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.