DEMONETISATION: Effects on MSMEs, Job Losses & Job Creation

On one hand, there are MSMEs in India which work primarily on day-to-day cash basis and then there are also MSMEs who in B2C & B2B who don’t even get paid for 120 days. It was difficult to measure the actual effect that demonetisation would have on MSMEs, while everyone floated all sorts of conjectures and gave a free reign to their imagination. India SME Forum, received various reports from its constituent organisations & associations, which varied from demonetization could kill the MSME sector in India, to demonetisation would clean up the MSME sector. It became extremely important for us to include a question on demonetisation, despite the fact that only a limited number of questions could be put across to keep the questionnaire concise.

On the issue of demonetisation in November 2016, an average of 58% of MSMEs across India, agreed with the contention that the move probably led to negative growth for MSMEs in India, whereas 20% were not sure. However, 22% of those surveyed strongly felt that there was no such possibility of demonetisation effecting MSME growth.

According to 78.80% of MSMEs surveyed from Uttarakhand, 67% from West Bengal,65.93% from J&K, 64.53% from Odisha, 64.80% from Himachal Pradesh, 64.47% from Maharashtra, 63.48% from Bihar, 60.29% from Telangana and 60.13% from Assam, demonetisation probably led to negative growth for MSMEs.

MSMEs didn’t want to take the risk of withdrawing cash from their account, lest they be accused to dealing in cash, also, because withdrawing cash was not possible during demonetisation. So that is the effect that we find in the five months immediately after demonetization from November to March. Generally those employed on contractual basis, cash, temporary basis or seasonal basis were retrenched as the owners of MSME units had no way to pay them in cash, which they might have been doing earlier.

This view also seems to get reflected in the data about job cuts undertaken by MSMEs, during the immediate 5 months period after demonetisation, where only 18.80% of MSMEs employed new staff and 77.11% of MSMEs surveyed retrenched staff in a major way, including off rolls staff, temporary staff and contractual staff, during the same period.

The survey revealed that 83% of medium enterprises retrenched employees, followed by 77% of micro enterprises and 75% of small enterprises. It is noteworthy that 87% of micro enterprises which retrenched staff and 77% of small enterprises which did likewise, were customer facing or B2C enterprises, whereas 75% of medium enterprises which retrenched staff were business-to-business or B2B enterprises.

Taking a mean average on the basis of data provided by MSMEs in the survey, a total of 1,04,421 employees were retrenched, while 37,142 were employed in the same period by 37,860 MSMEs surveyed, resulting in a net loss of 67,279 jobs in the 5 months immediately after demonetisation.

States where retrenchment had its highest effect where over 80% of MSMEs shed their staff, were Jharkhand with 94%, Tamil Nadu with 91%, Punjab with 89%, Bihar with 88%, Assam with 87%, UP and Himachal Pradesh both with 86%, Chhattisgarh with 85%, Kerala with 84%, Haryana with 83% as well as Goa with 82%.

What the survey suggests is that all those who were retrenched either found their way back or into the companies. The negative after effects of demonetisation on jobs, have been found to be rather short lived as seen in the data about new employees hired by MSMEs. The data reveals that 66.58% of MSMEs surveyed collectively hired an additional 2,46,416 people, in the 18 months from April 2017 to September 2018 at an average of 9.776 jobs per MSME unit.

When extrapolated across all MSMEs surveyed, including those that did not hire any new employees, the average additional employment generated by MSMEs calculates to be 6.50 jobs per enterprise.

States which topped the list with higher percentages of MSMEs generating employment in the 18 month period are Rajasthan with 82%, AP with 81%, Chhattisgarh with 77%, Haryana with 76%, Maharashtra with 71%, and Delhi with 70%. At the bottom of the table there is J&K with 30%, Punjab with 48% and Jharkhand, with 50% of MSMEs generating new employment.

The surprise element here is Tamil Nadu, where 91% of MSMEs had retrenched employees and only 58% of MSMEs in that state hired new employees.

Additionally, new employees who were not part of the workforce earlier were also hired by MSMEs, in the 18 months after demonetisation, from April 2017 till September 2018. Actually, its a known fact that the MSME sector in India is hungry for employing more people. However, most of the time, MSMEs do not find skilled people to hire. This has also been seen in our past surveys where MSMEs have been willing to hire more people, provided they get skilled manpower, because of the churn rate of employees , lost every year to larger organizations. A higher than 40% per annum churn of employees, pushes MSMEs to a continuous, hire, train and retain effort to replace the trained and experienced workforce which moves to larger organisations.

MSMEs are, in effect, are a great training ground or skilling ground of the unemployed. As a matter of fact, they are upset at being utilised as a training ground without any incentives or any kind of preferential treatment or any tax incentives. This is also evident from the responses given by the MSMEs that they should be incentivised for training and employing unskilled labour.