Inside out: Impact of Demonetization 2016

The recent announcement by the Prime Minster to cease the currency notes of Rs. 500 and 1000 denominations as the legal tender took nation by surpise. For many it worked like salt on their bleeding wounds on the other side some hail the PM for this act of valour and are singing hymn to the PM “Modi! Modi!” and “Acche din aa gaye hai!”

Here’s a whole inside out about what this transition will do to the nation:

I have old notes of Rs. 500 and 1000? What am I to do now?

Only short term worries! Relax

You have 50 days of time (till 30th December’16) to deposit these in your bank accounts and post office after furnishing a valid ID proof, plus the lower denominations notes still remain a legal tender. Also some leeway has been given by the government for the use of these notes at medical emergencies and public transportation.

What impact will it have on common man?

Well, the common man doing business honestly and paying regular taxes is least likely to be affected and it’s time for him to rejoice and welcome this move in the long run. Though this may cause some chaos in the current period as he may need to run to bank for immediate exchange, his payments may hinder for a while. On a lighter note, his wallet may become heavy (as he will have to carry more cash of smaller denominations) 😛

What impact will it have on businesses/persons mostly dealing in cash?

This move deeply impacts anybody who provides services in the informal sector and rural India and depends on monthly or bi-monthly cash payments. This sections accounts for our maids, plumbers, and electrician to name a few.

Their payments get delayed as they will have to wait to be paid until you can get your hands on some cash. The severity of this impact will depend on how easily and smoothly India’s banking system and the government executes the transition.

Though a year has been passed and the government says the Jan Dhan Scheme launched has opened over 25 crore accounts also, as good as the number speaks, almost 80% accounts are now active but, this does not mean that all the people of the country have been covered under this scheme. As good as 100-200 million people still doesn’t have access to bank accounts  and depends on high-value cash transactions will be crippled until new notes come through. However, it will be a long time before rural India moves to completely cashless transactions and towards digitization.

Again, in the short-term, people in rural India who have a significant amount of Rs 500 and Rs 1000 notes, but no official form of identification will have a tough time in exchanging their notes.

What has been the review of India Inc on this demonetization?

Industry Veterans speaks highly of this move, and they quoted it “a bold and revolutionary move”.

“It’s perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments which in turn will help the formal economy to grow at a faster clip in the long term.” Speaks Deepak Parekh, Chairman HDFC Bank.

“There cannot be a better move and India will see its results. The rupee will become strong and I have a strong feeling there will be investment in growth in the right direction, he said.” Industry chamber CII President Naushad Forbes

Paytm tweeted: We have got two words for you: Paytm Karo.

(Looks like they have got the Swag! On similar lines, Digital payment wallets are on a roll!)

How will this move impact the stock market and overall Economy?

Market experts forecast that this move is expected to have an ill effect on the stock markets in Wednesday’s (9th November’16) trade. Market players said shares of consumption and realty companies could see selling pressure as their business could take a beating.

“We could see a sharp correction in consumption and real estate stocks. Also, shares of smaller companies could come under pressure. Most consumption activity in the country happens through cash, which could impact their business. Most of the consumption stocks are trading at high valuations and investors could use this as a selling opportunity,” said Tirthankar Patnaik, India strategist at Mizuho Bank.

Although real estate stocks are part of the benchmark Sensex and Nifty indices, consumption stocks including ITC and Hindustan Lever have a considerable weightage and their performance could weigh on the overall stock market.

“We should see a negative knee-jerk reaction in the markets. The correction, however, may not last much as the focus will shift to the US election outcome,” said U R Bhat, managing director, Dalton Capital Advisors. “Most listed companies have to submit proper audited accounts so there aren’t much incidence of black money,” he added.

Spotlight on Wednesday’s trade would be the shares of smaller companies, which are used by manipulators to launder black money.

Global markets are expected to react positively if Democrat Hillary Clinton wins the US elections, while Republican Donald Trump could spark a sell-off in risky assets.

Not just the market but the move could also make a dent in the real economy in the short term, say analysts.

“The move will also impact the economy as there could be an immediate dip in growth and consumption number for the third quarter,” said Patnaik. “However, from a medium-term perspective, the move coupled with GST (goods and services tax) implementation will be positive for the India outlook and help improve India’s image in the eyes of overseas investors,” he added.

“It is a very powerful measure to curb black money. It will have deflationary impact in general and on real estate prices in particular. It could make homes affordable and is indirectly a boon to honest tax payers,” said Nirmal Jain, chairman, IIFL.

Artificial increase in real estate prices all over the country is expected to be down now. Buying a home will now be an affordable dream for the poor and the middle class.

How will this move impact Inflation and Growth rate in the economy?

Initial Impact:

Initially, there will be heavy deflation as people who have earned money through illegal means such as smuggling, corruption would be afraid to declare the money as they might be prosecuted by Govt/Income Tax Dept on the legitimacy of their income.

This will reduce the total currency circulation in the economy – leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down.

Far Term Impact:

There will be a lot of people who have a lot of cash, legally earned, which they will deposit it in the bank.

Now, credit creation is what they quote: the bank with more deposits can do more lending.

Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.

Deflation and Inflation will balance out each other in the future.

How will this affect the development in necessary lines of Education and Healthcare?

economic_developement

India does not stand alone in this act of demonetization yesterday; many countries have banned their high value currency notes, the recent and important one when the euro bank proposed to phrase out dollar 500 currency bill this February.

Now as the PM himself mentioned, this counts for a great step towards nation building and a fight against menace of corruption, terrorism and printing of counterfeit notes for funding these illegal activities.

This thus creates a direct link for the development and a positive, planned and progressive development of the nation. An end to corruption and black money will directly smoothen and ease the process of infrastructure maintenance and further creation. Projects no loner will be pending to be made or low quality of project be approved now.

In short, India 2020 and India of my dreams are reality now! Yayy!

 

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