New Delhi: In a sudden move that sent shockwaves through the nation, the Union government in November 2016 announced the demonetisation of high-value currency notes. The overnight withdrawal of 80% of the currency in circulation or notebandi, as it was called in common parlance, had stunned the Indian economy. 

The second economic disruption came with the roll-out of the Goods and Services Tax (GST) seven months later. For India’s micro, small and medium-sized enterprises (MSMEs), which employ more than 10 crore people in India and contribute a significant 30% of the country’s GDP, the botched imposition of the GST came as a shock.

Two years later, the Union government misled Parliament about the impact of these two devastating policies on micro, small and medium-sized industries. Incredibly, the Reserve Bank of India chimed in to back the government before a parliamentary committee while contradicting their own published findings. 

The fifth instalment of the Parliament Defied series reveals how, for once, Parliament’s Committee on Government Assurances caught the government lying and reprimanded it for peddling a false narrative. 

Though such committees of Lok Sabha and Rajya Sabha are meant to hold the government accountable for the promises made inside the two Houses, they terribly failed, shows this investigative series. 

THE Impact

In December 2018, two years after Prime Minister Narendra Modi’s sudden decision of demonetisation, which rendered much of the country’s currency “worthless pieces of paper”, and a year after a complete overhaul of the indirect tax regime, a Rajya Sabha Member of Parliament asked the Union Ministry of Finance about the impact of the two moves on small and medium-sized businesses.

“Whether with two years in retrospect, recent reports indicate that micro and small business firms are still reeling under the impact of demonetisation with a rather bumpy start for the GST regime,” asked the former Congress MP from Meghalaya, Wansuk Syiem.

The Ministry’s response to all her queries was curt: “Information is being collected.”

As mentioned earlier in this series, this is one of the phrases that are counted as an assurance made to Parliament. Any such assurance made must be implemented within three months. A Committee on Government Assurances monitors all such assurances and constantly checks on the progress made. The committee, an accountability watchdog, meets officials of the concerned ministry as part of the process, seeking information on the progress of the assurance. The ministry can also request the dropping of an assurance altogether or seek extensions. In some cases, the government has even argued that the minister’s statement did not constitute an assurance in the first place.

Unlike other stories in this series which show how ministerial pronouncements on the Parliament floor curdle into unfulfilled promises, this story dives into the back-and-forth between the committee and officialdom. 

A masterclass in obfuscation, the exchange stands out for the coordinated attempts by the Union government and the central bank to mislead the committee.

Governments and the bureaucracy take queries from the parliamentary process rather seriously. Ministers approve the responses being sent back. Finding a way to not lie and yet not provide too much information is a valuable bureaucratic skill. ‘Information is being collected’ is one tool in that skill box. 

In this case, the Ministry of Finance dropped the ball on providing Parliament with data on how MSMEs, companies making under Rs 50 crore annually, fared. The government missed the three-month deadline to respond. 

The delay prompted a strong rebuke from the assurances committee. This would not be the last time the committee lashed out against the government on this assurance. 

The committee visited Madurai and Thiruvananthapuram and met government officials, representatives from the RBI and banks, along with MSME associations.

It asked why the government was taking so much time when the “information was just a click away”. This was fairly harsh language by conventional standards, especially considering that the committee was then headed by a parliamentarian from an allied political party, AIADMK.

The Ministry of Finance, on its part, claimed it was still gathering information on the subject through the RBI.

Then it was the RBI’s turn. It made two contradictory statements in consecutive sentences. Both, to defend the government. 

First, it said, one could not conclude with certainty whether MSMEs had been affected. 

“It could not be said with certainty whether the impact as stated by the member in the question (referring to Congress parliamentarian Syiem who asked about the adverse impact on MSMEs) was due to demonetisation or not,” minutes of the meeting show RBI informing the committee.

In the next sentence, the RBI officials asserted that there was proof that MSMEs had not been affected. 

“With pan-India figures showing healthy growth it could not be said that demonetization had impacted MSME negatively,” read the minutes.

This was in complete contradiction to what RBI officials had said in a paper published a full year back, in August 2018.  

