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When will we slay demons of demonetisation?

ECONOMISTS

Mamata Banerjee thinks the loss from the demonetisation can never be "rectified"
Arun Jaitley believes the adverse effects of the demonetisation will last only "one or two quarters"

Dec. 31: How long will things take to normalise after demonetisation?

The political class is divided on the subject, with the Bengal chief minister and the Union finance minister standing on opposite sides.

"It's a lost case," the Bengal chief minister had said on the penultimate day of 2016. "The economy lost around three to four lakh crore rupees because of the demonetisation. This cannot be rectified."

Jaitley had aired a different view two days earlier. "I think one is clear, there could have been some adverse impact for a quarter or so. It doesn't appear to be as adverse as it was being predicted," he said.

Away from the rough and tumble of electoral politics, some economists too have been trying to find an answer to the question.

"No one can give a precise estimate of how long it'll take (for normality to return)," said Pranab Bardhan, professor emeritus of economics at the University of California, Berkeley.

"I suppose the bank queues will shorten in the next two or three months, but the enormous damage to informal sector operations and the linked operations in the formal sector may take at least a year to normalise."

The impact on the informal sector - which Bardhan describes as production and trade in agriculture, small business and household enterprises -- and its fallout on the economy has been the major concern among economists, many of whom are busy conducting surveys.

More than 90 per cent of India's labour force is engaged in the informal sector, often without written contracts, regular employment or social security. Wage payments are made substantially in cash across the economy, as are transactions between the formal and informal sectors.

"We don't know how the informal sector will adapt, or has adapted, to this (demonetisation); how much that sector has gone 'informally cashless' and has managed to facilitate transactions anyway," said Debraj Ray, professor of economics at New York University.

Abhijit Binayak Banerjee, professor of economics at the Massachusetts Institute of Technology, said several of his peers, including development economist Jean Dreze, were trying to assess the note recall's impact on the informal sector through surveys.

"I was in a vegetable market in Delhi a few days ago and learnt from the people there about a 40 per cent decline in sales," Banerjee said. "Several small surveys conducted by others are also talking about a 40 per cent decline in transactions. If this trend continues, I will not be surprised if the GDP growth shrinks by two to three per cent in six months."

Banerjee went on to question the government's numbers.

A dip in GDP growth, which seems a certainty because of a lower demand, will hurt an economy that has grown at rates of more than 7 per cent in the recent past. Lower growth numbers cannot be good news for the government as they have a direct bearing on revenues.

But Anil Bokil, who founded the Pune-based think tank ArthaKranti Pratishthan 12 years ago and has been advocating the note recall for years, said the concerns aired by economists were an attempt to "create confusion".

"There will not be much impact on the GDP (whose growth) will be around seven per cent. What has been done is a corrective action. Within 8 to 10 months, the desired results will start flowing in," Bokil said.

Economist Surjit Bhalla, who has batted for demonetisation, too argued that the concerns about a longer-term impact on the economy were unfounded.

"By the end of January, things will be normal in terms of cash.... And the things that are functions of cash will be okay by February," he said.

Bokil explained how higher growth would happen: he predicted that the demand in the economy would explode with the impending softening of interest rates.

"FDI and domestic investment will pick up as the demonetisation will result in transparency in the economy and reduction in corruption and crime.... The investment climate in India is going to be far better than that in China," he said.

Ray, the New York University professor, said the note recall could log one big achievement: it could make people wary of accepting cash for large transactions lest the government springs such a recall again.

"If there is a real distrust of cash, that could be a positive for bringing more transactions under the legal umbrella," he said.

"But there is a larger cost: (investors might wonder) if he (Modi) can dismantle the currency, what is he going to dismantle next? What new 'de-mons' do I have to look out for when making a long-term investment in India?"

If investors have such concerns, it would be difficult for the economy to hit a higher trajectory, let alone maintain the growth path.

Modi and his team have a difficult task in the new year: restoring the people's confidence in the government and its policies.


INDIA INC

Our Bureau

Dec. 31: India Inc has been going through absolute agony since Prime Minister Narendra Modi's shock announcement of demonetisation on November 8 but the applause over his "masterstroke" hasn't died out.

Shoguns of business believe that the surgical strike against the plumed serpent that represents black money, which has coiled itself around the legitimate economy over ages, was long overdue.

