“Most people here can’t operate smartphones. Even if they could, most of the time you can’t charge your phone. And even if you can, there’s no internet access. In most villages nearby, they don’t even have running water. Cashless. Seriously? Why is it even a priority when there’s so much else to fix?” fumes Gopal Shivram Chauhan, who grows rice and lentils on his 9 hectares of land in Hirve, a small village just 150km from Mumbai.

Chauhan employs 20-25 farmhands during the sowing and harvesting seasons. He pays his workers a daily wage of about 100 rupees (HK$11.4). Since agricultural workers are desperately poor, they all expect to be paid daily. But he rarely has any cash these days since Prime Minister Narendra Modi announced the withdrawal of Rs500 and Rs1,000 notes – which constitute 86 per cent of the money in circulation – in his war on “black money”, as unaccounted wealth is called in India.

So Chauhan these days often finds himself paying farm labourers in kind with crops, relapsing into a barter economy, while his prime minister has been spiritedly espousing the cause of hi-tech cashless transactions through digital platforms and banks. Modi has rolled out a bouquet of incentives to encourage people to buy online, organised a lottery to reward those who do, and launched an e-wallet app that will enable transactions through biometrics.

But only a four-hour ride from India’s heaving financial capital of Mumbai, Hirve – with no bank, no electricity for most of the year and no mobile phone connectivity – is a sobering reminder why a cashless economy is a distant dream in a country where 70 per cent of the population still live in villages and 73 per cent of the villages do not have a bank within a 5km radius.

Why Modi’s Indian banknote bombshell has shades of North Korea’s currency disaster

Hirve, where the nearest bank is 25km away in the town of Mokhada, tells you why 70 per cent of Indians with mobile internet access live in cities and only 17 per cent of Indians own smartphones.

Back in Mumbai, economist Praveen Chakravarty is as flummoxed as Chauhan. A senior fellow at Mumbai-based think tank IDFC Institute, Chakravarty says the goal of going cashless wasn’t really a priority and the government clutched at it almost as an afterthought, first framing it as an attempt to erase counterfeit currency, terrorism financing and black money.

“The cash to GDP ratio is 12 per cent in India while in Japan it’s 18 per cent. No one is saying the Japanese society is corrupt and its economy needs to be cleaned up. Why is cash suddenly such a big problem in India? This disruption will have a mammoth effect on the economy. Do we even know if the supposed gains we’ll make as a result of this drive will outweigh the costs?”

As of now, the costs appear staggering, with India set to lose its proud tag of the fastest growing major economy in the near term. Retail sales have plunged, small factories have ground to a halt and crop prices have collapsed. Coming right at the start of the sowing season, when farmers need cash to buy seeds, fertilisers and diesel for irrigation, the currency ban has come as a severe shock, especially to the 800 million Indians who depend on the rural economy.

“The sectors we have tracked have all seen a hit of 30 to 70 per cent,” says Govindraj Ethiraj, founder of IndiaSpend. India’s first data journalism initiative, IndiaSpend has been studying the impact of the cash crisis on the agricultural sector, small industrial units, tourism and health, among others. “Since entire business lines operate on cash, it doesn’t matter if individuals along the way have bank accounts. One person refuses to pay by cheque and the whole chain stops. If there’s no cash, there’s no business.”

The central bank has reduced the annual economic growth forecast to 7.1 per cent from 7.6 per cent. HSBC expects annual growth to fall off by 1 percentage point, while brokerage Ambit predicts “significant deceleration” between October and March, with the possibility of contraction in the last quarter. For the first time since June 2015, services contracted in November and then again last month. Manufacturing shrank in December, after a sharp slowdown in November.

How Modi’s currency ban is helping Chinese fintech investors in India

Sumant Kasliwal’s fashion start-up is an example of how these numbers are playing out across the value chain. His four-year-old 20Dresses.com, a personalised fashion portal, was on course for a turnover of US$4 million this year, till demonitisation hit. Kasliwal is now looking at US$3 million. Worse, he has no idea how sales will hold up in the next three months.