The paper’s conclusion: “Demonetisation led to a further decline in the already decelerating credit growth of the MSME sector.” 

Credit growth here refers to the amount of money banks lend to businesses. Economists see higher levels of credit as a sign of a healthy economy. This is because it indicates companies have more capacity and propensity to invest and expand their businesses. Declining credit indicates firms are wary of borrowing from the banks. Their fear stems from concerns about their ability to make additional income to repay the loans with interest. 

For the four months after demonetisation, MSMEs credit growth was negative (on a year-on-year basis), the RBI paper had highlighted.

“The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation,”

the authors of the paper added. 

Of course, RBI had published this paper, as it always does, with a disclaimer that it represented the author’s views and not theirs. This is a typical tactic that RBI and many other institutions use. It allows them to share critical research findings while maintaining arm’s length in case the conclusions cause a political storm. 

A full year after this paper’s publication, RBI officials were now trying to delink the problems in the MSME sector from demonetisation before the parliamentary committee. 

While any reference to the impact of GST on MSMEs was curiously missing in the RBI representative’s briefing, the paper by RBI officials certainly did talk about it. They found that the implementation of GST had led to a decline, lasting several months, in the exports by such businesses. MSMEs account for 40% of the country’s exports. 

The RBI official, appearing before the parliamentary committee, dismissed suggestions that demonetisation had a bad impact on MSMEs. Similarly, in their response to the committee, representatives from public sector banks brushed aside accusations of any lasting damage. They characterised the difficulties resulting from the decision as “temporary”, pointing to a “recovery” in credit growth to MSMEs by March 2018 as evidence to support their claims. 

While this was true, the government was hiding the complete picture.

The rate of MSME’s Non-Performing Assets (NPAs) – loans unlikely to be repaid – had gone up. “NPAs of both private banks and public sector banks pertaining to the MSME sector have increased over time,” the August 2018 paper noted. 

Credit information agency Transunion CIBIL’s MSME strength index, which measures the health of the sector with March 2018 as a baseline, reported a constant slide in the sector’s strength till December 2019. The arrival of the Covid-19 pandemic in March 2020 then delivered another severe blow to the MSME sector.

Officials from the Ministry of Micro, Small & Medium Enterprises told the committee that even they had not evaluated the impact of demonetisation on MSMEs. The Ministry, however, recounted its meetings with MSME associations that reportedly praised demonetisation. 

“These associations welcomed demonetisation,” according to the Ministry official.

Not taking official pronouncements at face value, the assurances committee decided to fact-check this claim. It met six different MSME associations across Tamil Nadu and Kerala to gauge their feedback. 

“Thousands of hotels were shut down due to recession,” the head of the Kerala Hotel and Restaurant Association told the committee. Tamil Nadu’s Salem-based MSME association, meanwhile, said small businesses were so hard-pressed for funds that they found it increasingly difficult to pay their EMIs or monthly instalments.

A Madurai-based association pointed out that exports too had declined after demonetisation and GST. This fact was borne out by the 2018 RBI paper as well. Similarly, rice millers and wood manufacturers flagged a dramatic downturn in fortunes following demonetisation. 

The committee highlighted contradictions between the rose-tinted view of RBI and the experience of the MSMEs. 

“Representatives of the MSME sector appearing before it have stated that they have indeed been affected by demonetisation,” minutes of the meeting show the committee concluding. 

After repeated extensions, eventually, the assurance was considered as fully implemented. However, what specific information presented to the committee led to its conclusion cannot be ascertained.

In Parliament, both the Ministry of Finance and the Ministry of MSMEs continued to face more questions about the impact of demonetisation on the economy, particularly on small-scale industries. 

As recently as August 2023, both ministries made it clear that neither is assessing the impacts of demonetisation on the economy or MSMEs. 

A survey by India Ratings and Research, a credit rating agency, found that a whopping 63 lakh MSMEs closed down between 2015-16 and 2022-23, resulting in the loss of a staggering 1.3 crore jobs nationwide. The agency blamed demonetisation, GST and the Covid-19 pandemic for the devastation caused.  

THE OTHER ^BROKEN PROMISES