In November 2016, the Indian Government took the radical step of withdrawing Rs500 and Rs1000 banknotes from circulation in order to curb the parallel economy, eliminate counterfeit cash and bring unused cash back into the economy.

While the situation settles, this action has had consequences for business owners and individual workers.

Withdrawal of Banknotes in India

The demonetization of currency in India is one of the first acts of its types to be initiated in the history of independent India. It essentially abolished the current version of 500 and 1,000 rupee currency notes, starting November 8, 2016, to be replaced by new versions. This step has been taken by the Government to curb a parallel economy, consisting of unaccounted cash, and to eliminate counterfeit currency. Additional objectives of this step are to bring unused-secreted cash back into the current economic system; and promote the adoption of a digital cashless economy in India. While the government has received quite a bit of criticism for this change, overall it has been welcomed by Indian citizens who are regular tax-payers. There are issues, such as long queues at banks, closed ATMs etc. but the situation is improving and the government promises that the banking systems should return to normality with a month.

What Does this Mean for Businesses?

In the manufacturing world this brings challenges because much of the supply-chain was dependent on cash for its day-day-activities. Commonly, cash has been used to pay casual/temporary workers who were paid as “daily wagers”. Further, at times production efficiency is being hit as situations such as the break-down of machines, the hiring of an impromptu replacement employee, issues in the forward supply chain, as well as backward supply chain issues are being impacted by a lack of cash in the system. Added to this, the literacy level, as well as economic status of workers, makes it difficult for them to open and operate bank accounts. Many such workers are reported to have lost their jobs as there was no cash available in the factories to pay them. Some factories are facing additional issues such as reduced overtime due to a deficit of cash; and late payment of salaries. Ethical audits are highlighting concerns such as delayed payments and other issues related to wages, such as less overtime and in some cases reduced bonus.

Longer Term Outlook

These are temporary issues, and the objective is to cleanse the system and provide a better compliance level of payments to workers. This is exemplified by India's Textile Minister Smriti Irani’s statement that this decision will be beneficial to the country's textile workers as cashless transactions will help bring about transparency in wage payments. The ministry is helping to boost this by ensuring payment cards are issued to workers.

In a diverse country like India, this will take time to settle but the teething issues will settle and it is expected that what will remain is a robust economy.

What SGS Can Offer

SGS has been involved in social accountability since its inception and has been offering tailored audit services since 1996. SGS can support organizations with a range of services, including evaluating approaches to human trafficking and monitoring supply chains as part of an overall due diligence approach to responsible sourcing. SGS also helps companies understand the product and labor supply chain, a critical step in the due diligence process, through use of the Transparency-One supply chain mapping platform. With the largest networks of highly trained auditors and extensive experience of reviewing operations’ capabilities, labor standards, environmental compliance and business integrity, we can support your responsible purchasing policies.

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For further information, please contact:

Savita Manjunath
Consumer and Retail
Head of Social Responsibility Services
SGS India Pvt Ltd.
t: +91 80 67261418