Latest news on India’s demonetization informs us how the rural economy is bearing the brunt of this initiative.
The action was intended to target wealthy tax evaders and end India’s “shadow economy”, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.
The details shed light on the consequences of implementing interventions without a holistic understanding of the landscape of the operating environment. In this case, it is the rural, informal cash intensive economy.
…the breakdown in the informal credit sector points to a government that has failed to grasp how the cash economy impacts ordinary Indians.
“It is this lack of understanding and not appreciating the importance of the cash economy in India on the part of the government that has landed the country in such an unwarranted situation today,” said Sunil Kumar Sinha, an economist and director of public finance at India Ratings.
This lack of understanding the dynamics of the cash economy (I don’t mind calling it the prepaid economy, in this context) and it’s role in the rural Indian value web has led to unforeseen challenges at a time when farmers are planting seeds for the next harvest, hampering the flow of farm inputs as traditional lines of credit face the obstacle of an artificial shortage of liquidity.
I want to use this clear example of systems design failure to explain my philosophy and approach to our work in the informal economies of the developing world. I’ve written often enough about what we do, now I have an opportunity to explain why we do it, and why it’s important.