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Demonetisation hit growth, jobs, bank credit: Economists’ report

“Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth,” the study said.

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Demonetisation Que

New Delhi, Dec 19 : The November 2016 demonetisation impacted economic activity in the country in the immediate aftermath, affecting the GDP numbers for that fiscal, while the measure’s impact had dissipated by the summer of the following year, according to a study published by the US think-tank National Bureau of Economic Research (NBER).

The NBER working paper titled ‘Cash and the Economy: Evidence from India’s Demonetisation’ is auhtored by Harvard Professors Gabriel Chodorow-Reich and Gita Gopinath, along with Prachi Mishra, who is currently Managing Director at Goldman Sachs in Mumbai, and the Reserve Bank of India’s Abhinav Narayanan. Gopinath, a noted economist, is set to take charge next month as Chief Economist at the International Monetary Fund (IMF).

“Our results imply demonetisation lowered the growth rate of economic activity by at least 2 percentage points (pp) in the quarter of demonetisation,” the report said.

“The cross-sectional responses (surveyed) cumulate to a contraction in employment and nightlights-based output due to demonetisation of 2 pp and of bank credit of 2 pp in 2016 Q4 (January-March) relative to their counterfactual paths, effects which dissipate over the next few months,” it said.

India’s GDP growth rate slowed to 6.1 per cent in the fourth quarter of 2016-17, from 7 per cent in the previous quarter, reflecting impact of demonetisation on key sectors. GDP had grown at a marginally higher rate of 7.3 per cent in the second (July-September) quarter before demonetisation.

The country’s Gross Domestic Product during the entire fiscal in consideration grew at a lower rate of 7.1 per cent.

“Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth,” the study said.

It estimated India’s economic activity to have declined by over 3 percentage points in November and December 2016, adding, however, that the effects of demonetisation were dissipated over the next few months.

Referring to other studies in this regard, the paper compared the magnitude of the peak effect on output of the note ban, which saw 86 per cent of extant currency notes being withdrawn from circulation, to the equivalent of around a 200 basis point tightening of the monetary policy rate.

“We conclude that while the cashless limit may appropriately describe economies with well-developed financial markets, in modern India cash continues to serve an essential role in facilitating economic activity,” it said.

Although focused on the short-term impact of the measure, the study also said that its longer-term consequences may include higher tax revenue and a shift to digital modes of payment, all of which would require more research for validating.

“There may be longer-term advantages from demonetisation that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms,” it said.

The study employs innovative methods of judging economic activity, including satellite images of lights at night, especially for the informal sector.

It used a “new household survey of employment” and “satellite data on human-generated nigtlight activity”, apart from other datasets to measure the fallout of demonetisation at the district level.

“If trend growth in India was 1.5 per cent per quarter (6 per cent per year), then our estimates imply an absolute decline in economic activity of about 0.5 per cent in 2016 Q4 from the previous quarter,” it said.

“This follows from the 3 per cent decline in November and December and no impact in the pre-demonetisation month of October.”

The report explains that the decline in output does not “obviously materialise” in the offcial GDP data released by the Central Statistics Office (CSO).

“As already mentioned, national data are volatile and subject to other shocks, making it difficult to discern a single break-point around demonetisation,” it said.

“Moreover, our measures of real activity have the advantage over official GDP of directly incorporating informal sector activity. The informal sector in India is estimated to account for 81 per cent of total employment (ILO, 2018) and 44 per cent of total output (CSO, 2018) and is especially cash-intensive.”

According to the model adopted by the study, demonetisation amounts to a forced conversion of cash into less liquid bank deposits, which in the presence of downward wage rigidity, results in a decline in output, employment, and borrowing by companies.

“We use our model to show these cumulated effects are a lower bound for the aggregate effects of demonetization. We conclude that unlike in the cashless limit of new-Keynesian models, in modern India cash serves an essential role in facilitating economic activity,” the authors said.

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Markets open on positive note

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Sensex Nifty Equity

Mumbai, Feb 20: The 30-scrip Sensitive Index (Sensex) on Wednesday opened on a positive note during the morning session of the trade.

