self-Employment:
a. Most of the self-employed workers lose their employment during the months of cash crunch. They don’t able to sell their products because of cash crunch and lack of digital transactions facilities.
• The drop in labour participation is in line with CMIE’s observation that new investments have been falling. For a developing economy like India, a drop in labour participation rate is a sign of an economic slowdown.
• Unlike in developed countries where labour participation is falling because of structural (ageing) reasons, India is a growing economy with a young population.
• A slowdown hurts the younger new labour force. This is already evident. During January-April 2017, job losses were concentrated in the younger age brackets.
The decline in the Labour Participation Ratio should be a matter of deep concern for the Indian economy. Persons may drop out of the labour force due to discouragement, the inability to find a job. In the meantime, they may take up part-time jobs to make ends meet or may be compelled to start a small business (“forced entrepreneurship”) as a desperate move for their very survival.
A remedy for this dismal state of affairs will not be forthcoming until the government recognizes the reasons behind this phenomenon. Government should focus on ensuring growth, job creation and investment. The urgent need is to get the private sector to start investing. One way to avoid winds of deflation is to kick-start private investments.
There is a concerted attempt to improve ease of doing business, and technology is being used to deliver public services without leakages.
© 2020 Basix Education Pvt. Ltd. All Rights Reserved