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Data Shows Demonetisation Is Hurting More Than Helping

23/01/2017 3:33 PM IST | Updated 23/01/2017 3:51 PM IST
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Since 8 November, 2016, demonetisation has remained the most debated topic in India.

While nobody believes it was an all-round success, the general sentiment seems to be in favour of the decision. This is despite the fact that most key economic indicators have suffered and multiple financial institutions and rating agencies have cut India's future GDP forecasts since the announcement of demonetisation. The International Monetary Fund (IMF), for example, has cut India's growth forecast for current fiscal to 6.6% from its previous estimate of 7.6%.

If one were to look at the impact of demonetisation on various sectors, there is barely one which stands to benefit from the move over a longer term.

The Indian economy is heavily dependent on cash, with less than half the population using the banking system for monetary transactions. Consumption accounts for around 56% of India's GDP, so a drop in spending will naturally pull down growth.

The short-term disruptions in economic activity in cash-intensive sectors such as retail trade, hotels, restaurants and transportation do not in any way get balanced out by the long-term benefits of the move. If one were to read the RBI's recent commentaries, it appears that a lot of the newly printed currency is not being circulated as much, pointing to the fact that much of it is getting hoarded again. As a result it is unlikely that the tax base will become bigger beyond a single financial year, if at all.

If one were to look at the impact of demonetisation on various sectors, there is barely one which stands to benefit from the move over a longer term.

Agriculture

Agricultural growth in India fell 0.2 % in FY 2015 and grew at 1.2 % in FY 2016, largely because of back-to-back droughts. As per Crisil's Report, "Crisil Outlook Fiscal 2017", the agriculture sector was expected to grow 4 % in FY 2017 on the back of a good monsoon, but demonetisation is likely to dent this forecast.

The rural economy, where 65% of the Indian population resides, is largely dependent on cash. Their entire business of buying seeds, fertilisers and farm equipment, as well as paying workers, traders and commission agents, runs on cash. Farmers have incurred losses as they were forced to reduce the wholesale vegetable prices to the lowest possible levels. The cash ban forced many of them to dump their produce.

Automobiles

Two-wheeler companies which rely on the middle class have been hit hardest. Here's a look at the performance of the top three companies in this space:

Priyanka Laroiya

Microfinance and non-banking finance companies (NBFCs)

Microfinance companies use cash in their lending and recovery operations. On account of non-availability of cash and disruption in borrowers' regular business, collection efficiency decreased to 87.43% in December from 99 % in November (i.e. ~ 13% less money was returned to microfinance companies).

State-wise collection efficiency for the period November 2016 to mid of December 2016

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Real estate and building materials

Real estate companies, many of which were already near bankruptcy, have been hit even more. That said, further fall in real estate prices is one bright thing to have happened because of demonetisation. At the same time, many mid and small builders have been driven out of business, and daily wage earners have lost their livelihood.

Unemployment and job loss

According to the Centre for Monitoring Indian Economy (CMIE), unemployment rates rose to 6.1 % in the week of 4 December and further to 6.6 % in the week ended 11 December and then to 7 % in the week ended 18 December.

A recent report from the All India Manufacturers Organisation (AIMO) claims that demonetisation has caused 35 % job losses and 50 % dip in revenue of SMEs.

The currency ban has badly affected Small and Medium Enterprises. A recent report from the All India Manufacturers Organisation (AIMO) claims that demonetisation has caused 35 % job losses and 50 % dip in revenue of SMEs.

Further, most materials companies have experienced a domino effect.

Priyanka Laroiya

In 1978, the government led by Morarji Desai demonetised ₹1000, ₹5000 and ₹10,000 notes. The expectation at the time was that the black economy, estimated to be around 15-18% of GDP then, would diminish if not get totally eliminated. Fast forward to 2016, the black economy went up to 25%. Let's hope that history never repeats itself. If one were to examine the impact of demonetisation beyond business and financial markets, the only plausible explanation for any good to have come out of this move is reduction in terror funding and fake currency. But again, the same could have been achieved by simply replacing the old notes with a newly printed series, without demonetising any denomination.

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