Demonetization – Beneficiaries and Hardest Hit –Year (8-Nov-2016 till 8-Nov-2017)

With this so-called demonetization plan, 86% of the currency in circulation was replaced and this resulted in a huge monetary squeeze (Figure 1). The plan was an attempt by the government to wash the stock of counterfeit money out of the economy, which has allegedly been used to fund criminal activities, such as terrorism and drug trafficking.

In addition, the scheme aimed to draw a large part of the black economy into the banked and taxable part of the economy (overall tax revenue to GDP is a meager 11%). Demonetization also targeted to reduce cash in the circulation.

Source Economic Times

Immediate impacted industries- The informal sector which is very cash-dependent and the liquidity squeeze had put a brake on transactions, especially in sectors such as retail, agricultural and commodities. Many entrepreneurs who didn’t have the bank account nor paid the taxes from the agricultural and retail sector ran their daily business solely based on cash transactions. Unorganized sector suffered job losses of 1.5 million (Jan- April 2017) according to CMIE (Center for Monitoring Indian Economy). Rural stress has forced loan waivers of Rs. 88,000 crore. During the demonetization business of these sectors was impacted most as they were not able to pay to the workers, buy the intermediate goods and couldn’t sell goods and service due to cash crunch.

Second, there was crackdown on black money which has been hoarded in the real estate sector. It had resulted in reducing the cash transactions significantly. This was also detrimental for private consumption and housing investment. According to the data from Knight Frank India, sales across the top eight cities were down by 11% year-on-year in the first half of 2017, but they have risen by the same proportion when compared with the July- December 2016.

The demonetization had impacted the various economic sectors. For few it was fruitful and for others not so fruitful.  Given below the data for the few sectors impacted by demonetization.

 

 

 

 

 

 Source: Economics Times

Beneficiaries Sector:

Banks: Within the first month, practically all demonetized currency notes in the country were back in the bank vaults. The sudden flow of cash to public sector banks gave them an instant lifeline clearly visible across the banking system. Lending rates get slashed, the overnight marginal cost of funds-based lending rate (the minimum interest rate below which a bank cannot lend) fell to 7.75% from 8.65%. Meanwhile, three-year loan rates came down to 8.15% from 9.05%.

Financial Technology Startups-Digital wallet and other mobile payment companies were the other beneficiary sector. Due to the cash crunch, many people turned to digital wallets that can be used in conjunction with mobile payment systems, allowing them to pay for purchases with their smart phones.

Among mobile wallet companies, Paytm was the biggest beneficiary. We can gauge the impact of the demonetisation drive on its business by looking at the company’s user base, which has reached 160 million – a fourfold increase since May 2016. Paytm’s traffic rose by 435%, app downloads grew by 200%, and the company saw a 250% rise in overall transaction value.

Hardest Hit Sectors

Rural Area– In rural areas, where access to banking and the internet is quite low was very badly hit. A 2016 Reserve Bank of India (RBI) report on branch authorization policy classified 93% of rural centres in the country as unbanked. Access to the internet is equally patchy, with only 3% of households in underdeveloped rural areas reported access to internet in a 2016 consumer economy survey.

The liquidity squeeze led to a pile-up at wholesale markets, leading to a sharp decline in the Wholesale Price Index (WPI) of perishables such as fruits and vegetables in the immediate aftermath of demonetisation. By turning farm markets into buyers’ markets, demonetisation may have also contributed to the decline in prices of pulses.

Two wheelers & Four Wheelers- Rural consumer sentiment too took a hit, with domestic sales of two-wheelers plunging sharply. Car sales also declined but the decline was less severe than in the case of two-wheelers.

New investment –proposals worth Rs.1.25 trillion were observed during the quarter ended December 2016. This is low compared to the average Rs.2.36 trillion worth of new investments seen per quarter in the preceding nine quarters of the Modi government.