The BSE Sensex opened at 35,564.93 before touching a high of 35,581.14 and a low of 35,520.21.

It was trading at 35,528.69 up by 176.08 points or 0.50 per cent from its Tuesday’s close at 35,352.61.

On the other hand, the broader 50-scrip Nifty at the National Stock Exchange (NSE) opened at 10,655.45 after closing at 10,604.35.

The Nifty is trading at 10,656.25 in the morning.

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PF funds’ investment in IL&FS bonds have no government guarantee: Finance Ministry

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IL&FS Financial Service

New Delhi, Feb 19 (IANS) The provident and pension fund trusts that invested in the IL&FS bonds now fear loss of money as the debt-ridden company’s bonds are unsecured debt, and the Finance Ministry says superannuated bonds do not carry any government guarantee and all such instruments have to face all market-related risks.

“Since these are investments in bonds, the government does not ensure any guarantee on them as such and if these are invested in stock markets, they carry the market risks as applicable. It is between the bond issuer and bond holders…,” the Finance Ministry said in response to IANS queries.

Thousands of crores of money of more than 15 lakh employees of both public and private sector companies have exposure to IL&FS bonds.

However, queries sent to the EPFO Commissioner and Labour Minister Santosh Gangwar remained unanswered.

Over 50 funds that manage retirement benefits of over 15 lakh employees have exposure to IL&FS. PF trusts of state electricity boards, public sector undertakings (PSUs) and banks are among them. The provident and pension fund trusts have filed intervening applications in the National Company Law Appellate Tribunal (NCLAT) stating that they stand to lose all the money since the bonds are under unsecured debt.

Usually, retirement funds have a low-risk appetite and invest in “AAA” rated bonds (which IL&FS bonds used to be once upon a time) and get assured returns with low interest rates.

The worries of pension and provident fund trusts come from the classification of IL&FS profiling its companies as to which can meet the dues obligations. Many important trust managing funds of PSUs like MMTC, IOC, Hudco, SBI and IDBI are among those filing petitions. From private sector, HUL and Asian Paints are among the petitioners.

IL&FS is currently under resolution process at the National Company Law Tribunal (NCLT). The process will decide under Section 53 of the IBC the order of priority for distribution of proceeds of the process.

The beleaguered company has informed the NCLT that of the 302 entities in the group, 169 are Indian companies, out of which only 22 are emerging as those which can meet all obligations (green), while 10 firms can pay to only secured creditors (Amber). There are 38 companies of IL&FS (red) which cannot meet any obligations of payment, and 120 entities are still being assessed.

These PF and provident funds trusts are worried that if payment is limited to secured creditors, then only financial creditors like banks will receive the dues while unsecured bond-holders will be get any payments.

IL&FS bonds attracted investments by PF trusts as it had the shareholding of SBI and LIC giving its bonds the comfort factor.

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Sachin Bansal invests Rs 650 crore in Ola

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Bengaluru, Feb 19 (IANS) Internet entrepreneur and Flipkart co-founder Sachin Bansal has invested Rs 650 crore, or about $92 million, in ride-hailing platform Ola in his personal capacity as investor, the company said in a statement on Tuesday.

This investment is part of Ola’s larger Series J funding round. It is also the largest investment by an individual in Ola to date, it said.

“Ola is one of India’s most promising consumer businesses that is creating deep impact and lasting value for the ecosystem. On one hand, they have emerged as a global force in the mobility space and on the other, they continue to build deeper for various needs of a billion Indians through their platform, becoming a trusted household name today,” Bansal said.

He further said he has known Ola founder Bhavish Aggarwal as entrepreneur and friend over the years and that he has great respect for what he and the team at Ola have built in 8 years.

“We are extremely thrilled to have Sachin onboard Ola as an investor. Sachin is an icon of entrepreneurship and his experience of building one of India’s most respected businesses ground up, is unparalleled,” Ola CEO Bhavish Aggarwal said.

Ola integrates city transportation for customers and drivers onto a mobile technology platform ensuring convenient, transparent, safe and quick service fulfilment, the statement added.

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