“Seventy per cent of our orders are paid for by cash on delivery. This is very unique to India, where people may order online but prefer to pay by cash. All deliveries we made after the currency ban have been returned. November itself saw a drop of 40 per cent. We have to sell our winter wear inventory at a huge discount,” says Kasliwal, predicting the drop in demand to persist for at least two quarters. Bracing for harder times, he recently laid off a quarter of his staff. “This will have a massive cascading effect on our suppliers, who all pay their workers in cash.”

When Kasliwal stops buying, so do his suppliers. Modi wants small businesses to formalise their operations by paying staff by cheque or digital platforms but there’s good reason why 90 per cent of India’s workforce and firms are still in the cash-driven informal sector.

“If a worker has to be paid by cheque, the employer would have to cover for health, retirement, etc, increasing the cost by a quarter. This, the employer will try to make up by slashing the basic pay, and the worker would look for better, cash wages elsewhere. Without altering the existing labour laws, you cannot effect such fundamental changes,” says Kasliwal.

India has one of the most complex labour laws in the world, with 144 central government laws and 160 state ones. Cumbersome laws on hiring and firing workers, and closing plants, mean small employers prefer to remain outside the tax ambit by staying small, which helps them dodge labour laws, minimum wage requirements and trade unions.

20Dresses can take a hit for a couple of quarters, even if it requires laying off some of its staff, but many of these small suppliers, with 10 to 12 workers, could fail. “They can’t continue to pay their staff with no orders in hand. Many of them will die in the process,” Kasliwal predicts.

That fear is echoed by labour lawyer Vinod Shetty, who works with ragpickers in Mumbai’s Dharavi, one of the world’s biggest slums. Home to over a million people, Dharavi is also a buzzing hub of all manner of small enterprises that are fuelled by cheap migrant labour, most of whom are choking on the cash ban.

“Many of the people involved in the businesses in Dharavi are from the most vulnerable sections of society. Take for example the recycling industry. This is where the discarded waste of 20 million Mumbaikars are sold, sorted, bundled, recycled and sold again,” says Shetty.

“The scale of these businesses is small and the labour force is primarily drawn from the sections of the population that have been relegated to the margins of India’s growth story – untouchables, destitutes, tribals and poor Muslims. They are vulnerable to the slightest of disruptions, and this one shows no sign of easing even after two months. Many livelihoods may be lost forever.”

Modi’s key aide blames poor planning for India’s currency crisis

Across the road from the 215 hectare slum, Altaf Sheikh is braving the afternoon blaze and stench over the sprawling mangrove dump where many of the city’s sewers drain, diligently separating the copper from the tangle of wires he has bought this morning.

For this back-breaking work, he used to make Rs700-800 a day by selling back the copper to a trader in Dharavi, barely enough to support his family and survive in India’s most expensive city. These days he isn’t even hitting half of that.

“I’ve never had it this bad. The traders are saying they can’t pay as they don’t have enough money, and are demanding hefty discounts. I have a bank account but they are refusing to pay by cheque. And even if they do, I’ll have to skip a day’s work to get that money out of the bank,” says Sheikh, alluding to the long queues.

India’s China policy off target, says Modi’s Mandarin-speaking ‘guided missile’

His hand-to-mouth existence naturally precludes that option. Scrap prices, he says, have crashed as a result. Copper scrap now fetches him Rs260 a kg, compared with Rs380 prior to the cash clampdown. Brass scrap has plummeted from Rs250 to Rs160 and iron scrap from Rs20 to Rs4.

Further up the value chain, and deeper into Dharavi’s labyrinthine heart, Hanumanthi Devi and her two employees are busy sorting scrap into separate containers at her 10ft by 3ft shop. The gritty 60-year-old, who started out as a ragpicker 35 years ago and graduated to trading along the way, is among those who buys scrap from Sheikh. Asked why she isn’t paying Sheikh the old rates, she in turn blames her client, a bigger vendor. He doesn’t have enough cash and won’t write cheques, she says. Why won’t he? “He would have to pay tax.”