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Demonetisation fallout: Experts warn note ban will slow down Indian economy

black money crackdown Updated: Nov 23, 2016 00:51 IST
Sunny Sen
Demonetisation

Volunteers of Delhi ‘s ruling Aam Aadmi Party shout slogans during a protest march against the demonetisation of Rs 500 and Rs 1000 notes, in New Delhi on Tuesday.(PTI)

For all its good intentions, the government’s decision to scrap high-value banknotes threatens to hobble the economy. Some experts see a contraction of economic activity in the next two months, and consensus says the GDP growth could slow by a whole percentage point in the next 12 months.

“The footfall at our dealerships is half of what it was in October,” said Pawan Kant Munjal, who runs Hero MotoCorp, the world’s largest motorcycle maker. Varun Berry, managing director of Britannia, the country’s largest biscuit maker, sees a 30% to 70% drop in sales of FMCG, which includes everyday items such as soap, detergent and toothpaste, in addition to packaged foods.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector. Nearly half the population still does not have a bank account. Less than 300 million use the internet, and therefore the overwhelming majority cannot make electronic payments.

Read: Marginal relief for wedding, banks to provide funds to co-ops

The demonetisation, arguably the biggest currency culling the world has seen, pulverised 86% of the value of notes in circulation.

Ratings agency Fitch said on Tuesday it would revise down its India growth forecasts for the fourth quarter.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted...The time spent queuing in banks is also likely to have affected general productivity... ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor’s.

An HSBC report said India’s GDP growth, which clocked 7.1% in the first quarter, could drop by up to a percentage point in the next 12 months. The National Institute of Public Finance and Policy (NIPFP) warns of a contraction and social unrest.

“In the short term, prices of essential commodities, including food items, will only go up because trucks are stranded,” says NIPFP’s R Kavita Rao.

Read: Note ban the beginning, and not the end of war on black money: PM Modi

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%.

Real estate, known to be fuelled by cash, has seen a 20% drop in sales since November 8.

Electronic commerce, where the very Indian innovation of cash-on-delivery accounted for nearly 70% of transactions, is feeling crippled. “There is some disruption, and it’s not certain if this is a two-month or six-month event,” said Ashish Gupta, MD, Credit Suisse India.

Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%. Even though chemists are allowed to take old currency notes, distributors are not.

In gems and jewellery, 80% of the purchases are in cash. “It may weaken the credit profile of industry players due to the high working capital cycles,” said Sunil Kumar Sinha, principal economist at India Ratings and Research.

(With inputs from Mahua Venkatesh, Kalyan Subramani and Himani Chandana)