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While Destroying Delhi’s Informal Markets, Demonetisation Also Lead to Rising Informalisation

The Wire
By Professor  

Beside job losses, demonetisation had hardly any impact on formalising the regulatory process of cash-based transactions across identified market arrangements in Mayur Vihar and Old Delhi bazaars.

The conceptualisation of formality and informality in understanding the market dynamics of the exchange of merchandise (or visible goods) and its role as a source of livelihood for billions of people living in the developing Global South (particularly in major cities within South Asia and Southeast Asia) continue to invoke interesting academic discourses across social sciences.

In India, the widespread existence of the informal sector within cities like Delhi is seen in commercial exchanges of merchandise in the form of street vending activities and local weekly markets operating as tehribazaars and haats.

Post the announcement of the demonetisation of the Rs 500 and Rs 1000 currency notes in November 2016, the worst impact of the shock announcement was seen in these cash-run informal bazaars across Delhi. Some key empirical trends can be observed from interviews of merchants and vendors operating in the weekly market in Mayur Vihar (East Delhi) and the old markets of Chawri Bazaar, Chandni Chowk and Meena Bazaar (old Delhi).

The empirical observations highlighted here are drawn from a six-month field study (undertaken by the Centre for New Economic Studies at O.P. Jindal Global University). The objective of the study was to understand the governing dynamics of market activities in a few local markets in Delhi, in a post-demonetisation context.

Observations from Mayur Vihar

In Mayur Vihar, there were approximately 13 weekly markets around a decade ago, now increased to around 280 in number. One of the largest markets here is a weekly bazaar set up every Wednesday near D-Park, Pandav Nagar. This weekly market came into existence some 30 years ago, with a few merchants selling garment products through street vending.

However, most traders in the market came to the area to sell a wider basket of products only a decade ago, after the establishment of a Mother Dairy plant in the vicinity (less than 100 m from the market area), triggering residential expansion and consumer demand in the neighbourhood. The stalls in this market are set up across footpaths on small wooden planks (for the display of goods) and have minimal infrastructural support. The market is operational between 4-9 pm every Wednesday.

The table below lists the main merchandise sold in the market. Post-demonetisation, we observed an increase in the number of garment sellers who claimed to be a part of migrating groups from rural parts of Uttar Pradesh and Rajasthan.

Some key findings from our interviews of vendors operating in the market include:

  • Most merchants operating in the market are part of migrated communities from rural parts of Uttar Pradesh, who often sell their products on different days of the week across different weekly markets across Delhi. In the study report, we call them the floating vendors. Vendors selling garment products often purchase these goods from the old Delhi markets of Chandni Chowk and Chawri Bazaar, and maximise sales on a minimal profit margin.
  • Post-demonetisation, the street-vending business for most vendors was wiped out for a month almost, during which the weekly market was closed, with limited cash available for purchase or sale. However, after March 2017 (three months after the announcement), market activity flourished with the increased presence of vendors. In the absence of lower-denomination currency notes (Rs 20, Rs 50 and Rs 100), some vendors used products with a lower price as barter (so to give customers their change). A similar observation was noted in a previous study conducted in the India-Bhutan border area (in December 2016).
  • The number of merchants selling a similar product basket (say cotton apparel, plasticware or steel utensils) shape the bargaining power for consumers in influencing a floating price range. No one seems to know the actual price of the product sold and most purchases are dependent on a classical supply-demand framework (the number of sellers vs the willingness of the consumer to buy the product) with no role for indirect taxing, the price ceiling in the price quoted.
  • The chart below offers a social network analysis map detailing the chain process of inventory management for products procured to be sold by merchants at the market.

The process of inventory management, which includes market aspects such as the inventory procurement of goods, inventory distribution of goods and inventory management and sales, is a key subject area in the business scholarship of supply chain management. However, most studies, in capturing supply chain processes and effects, remain centred on formal, regulated sectors of the economy (like manufacturing, fast-moving consumer goods or e-commerce).

In trying to assess the market impact of demonetisation, one of the biggest challenges faced by economists in depicting the impact of the cash crunch in the cash-run parts of the economy stemmed from an inability to realistically estimate the statistical short-term impact with the limited data available on the governing dynamics and scale of informal markets. The short-term impact on inventory management of goods sold in Mayur Vihar reflected a deep loss of market activity (during the cash crunch), but this was time bound for a period of 6-8 weeks. In the medium term, however, (eight weeks after the announcement), we observed how the informal market base, including its agents (the merchants present), in eastern Delhi rapidly expanded.

One of the key reasons supporting this observation is the rapid scale of migration into the city of people (with relatively low skills) who are absorbed by the shadow economic system in the absence of any opportunities within the organised sector.

