Demonetisation: Future shock for India

Inflation

Even though as most of leading economists view the government’s decision to ban Rs 500 and Rs 1000 notes as a positive move from a long term perspective, the short term perspective are going to be disastrous for the general well being of economy. It will adversely affect the brand India. Inc performance and the economy is destined to be muted in next many quarters.

The former Union Finance Minister P Chidambaram, in a press conference said that the demonetisation is not a solution as far as scourge of black money is concerned as it will only hit the common man who has nothing to do with the genesis of black money. The total share of high denomination notes of Rs 500 and Rs 1000 is approximately 87% in market and withdrawing so much of currency abruptly will have a ripple effect on Indian economy. It will create difficulties even in routine things like purchasing medicines, groceries, buying bus and train tickets and paying for auto-rickshaws.

According to an Ambit Capital report the GDP will get a severe hit on account of shortage of cash due to demonetisation and to achieve even a modest growth rate of 3.5% will be an herculean task against the earlier prediction of 6.8%. The report further predicted that in the second half of the current fiscal year GDP is likely to see a growth of 0.5% only, which is down from the 6.4% forecast by Ambit in the first half of the year. The report also predicts that the slowdown on account of demonetisation will have a ripple effect on the next FY 2017-18 also and growth is supposed to be pegged at 5.8% against an earlier estimate of 7.3%.

The real estate business is undergoing cash flow problem as a result of general recession in the sector and the demonetisation will adversely affect it as around 40% of the value of purchases take place using black money only. It will also make the small businesses in the informal sector unviable resulting in the loss of employment and productivity. The demonetisation will have a detrimental effect on sensex also and as a matter of fact Ambit has already scrapped its March, 2017 target of achieving 29,500 mark and instead they have been predicting a target of 29000 for March, 2018.The only silver lining seems that RBI may cut down the interest rate by 25-50 basis points in the second half of the year.

There are numerous sectors which are dependent on high proportion of cash transactions and these will be impacted to a wide extent as receivables of companies in these segments will go up exponentially. Some of these sectors are namely real estate and jewellery sectors would be the worst-hit as they remain the preferred investments destinations of Indian consumers for their black money.

In agro sector purchase of agrochemicals, seeds and fertilisers; usually done in cash, too, could come down. All metal companies will get a jolt as a large part of trading in steel and other metals is carried on a cash basis since long.It may impact the asset quality as well as credit growth of microfinance companies and which will result in the reduction in the short- term debt servicing capacity of small borrowers. The housing finance companies could also witness stress on their credit quality as well as further growth because the falling realty prices is likely to jeopardise the loan against property business.

Even e-commerce mega companies are likely to feel heat in the near to medium term as cash on delivery segment constitutes roughly between 65 to 90 per cent of e-commerce companies’ revenue which in turn can impact the valuations of e-commerce players profitability. The ongoing activities in the infrastructure sector of roads, railways, transmission and also in the distribution sectors will be hampered as payment to labour is usually made in cash.

The low density of bank accounts in small villages and remote areas and supply-chain disruptions could also affect demand for consumer goods for a brief while. The demand supply chain will be largely disturbed of big ticket consumer durables such as apparels, white goods and the likes could also head south.
Chidambaram said in his interview that Central Board of Direct Taxes had advised the UPA govt way back in 2012 to avoid issuing Rs 2000 currency notes, saying that it is likely to bring more harm to the public than benefit. In that backdrop the present Modi govt’s decision to scrap the high denomination notes of Rs 500 and 1000 belies common logic.

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