a. Demonetisation and After ..
Many of us are yet to come to grips with what followed the announcement on the 8th November '16. The reactions have been extreme depending on one's viewpoint, ideology, political affiliation, with most of the population reacting very strongly for it or against it.
The facts: In a country in which 80% of the population relies on cash for it's survival, pulling out 86% of the currency in circulation overnight is bound to have serious repercussions over the short term.
How short is the short term, let us hope it's really short.
While the decision has been defended on the grounds of curbing black money, curbing counterfeit currency and abetting terrorism, the arguement of curbing black money does not stand on firm ground for many.
There were better ways of getting at the root of black money but not this one when, according to a report of the Ministry of Finance, the component of black money in cash accounts for only 6 - 10%, the rest being stashed away in land, realty, gold, foreign currency or overseas assets.
What has made things worse is the ill preparedness of the RBI in handling the fallout of this draconian step.
How fast will they be able to put the money back will decide the extent of misery which the poor unbanked population as also the ones which depend heavily on cash for their living or business, will have to endure.
The ATM conversion for accommodating the new currency notes has reached a figure of 1.81 lacs out of a total of 2 lacs ATMs, much faster than expected but the cash is missing.
Also, as per the latest figures, Rs 11.8 lakh crores out of Rs 15.4 Lakh have already been deposited with the banks.
The following note from Franklin Templeton Investment highlights the impact on our various areas of our economy in the short, medium and long term.
Franklin Templeton India View:
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On November 8th, in a historic move, the Indian Prime Minister announced demonetization of high-denomination currency notes by withdrawing the legal tender of the existing notes of INR 500 and INR 1,000. This move was intended to tackle counterfeiting Indian currency, nullify black money hoarded in cash and curb funding of terrorism with fake notes.
What is the short term and long term impact of this move on the Indian economy and its key sectors? How would consumption, inflation and bond yields react to demonetization? I am happy to share our demonetization impact analysis note (click here to download) which answers these and many more questions. Here are a few excerpts of our views on demonetization -
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- Should help to accelerate financialisation of the Indian economy over the medium to long term.
- Demonetization along with other measures like GST, Aadhar, Jan Dhan, and Unified Payment Interface (UPI) should help in shifting significant portions of the informal economy (estimated at 40% of GDP) into the formal economy.
- Improve the Government's tax revenues led by significantly better financial trails over the medium to long term.
- Provide more flexibility for the Government to manage fiscal deficit, as also potentially enable a shift to lower interest rates in India.
- Likely to be negative for growth in the very near term until the level of cash in circulation reverts to normalcy.
- Sudden withdrawal of INR 1.4 trillion of cash (9% of GDP) represents substantial monetary tightening, which could result in deflationary forces due to lower aggregate demand.
- Scope for a 50 bps policy rate cut (by the RBI) over the next 1 year in order to offset the deflationary impact.
- CASA balances are expected to improve and possibility of this money being channelized towards g-secs (in the scenario of a muted credit demand) may lead to a bond rally.
- Lower interest rates, along with a return to normalcy for cash in circulation should set the stage for a stronger recovery in aggregate demand in FY18.
Assessment Of The Situation: It is nobody's guess how things will pan out but as long term investors we must use this opportunity to keep on buying at lower levels.
The series of initiatives being planned, Demonetisation, Goods and Services Tax, Benami Land & Property law and the efforts to move the country to a digital economy will surely mean a a better tomorrow for all of us though it will mean enduring near term pain for many of us.
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