Ripples: Demonetisation, Trump and OPEC Part-2

 This blog post is part of the series on "Ripples: Demonetisation, Trump and OPEC". To read the previous part click here. This post was written in collaboration with  Akansh Gangil and Shikhar Bansal.

 Trump election and failure of Analytics

The election of Trump as the next President of the United States came as a shocker for many. The various pre poll surveys and analytics failed to predict his victory. Trump has campaigned on a slogan of "Make America Great Again" by announcing to do away with past economic policies of the US. His policies of first 100 days will have huge implications on global economy and polity.

The good news can start with US growth, which might accelerate above the 2.2% average annual rate. Trump may implement the Keynesian fiscal stimulus that Obama often proposed but was unable to deliver.

Trickle Down Economics

Mr Trump proposed to cut taxes dramatically. His tax cuts would mostly benefit the rich, which would limit the boost to demand somewhat, but a large increase in the government deficit could not help but give a jolt to the economy. At the same time, Mr Trump seems likely to increase spending on defense and on infrastructure (and, possibly, on a wall, which would seemingly count as both).

Decrease in corporate taxes will help mainly the service sector and not the manufacturing sector. As the taxes are lowered, more disposable income will be available with individuals which will raise the inflation levels, which even though desired, leading to raising the already high wages. Thus labor cost will remain as the major hurdle for manufacturing growth.

 Shift in Trade Policies

 During the presidential campaign Trump has repeatedly called for repealing or renegotiating the trade deals.

 This adamant attitude towards US participation in blocs like NAFTA, TPP  and TTIP will adversely impact automotive industry all over the world as import duty on automobiles and auto-parts, coming from Japan, China and other countries, will increase by a large margin. Consequently the big OEMs (Nissan, VK, BMWs, Ford) and their suppliers manufacturing outside the US might shift their manufacturing plants to US. But, as already discussed, labor cost will make manufacturing costly, thereby leading to price rise for SUVs, Trucks and as well as cars.

 Geopolitical Issues

Mr. Trump being the next commander in chief has to tread very carefully as geopolitical tensions can rise by any impulsive move from his side. And tensions among nations is always bad for business( other than defense suppliers). US position on critical international issues like climate change can change. The US stand in various international forums on climate change will need to be carefully analyzed. 

 It is hard to know or anticipate how he will use the army, or the diplomatic machinery of the American government. Any move toward greater conflict in the Middle East or Asia could have serious economic consequences: from soaring oil prices to market panic to interruptions in global trade. The economic and human costs of war are impossible to anticipate but frightening to consider.

Indian Perspective

Perhaps the most negatively impacted industry will be IT as more stringent laws and higher cost for H1B visas seems to be  in the offing. This will considerably increase the cost for IT companies. Apart from trade, the diplomatic position of US towards Pakistan and China will also have huge implications on Indian trade and international policy making.

Whether we like it or not, Donald Trump is set to be the US President and his policies are bound to create Ripples.  

 

Ripples: Demonetisation, Trump and OPEC Part-1

Since my last blogpost, a lot has changed around the world sending shockwaves through the economy. Some of the ripples form these shocks have been felt globally, some felt nationally, and others are looming to be felt.

The three major events from an Indian economy point of view were the demonetisation of Rupees 500 and 1000 notes, election of Donald Trump as the US President, and the decision by OPEC to cut oil production.

I will be writing about the three major shocks in this "Ripples" series in 3 different parts in collaboration with Shikhar Bansal.

Demonetization

On November 8, 2016 Prime Minister Narendra Modi in his address to the nation announced the demonetisation of Indian Currency notes of 500 and 1000 denominations from midnight, thereby, turning almost 85 percent of the Indian cash in circulation to "worthless pieces of paper" as these notes will no longer be legal tender. There’s a complex system of exemptions and exceptions to this demonetisation. The public was asked to submit the old currency in the banks and post offices, and was urged to embrace cashless transactions using mobile banking and internet banking.

The move was touted as a masterstroke against corruption and black money. The opponents of the move, on the other hand, are citing it as a major hubris. They point to the lack of preparedness and proper planning in implementation. The lack of proper internet and financial/general literacy in the rural India is also being considered as a major hurdle to India transcending to a cashless society.

The businesses and markets reacted to this shocker in the manner as described below:

1.  Sensex performance after demonetisation.

Due to initial panic among the investors, specifically those who were invested in adversely affected sectors, the markets tumbled by about 1800 points in just five sessions of trade. Demonetisation cannot be hailed as the only cause for tumbling of the markets, as US Presidential elections also had a major impact on IT bigwigs. But the largest impact of the government's move will be in the unorganised sector, which isn't represented in the markets.

     2.  Sectors which are affected negatively are: Real Estate, Auto, FMCG, Luxury, and Bullion Markets.

The sudden drop in money supply and increased incidence of deposits have had an adverse effect on consumption in the economy. This sudden demand curtailment further leads to a cascading effect due to decline in consumer confidence. With consumers preferring to hold cash in hand, consumers will stick to purchase of necessities and will cancel/ postpone buying premium FMCG products and luxury items. Due to real estate and construction sector getting affected, related industries like cement and construction material will experience a slowdown.

    

   3. Sectors with an upswing: The number one beneficiary are banks, with an improved CASA. RBI might cut rates by 50 bps. This will help banks lower funding cost, therefore, lending fillip to credit demand (in near to medium term). SME may face near term payment issue due to sudden scrapping of high currency notes. This would increase demand for working capital loan. Cheaper credit coupled with Make In India will provide imputes to SME, which may lead to a boost in manufacturing growth. With the cap on gold holdings being announced, pressure on gold finance players will increase.

  4.  Digital wallet and UPI : The demonetisation has been a boon in disguise to the mobile banking and digital wallet providers like Paytm and Mobikwik which have been successful in increasing their reach to local vendors. Digital Paytm on 29th november said that it has seen 35 million transactions for mobile and DTH recharges on its platform since demonetisation which is over 70 percent of the total recharges done in the country. Also, the banks have come up with Unified Payment Interface which can act as game changer in making mobile transactions safer and easier.

Does India has what it takes to become a cashless economy? Only time will tell, but one thing is for sure that such an endeavor will need the private sector to create the cheap and easy mechanisms for cash transfers using smartphones that would make cash redundant. And though this process is ongoing, and swift, it’s far from complete.