In IMTFI's PERSPECTIVES blog series, IMTFI fellows take on the recent demonetization move in India. This series aims to foster an open dialogue on issues around money, technology and financial inclusion for the world’s poor. Individual contributions reflect contributors' own reflections on recent events - based on their research and areas of expertise. The topic of demonetization will conclude with a curated commentary by IMTFI on key themes, important questions, and what we can learn from these contributions for digital financial inclusion going forward.
By IMTFI Fellows Isabelle Guérin, Santosh Kumar and G Venkatasubramanian
The first part of this blog post argues that so far, demonetization has mostly caused a boom in the informal economy, especially informal debt. One could argue that the boom in informal debt is only temporary and that digitization will gradually bring about formalization. Here too, we have grounds for doubt. The link between digitization and formalization raises some crucial questions:
Firstly, what is meant by 'formalization'? Is it a matter of accountability and traceability or is it a matter of social protection? Both are of course interrelated: accountability allows for taxation, which in turns gives the financial means for social protection. The wage payment transparency that digitization offers might well encourage employers to declare their laborers and gradually offer them protection (more than 90% of Indian laborers do not have any social protection). But as the history of European welfare states has illustrated, transparency is neither a necessary, nor a sufficient condition for this. The priority should be to define and implement labor laws. However efficient it may be, digitizing wages is no substitute for labour regulation. Ethnographies of labor have repeatedly highlighted the multiple strategies and tactics employers use to control laborers and cut wages, from the use of kinship and caste networks to making subtle alliances with local authorities and political parties. It is difficult to see how digitization could stop this1. Some exploitative labor relations may evolve however, for instance those based on wage advance, which are a rule in various forms of seasonal activities. This year it seems that most employers haven’t been able to provide advances, and yet workers have accepted to start working. Will this be only temporary or can it start new forms of relations?
The second question, which is related to the above, concerns social protection itself. Demonetization aims to formalize the economy without any extra effort on providing protections. At present the informal economy gives a form of social protection, however flawed. As we argue above, many people are embedded into complicated webs of rights and obligations that ensure their daily survival through the constant circulation of cash, goods and services. In our 2010 survey in Villipuram and Cudallore districts in Tamil Nadu, we found that almost 90% of debt arrangements (most of which were informal) also included additional services such as access to information, employment, government resources, health services or simply financial help. Eliminating such arrangements without offering alternative protection would be a crime, as we have argued elsewhere2. The failure of microfinance to substitute informal lending, something which has been fought for over than a century, illustrates this.
a) Pricing is the first issue. Who will pay for these transactions and how much will this all cost? As in many other contexts, due to high levels of household debt, the Indian laboring classes are already crushed by financial costs. Increasing monetary grabs to raise the profits of financial providers would be really unfair, although in fact this is already happening3. It is urgent to analyze the true costs of digital payments in depth. This would involve taking both direct and indirect costs fully into account (for instance, traders may increase their selling prices to cope with the cost of digital payments). This would also involve a prospective mid-term analysis, as costs are likely to be low at first to attract customers, and then rise. It would be extremely helpful to make international comparisons, in order to get a reliable picture of fintech business models.
Notes
By IMTFI Fellows Isabelle Guérin, Santosh Kumar and G Venkatasubramanian
The first part of this blog post argues that so far, demonetization has mostly caused a boom in the informal economy, especially informal debt. One could argue that the boom in informal debt is only temporary and that digitization will gradually bring about formalization. Here too, we have grounds for doubt. The link between digitization and formalization raises some crucial questions:
 |
January 2016. (a) A group of women complaining to a clerk officer that their labour welfare benefits
cannot be withdrawn from the bank. Photo credit: Santosh Kumar
|
Firstly, what is meant by 'formalization'? Is it a matter of accountability and traceability or is it a matter of social protection? Both are of course interrelated: accountability allows for taxation, which in turns gives the financial means for social protection. The wage payment transparency that digitization offers might well encourage employers to declare their laborers and gradually offer them protection (more than 90% of Indian laborers do not have any social protection). But as the history of European welfare states has illustrated, transparency is neither a necessary, nor a sufficient condition for this. The priority should be to define and implement labor laws. However efficient it may be, digitizing wages is no substitute for labour regulation. Ethnographies of labor have repeatedly highlighted the multiple strategies and tactics employers use to control laborers and cut wages, from the use of kinship and caste networks to making subtle alliances with local authorities and political parties. It is difficult to see how digitization could stop this1. Some exploitative labor relations may evolve however, for instance those based on wage advance, which are a rule in various forms of seasonal activities. This year it seems that most employers haven’t been able to provide advances, and yet workers have accepted to start working. Will this be only temporary or can it start new forms of relations?
 |
January 2016. (b) A group of women complaining to a clerk officer that their labour welfare benefits
cannot be withdrawn from the bank. Photo credit: Santosh Kumar |
The second question, which is related to the above, concerns social protection itself. Demonetization aims to formalize the economy without any extra effort on providing protections. At present the informal economy gives a form of social protection, however flawed. As we argue above, many people are embedded into complicated webs of rights and obligations that ensure their daily survival through the constant circulation of cash, goods and services. In our 2010 survey in Villipuram and Cudallore districts in Tamil Nadu, we found that almost 90% of debt arrangements (most of which were informal) also included additional services such as access to information, employment, government resources, health services or simply financial help. Eliminating such arrangements without offering alternative protection would be a crime, as we have argued elsewhere2. The failure of microfinance to substitute informal lending, something which has been fought for over than a century, illustrates this.