Observations from old Delhi

During our study of markets of old Delhi (Meena Bazaar, Chandni Chowk and Chawri Bazaar), we interviewed around 30 merchants selling a wide basket of products, ranging from imitation brass jewels, used books, garments and plasticware to second-hand machinery goods. The spatial positioning of the markets in the old Delhi region is based on the strong historical importance of the area from the Mughal era, when the Jama Masjid was constructed during the reign of Shah Jahan. Markets such as the book market in old Delhi (located near Chandni Chowk) has been operational for the past 100 years and witnessed a major influx of merchant and booksellers after Partition in 1947.

Most vendors interviewed in Meena Bazaar set up their shops when they shifted to the city in the 1970s and still have unregistered stalls running entirely on a cash-based business model. Below is a supply chain matrix on the inventory management of scrap tools and second hand machinery products sold near the Jama Masjid area of Motor Market.

Some of the vendors in old Delhi procure their tools from various parts of India like Pune, Bangalore and Gandhinagar, and also from abroad from countries like Germany, the US and the UK. Similarly, the brassware and imitation jewelry vendors in Chawri Bazaar procure their goods from Agra and villages around it, transporting the goods using tempos, which costs them approximately Rs 40-50 per kg. These goods are then sold to retailers, who buy them in bulk.

Another interesting aspect of studying markets in old Delhi is seen in the operational dynamics of the second-hand book market, where customers, usually students, sell their books to the retailers at a cheaper price, which is then re-sold (and is outside the formal accounting systems). The volume of revenue from second-hand book sales is huge and remains growing here. The selling price of books sold to the retailers depends on the edition of the book, the author of the book and the demand for the book. These factors help in determining the retail price. The retailers or book sellers in the market then sell it to the customers at a minimum of 50% profit margin.

Of course all these transactions and activities in the old Delhi markets remain part of an informal, unregulated set up. In a post-demonetisation scenario, some of the following observations were made during our study:

  • Most markets located in the old Delhi region were the worst impacted after demonetisation. Almost all economic transactions in Chawri Bazaar, Chandi Chowk, Meena Bazaar, Motor Market, Flower Market and Book Market are cash-based and it took months for merchants to resume their market operations on a day-to-day basis.
  • Unlike the case of Mayur Vihar, markets reported loss of business in the medium term (between 8-12 weeks after the announcement). The loss of economic livelihood for some of the merchants, especially those doing business in perishable goods (like fruits, eatables and bakery items) was severe.
  • It was only after mid March that businesses with a smoother flow of cash (in form of new Rs 2,000 and Rs 500 currency notes) resumed with a reasonable consumer demand. However, most merchants complained of not having enough small-denomination currency notes for change, which forced them to barter certain goods in exchange (similar to the Mayur Vihar case).
  • The scale of business in terms of merchants selling goods across these markets have increased over the last six months, with more merchants operating as floating vendors selling garment products, plasticware and steel utensils. Most of these floating vendors are part of migrant trading communities, with members of the group selling products across the city on different days of the week. In old Delhi, we saw most of these vendors positioned outside metro stations to provide easier access to consumers.

Towards an inclusive view on urban informality

From the observations made, it was evident that in spite of the shock effect of demonetisation on commercial trade in these informal markets, the lack of employment opportunities within the formal sector is consequentially linked to an increasing degree of informalisation in market activities, which is visible for both migrating communities and the traditional trading communities.

In the context of informal markets, demonetisation had hardly any impact in formalising the regulatory process of cash-based transactions across the identified market arrangements. On the contrary, the short- to medium-term impact of the announcement caused a massive drop in market activity, affecting the economic livelihoods of most trading merchants. As a radical economic reform intended to curb the black economy, demonetisation can be seen as a major epistemic failure with no evidence on the extent to which there was any positive impact on the formal economy structure of India. While on the other side, there is enough evidence on the negative effects and externalities caused by this impromptu macroeconomic experiment. The results of our study helps in reaffirming this view.

Most bazaars across Delhi operate on a large informal scale, engaging more than 60% of the people living in the city area with little infrastructural support (in terms of land allocation, essential utilities like power, water and so on). A lack of robustness in urban planning methods and existing policy discourse from the side of the state remains responsible for this. At the same time, in times of poor job creation (across formal sector groups), an ineffective skill development process and a widening gap between skills attained from an academic degree and the skills demanded by industries, one is likely to see a prophetic rise in informalisation of occupational activities across cities in the years ahead.

In terms of policy prescriptions, there is an urgent need for policymakers (particularly studying urban spaces and planning), to view urban informality in an inclusive way rather than use a dualistic policy lens in viewing such market spaces outside the formal, organised market set up. The use of subjective, ethnographic research methods, going beyond traditionally-used econometric tools, is required in policy assessment. Public policy analysis incorporating the greater use of mixed research methods, accommodating for a larger sample of survey-based interviews along with quantitative data (wherever available in secondary form) is critical for understanding the nature and differentiating form of urban informality.

Deepanshu Mohan is assistant professor of economics and executive director, Centre for New Economic Studies at OP Jindal Global University, and Richa Sekhani is a former researcher at ICRIER, New Delhi.