 

 

 

Source Hindustan Times

Data suggests that demonetisation has hit the pace of announcement of new investment proposals during the quarter ended December 2016. 227 new investment proposals worth Rs.818 billion were announced during this quarter till November 8. In comparison, only 177 investment proposals worth Rs.437 billion were made between November 9 and December 31, 2016.

Thus demonetization had both hits and misses on the Indian economy but still its long journey, as many more goal posts yet needs to be achieved.

Sources

Hugo Erken RaboResearch Global Economics & Markets

https://theconversation.com

http://www.businesstoday.in

http://www.livemint.com

https://economictimes.indiatimes.com

Follow me at twitter – @RhizKris

Demonetisation Impact on Industries

The eve of 8th November, 2016 would be treated as the historic day in the Indian Economic history, Prime Minister of India Mr. Narendra Modi through his address to the Nation announced that INR 500 and INR 1000 currency notes would no longer be legal tender money from that midnight, eliminating nearly 86% of the currency in circulation, creating a huge cash crunch in the economy.

The announcement was unexpected and population of 1.34 billion was given time till 30th December, 2016 to deposit old currency and simultaneously get the new currency in cash up to INR 4000. These limits of depositing and withdrawal were regularly revised as per the requirement by the monetary authority.

The majority of the people thought public in India will revolt on this and there would be agitations. But there was no such upheaval and people accepted the move willingly as the intention behind this move was to get the black money out in the circulation, lowering on the real estate prices and it would be India’s biggest move against shadow currency. It is too early to comment on the success or failure of the intentions, but we can still observe the impact of it on the various industries in India. Following are the industrial statistical facts related to demonetization:

Automobile sales in India fell 18.66% in December 2016, the steepest in 16 years post demonetization. “Automakers sold 12,21,929 vehicles – passenger and commercial vehicles as well as two and three-wheeler – in the December month in India,” according to data from industry body Society of Indian Automobile Manufacturers(SIAM). The drop was the steepest since December 2000, when it was 21.81%, said Vishnu Mathur, Director-General of SIAM.

According to data made available by Knight Frank India, the year 2008 saw sales volumes going down by 27%, indicating negative growth. The year 2016 has also projected negative growth of -9%. In the fourth quarter, after demonetization, sales volumes have dropped by 44% and new launches have fallen by a massive 61% year-on-year during the same period. Had it not been for demonetization, property markets would have actually fared much better.

Counterpoint Research data showed that 25% of the 118 million smart phones shipped in India this year were 3G and 2G devices. About four to five million of this shipment is expected to still be unsold. At an average sale price of US$ 50, this inventory could be worth INR 1,700 crore, the research house said.
Industry insiders and market watchers said that local players such as Micromax, Intex, Lava and Karbonn would find it tough to liquidate 3G-phones at a discount, as 4G phones are already available at affordable prices, unless manufacturers take to deep discounting and absorb the losses.


Source: National Horticulture Board; Negative values indicate rise in prices

The price of peas dropped between 15% and 20%. The crash in prices was also due to oversupply, the data shows. While the prices of tomatoes (hybrid variety) fell by 55%-85%, the supply was double and even triple the previous year in parts of India, such as Ahmedabad, Kolkata and Hyderabad, according to data from the National Horticulture Board.

Mobile wallets companies have turned out to be the single largest beneficiary of demonetization. Shopkeepers, vegetable sellers, petrol pumps and even sex workers lapped it up. One of the company – Paytm’s traffic increased by 435%, app downloads grew 200%, and there was 250% rise in overall transactions and transaction value. The value of mobile wallet transactions did not increase. In November, 2016 according to SBI Research, transaction value was down to INR 35,240 crore, lowest since February 2017 as more people bought low-ticket items. Until December 2013, INR 18,130 crore worth of card transactions had taken place.

The above statistical figures are considering the impact on the industries up till three-four months of demonetization. Hoping things turn in favour in future!!!!
* Source of the statistical figures Economic Times

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