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Economic Survey: Note ban hit informal economy, raised social insurance demand

LiveMint logoLiveMint 11-08-2017 Elizabeth Roche

New Delhi: The Narendra Modi government’s demonetisation initiative impacted the informal economy, raising the demand for social insurance, especially in less developed states, according to the second volume of the Economic Survey 2016-17 tabled in Parliament on Friday.

The impact was acute between December and March, but has since faded, thanks mainly to programmes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which performed its stated role of providing a social safety net at times of need, the Survey said in the chapter titled “State of the Economy: An Analytical Overview and Outlook for Policy”.

In a surprise move, Prime Minister Narendra Modi announced on 8 November that effective from midnight, Rs500 and Rs1,000 banknotes would not be valid, withdrawing some 86% of currency in circulation by value. The move was aimed at combating black money, fake currency and terror finance, the government said.

According to the Survey, “there is suggestive evidence of increased demand for insurance over the demonetisation period (early November 2016-March 2017). This is especially strong for the less developed states comprising Bihar, Chattisgarh, Rajasthan, Jharkhand, West Bengal and Odisha which witnessed about a 30% increase in man days worked” under the MGNREGS.

“Interestingly, there were four phases in the demonetisation-MGNREGS relationship,” the Survey said.

In the first phase, “for about four weeks after demonetisation, there was a decline in the demand for MGNREGS work”, the survey said, adding that in the second there was a four-week-long period of recovery. In the third phase, there was a 10-week period where demand increased substantially; and finally in the last phase “since the middle of March, there was once again no differential impact on MGNREGS relative to previous years”, the survey said.

According to the Survey, the initial pattern of “reduced demand in the first four weeks following demonetisation is puzzling”.

One interpretation, it said, was that “demonetisation increased demand for MGNREGS employment, but this was initially offset by constraints on the ability of local governments to supply MGNREGS work”.

“In this view, demonetisation affected both the supply and demand for insurance, and in the first few weeks, the decrease in supply overwhelmed the increase in demand. Over time, as cash began to flow and financing constraints lifted, the demand for insurance was more clearly identifiable,” it said.

“Alternatively, it is possible that better agricultural performance in 2016-17, which was especially marked in those four peak harvest weeks after demonetisation, offset any demonetisation impact,” it said.

According to the Survey, about 51.2 million households were provided employment, totaling 2.354 billion person days during 2016-17. Out of this, 56% were generated by women. The work completion rate during 2016-17 was also the highest since inception of MGNREGS in 2006, with the focus being on natural resource management and agricultural and allied activities.

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