The Impact of Demonetization and GST on Small Business in India
India's demonetization policy in 2016, a one-off measure aimed at curbing black money and counterfeit currency, brought about significant changes in the financial landscape of the country. However, its impact has been complex and multifaceted, affecting various sectors, including small businesses. In this article, we will explore how demonetization and Goods and Services Tax (GST) have affected new startups and wedding photography studios, reflecting the broader economic challenges faced by small businesses in India.
Understanding Demonetization and the Banking Mafia
From a financial perspective, demonetization was intended to curb black money and eliminate counterfeit currency. However, the policy also had an unintended consequence of significantly benefiting the banking mafia. A medium-sized shop, for instance, might have to pay 1.75 times the bill to the banking mafia, an additional expense of approximately Rs. 3000 per day, leading to a monthly cost of around Rs. 100000. This means that a typical shop has to pay a substantial portion of its earnings in banking charges, which is a deadweight loss for the economy and a windfall for the banking mafia.
The total charge levied on banks from small, medium, and large enterprises by the banking mafia is a massive sum that could be in the range of lakhs of crores. This excessive banking commission significantly contributes to the creation of black money, as it is a form of daylight robbery, eroding the value of the currency and depriving the public of its purchasing power.
Impact on Small Businesses and Startup Growth
New startups, particularly those in industries such as wedding photography and cinematography, have been significantly affected by demonetization and GST. In 2016, the launch of a wedding photography and cinematography company faced numerous challenges, including adjusting to the new financial responsibilities and reducing expenditures. After demonetization, many customers were hesitant to spend, while the introduction of GST led to an 18% increase in the overall bill. Consequently, many companies, including wedding photographers and cinematographers, had to focus on providing the cheapest quotations to appeal to customers who were looking to reduce expenses.
For instance, a recent study of a wedding photography and cinematography company that started operations in 2016 revealed that despite having a substantial amount of funds, there was a reluctance to spend due to the financial uncertainty resulting from demonetization and GST. The company had to navigate through these challenges and adjust its pricing strategies to remain competitive in the market.
The Role of Inflation and Interest Rates: Explained Through Dosa Economics
To understand the impact of high inflation and low interest rates on individuals, especially pensioners, one can use the concept of dosa economics. The Reserve Bank of India Governor, Raghuram Rajan, used this analogy to explain how inflation can silently erode the value of savings.
In a high inflation scenario, at an 8% interest rate, a pensioner receiving Rs. 8000 in interest can only buy 152 dosas, as each dosa costs Rs. 52.75. Similarly, with a 10% interest rate, the pensioner can buy approximately 182 dosas. However, considering inflation, the principal of Rs. 100000 in a high inflation period would be worth 1818 dosas, whereas in a low inflation period, it would be worth 1896 dosas. This means that in the high inflation period, combined with interest, the pensioner's funds are worth approximately 2000 dosas, while in the low inflation period, the total is worth 2048 dosas.
Therefore, despite receiving lower interest, the pensioner is slightly better off in a low inflation period, as the overall value of their principal and interest combined is higher. This example highlights how inflation can significantly impact the real value of money over time and underscores the importance of understanding the dynamics between interest rates and inflation.
In conclusion, demonetization and GST have had a complex impact on small businesses in India, with many startups and entrepreneurs having to adapt to new financial realities. The concept of dosa economics helps to illustrate the silent killer of inflation on savings and the need for individuals to consider both interest rates and inflation when making financial decisions.