Thirdly, we need to consider the consequences of the rise in e-payments. Many citizens don’t use their bank accounts for deposits, as it goes against a vision of wealth as something that should constantly circulate. E-payments may have a more promising future, but here too there are questions to raise:
 |
January 2016. (c) A group of women complaining to a clerk officer that their labour welfare benefits
cannot be withdrawn from the bank. Photo credit: Santosh Kumar
|
a) Pricing is the first issue. Who will pay for these transactions and how much will this all cost? As in many other contexts, due to high levels of household debt, the Indian laboring classes are already crushed by financial costs. Increasing monetary grabs to raise the profits of financial providers would be really unfair, although in fact this is already happening3. It is urgent to analyze the true costs of digital payments in depth. This would involve taking both direct and indirect costs fully into account (for instance, traders may increase their selling prices to cope with the cost of digital payments). This would also involve a prospective mid-term analysis, as costs are likely to be low at first to attract customers, and then rise. It would be extremely helpful to make international comparisons, in order to get a reliable picture of fintech business models.
b) Household budget management is another issue. When monthly wage payments deposited into bank accounts became mainstream in Europe, the adverse effects on budget management were multiple, though widely underestimated. People have complicated and subtle methods of balancing expenses and resources, often through moral and physical earmarking, especially when they can’t read or write4. Juggling debt also helps to manage budgets5. People combine various financial tools to support ongoing borrowing, repayment and re-borrowing (one borrows from one place to repay elsewhere). People alternate between debtor and creditor roles. Even the poorest people are also likely to be creditors. Juggling debt can help to substitute cheap debts for expensive ones, and help to manage different repayment time scales set by lenders. Social motivation also counts. Juggling practices often reflect conscious strategies to multiply or diversify social relationships, and strengthen or weaken the burden of dependency ties. The subtle and complex trade-offs involved lead to a plethora of complementary and often incommensurable, non-substitutable financial practices. How are these subtle and complicated methods of management going to evolve with digitization?
c) Privacy is another important matter. There is of course the tricky issue of personal data. How public and private stakeholders are going to use it is a key question. Markets of the poor South are major emerging markets and one can easily figure out the outstanding importance of collecting big data on markets which are yet to be built. Privacy at the local/community/household level is another factor. We have already raised the issue of complex webs of financial circuits. Many of these are hidden, especially within households, where men and women often have their own networks. Indian women are rarely allowed to manage and control their own budgets. In order to maintain micro-spaces of freedom or simply to be able to make ends meet, they often deploy various strategies to bypass male and in-laws’ control. This can involve hiding some purchases and lying about prices, storing small amounts of cash in various hidden places in the home or with a neighbor, buying small pieces of gold, investing in saving groups with neighbors or relatives, etc. The same goes for men, who are often pulled between their obligations to their wives and children, versus their parents and sisters. It is unusual for accounts to be kept, be it listing income and expenses, or keeping bills. But this is not just due to illiteracy or the prevalence of oral culture, as is often thought. Opacity may serve the clear purpose of allowing women and men to maintain their own financial circuits, and to steer between conflicting obligations. Demonetization has brought these hidden circuits to light – a wife having to reveal the 5000 INR under the mattress for her daughter’s education, a husband indebted to a neighbor for the marriage of his niece and so on. This has resulted in much tension and conflict. Well beyond these tensions, which are likely to be temporary, the prospect of digital – and therefore traceable – payments is an important cause for concern. It implies transparency and the possibility to track every expense and transfer. Far beyond taxation issues, which many ordinary villagers worry little about for the moment, how will privacy within households be maintained, especially for women for whom individual freedom is a daily struggle?
Read more about Isabelle Guérin, Santosh Kumar and G Venkatasubramanian's IMTFI Research here
- See for instance Harriss-White B. (2003), India Working, Essays on Society and Economy, Cambridge University Press, Cambridge. Guérin I., Kumar S., Venkatasubramanian G. (2015) Debt bondage and the tricks of capital, Economic and Political Weekly, June 27, Vol. L n°26-27, 11-18. Picherit D. (2012) ‘When manual labourers go back to their village: Labour migration and protection in rural South India’, Global Labour Journal 3 (1): 143-62. Pattenden J. (2016). Labour, state and society in rural India: a class-relational approach, Manchester: Manchester University Press.
- See Guérin I. Kumar S. (2016) The uneasy relationship between market and freedom. Is microcredit a source of empowerment or domination for women? Journal of Development Studies, Early view DOI: 10.1080/00220388.2016.1205735
- Twelve days after the 8th of November, Paytm, one of the first Indian provider of e-wallets, announced daily sale revenue of de 1,2 INR billion (see http://www.epw.in/journal/2016/51/postscript/demonetised-delinked.html). According to the international consultancy firm BCG, in 2010, the annual Indian markets for digital transactions will be 35000 INR billions. On the basis of a profit of 1% of the transactions, expected income represent 350 INR billions (http://indianexpress.com/article/blogs/demonetisation-implementation-cash-crunch-digital-payments-cashless-transactions-4435312/).
- See the seminal work of Viviana Zelizer on this. Zelizer V. (1994) The social meaning of money, New-York: Basic Books.
- See Guérin I. Morvant-Roux S. Villarreal M. (eds) (2013) Microfinance, debt and Over-indebtedness. Juggling with money, London: Routledge
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