Staring at empty stores, blaming note ban

In the winding lanes of Chawri Bazar, one of Delhi’s oldest wholesale markets, paper merchants sat slumped in their stores, pondering how to make the transition to the new economic order ushered in by Prime Minister Narendra Modi two weeks ago. 

“This is like curse of God on us,” said Gian Prakash Gupta, 60, a soft-spoken paper wholesaler who was crammed into a closet-size office with two other men, three hanging statues of Hindu gods and stacks of broadsheet paper. The power was out, despite the garlands of electric wire that hung over streets too narrow for cars, and Gupta lamented, “We do not know how to use computers, how to do online transactions, how to use card-swiping machines.” 

The business of traders like Gupta, whose operations lie partly in the vast informal economy that makes up around 20% of India’s gross domestic product and more than 80% of its employment, has been virtually paralysed since November 8, when Modi announced a surprise ban on the country’s two largest currency notes, the 500 rupee bill and the 1,000 rupee bill. 

The Modi administration hopes the measure will reduce the vast quantities of untaxed cash that Indians are accustomed to storing away, increasing tax revenues and giving the economy a lift by driving more of the cash into banking, where it can be lent to business to spur growth. 

But the success of the audacious gamble depends on traders like Gupta changing their way of doing business, which has traditionally relied mostly on cash. So far, they say, they have no idea how to make the transition from dealing in cash, and without the banned notes, their business has almost completely dried up.

 Unless Modi’s government is able to get the informal sector back on its feet, India’s growth will be slowed sharply next year, economists say, counteracting the gains he sought to achieve from the currency ban. 

While it is still too early to pronounce victory or defeat, the early results are not encouraging. In addition to the traders, retail and real estate industries have been hard hit. With the winter wheat crop in peril, the government was forced to allow farmers to use the old 500 rupee notes to buy seed. 

Fitch Ratings, in a note on Tuesday reaffirming its negative rating on the Indian banking industry in 2017, said the currency ban “has created a cash crunch, and seems to be holding back economic activity.” The longer the disruption continues, the greater the impact on economic growth, Fitch said, adding that it was already revising downward its forecasts to reflect a weak last quarter of the calendar year.  Perhaps more ominously, even some of Modi’s own party leaders are predicting doom. “The industrial sector will get a bashing,” said Subramanian Swamy, the former Harvard University economist and lawmaker from Modi’s Bharatiya Janata Party. The Modi government, which held off printing most of the new notes to avoid news of the ban slipping out prematurely, is now racing to provide enough new currency to replace the old notes. But on Monday, only about 10% of the value of the banned notes had been replaced, Reserve Bank of India figures indicate. 

Every day since the ban, Gupta and his fellow traders have been showing up for work in stores devoid of customers hoping something will change. These are the people who supported Modi in the last election, those who run small businesses and make up the heart and soul of the BJP. Last week, members of the Paper Merchants Association huddled behind closed doors to decide how to respond. 

But even before the meeting started, the office holders of the association were under stress. They did not have enough cash even to pay Rs 2,000 for tea and snacks for the 40 members who were coming. Once the meeting got underway, they argued for an hour and a half about how to respond to the cash ban. 

“No point in going on strike and closing the market,” said one. “From now onwards, we will not be able to do any hanky-panky.” “We have to correct ourselves,” one member could be heard saying. “We need to stop dealing in cash.” The problem for many is they do not know how to do without cash. In the Chawri Bazar, generations of traders have bought and sold paper, from wedding cards to calendars to packing material, mostly in cash. Their customers paid cash, and they used it to pay their suppliers and workers. 

They paid little in taxes, helping keep costs down in never-ending price wars in which they made razor-thin profits that rarely exceeded a few percentage points. It was impossible for anyone who even briefly contemplated paying their fair share of taxes to compete. Now, the cash in their safes — the millions of rupees just collected from customers or on its way to suppliers — has been stranded, its fate uncertain. As the government struggles to keep up with the demand for new notes, it has put in place strict regulations on how much currency each business can withdraw. Rs 50,000 can be taken out a week from business accounts. 

‘Insulting and humiliating’ “What do I do with that little money?” asked Gopal Goel, who owns Durga Marketing, a wholesale retailer in packaging paper, as well as a paper mill in Jammu and Kashmir. 

Until Modi announced his currency ban, Goel said his business usually brought in at least Rs 4,00,000 in cash daily. He withdrew about the same amount from the bank to pay bills. But since the ban, he has struggled to make any deposits or withdrawals because the banks are overrun by long lines of people trying to withdraw new currency and exchange now-banned notes. 

“This is insulting and humiliating,” Goel said. “Are we thieves?” Raj Kumar Bindal, 65, whose father started the family’s paper trading business 50 years ago, used to sell three truckloads of paper each week, he says, but now sales are zero. He say he has cancelled all of his orders from the paper mill. “How this will be corrected, only God knows,” he said. He is not sure how long he can retain his 25 employees, he said. 

Perhaps the most despondent trader was Ramanuj Pandey, 66, the manager at Dharmson, which is stocked floor to ceiling with diaries and calendars for 2017. If he fails to sell them by January, they will be useless. By lunchtime Friday, he had served only two customers, not even 10% of normal traffic. “Until money flows again, this market will be without customers,” he said. 

Gupta, president of the paper association, said he and his fellow traders did not know what to do. Even if he wanted to do business without cash, he does not know how to use a computer. He could hire someone who is computer literate, he said, but he was not sure he could squeeze another person into his office, in which broadsheet paper was stacked high. 

He doubts it will be possible to develop a new business model to move traders to a cashless society in which they pay credit card company commissions, because his business operates on such a small profit margin, he said. “Modi has taken this gamble,” he said, and nobody knows how it will turn out. But one thing is certain, it has put the Indian industry in crisis.”