Industry has suffered a severe downturn in its operations, with anecdotal evidence suggesting a slump in business ranging from 30 per cent to as much as 70 per cent in the past seven weeks.

The meltdown has been the sharpest in areas like fast-moving consumer goods (FMCG), automobiles, mobile phones, personal computers, real estate, consumer products and jewellery.

But some sectors are starting to ride their way out of the rut.

"At this point of time, it is difficult to pinpoint when the pick-up in consumption will happen. Certain sectors are already seeing an uptick in December and the gradual pickup in consumption in other sectors should happen in the first quarter of the next calendar year," said Keki M. Mistry, vice-chairman and chief executive officer of mortgage financier HDFC.

Not everyone is as optimistic.

"Demonetisation has had a short-term impact on sales for nearly every player in the automobile industry. It has resulted in reduced foot traffic in dealerships and complicated purchasing decisions of customers," said Arun Malhotra, managing director of Nissan Motor India Pvt Ltd.

Carmakers like Nissan expect the demonetisation-induced crimp in business to drag on into the first quarter of 2017 (January-March) but expect recovery in the second and third quarters.

"Nevertheless, we view it (demonetisation) as a positive move that will benefit the economy in the long run," Malhotra added.

To meet the challenges in terms of cash availability, Nissan and Datsun dealers are promoting cashless payment options such as use of cheques, debit/credit cards, 100 per cent financing and some cashless services to help ensure a great customer experience, Malhotra said.

The sharp shortage of cash has massively impacted discretionary spending in the economy with the FMCG companies having to brace for extremely negative headwinds.

Sunil Kataria, who heads India and SAARC business at Godrej Consumer Products, said that after 86 per cent of the country's currency stash went out of circulation with one fell stroke, consumers started to focus on basic necessities and essential commodities in preference to discretionary products.

According to Kataria, the FMCG distribution structure in India is layered with around 45-50 per cent of the sector's business being done through a multi-layered indirect wholesale channel, through which most of Indian FMCGs reach around 9 million outlets. A large swathe of this wholesale business transacts in cash and immediately collapsed with the announcement of demonetisation.

Kataria, however, expressed the hope that consumption of basic essential items, food, staples and products like soaps would bounce back sooner though discretionary items would face a stormy future well into next year.

"The wholesale distribution channel will definitely be hit by a medium-term drop. But I guess some stability, some equilibrium and some new business model will be found over a period of time," he observed.

Kataria reckons that the big event - demonetisation - will change the trajectory of modern trade in India.

"Modern trade, which has been in India for more than two decades, has struggled at around 7-8 per cent of the salience in FMCG business.... I would not be surprised if over the next 12 to 18 months, modern trade moves into a 13-14 per cent kind of salience and sort of stabilises there. Even e-commerce now is likely to take a leap in India in terms of FMCG business. So, these are the two things which will happen on the channel on the positive side," Kataria added.

Harsh Goenka, chairman of RPG Enterprises, thinks that the worst impact of demonetisation will be in the unorganised sector, which isn't represented in the markets. "People have been inconvenienced - even those who have access to debit or credit cards. We will have to endure this bumpy ride for some more time before we become a more efficient economy."

The contours of the real estate sector - which has been a magnet for cash-based dealings - will change forever, said M. Murali, managing director of Shriram Properties.

Murali believes that the unorganised segment of the real estate market and the players reputed with weak governance practices will be completely wiped out. Only the reputed developers will survive, creating a "demand high, supply less" sort of situation, more particularly in mid-market and affordable housing segment as there will be fewer players on the ground.

Homebuyers will need to realise this aspect and understand that "pricing" will become a critical factor in the current scenario. No player will give up the chance to offer the best possible price to secure business. This means that bargain hunters could make a killing. But it also means that prices will not drop precipitously either since the shakeout will leave fewer players in the market.

Buyers will have the best time in 2017. With surplus liquidity and lower cost of funds for banks, lending rates will come down, which is great for the real estate sector. Banks may further relax their margin requirement stipulations for home loans. "Home buyers will find it easy to get housing loans. Consequently, demand for housing will go up," Murali said.

Wealth managers are also reconfiguring their strategies to grab investment business.

"There are two type of themes which seem to be taking shape - one, demonetisation can lead to an opportunity where organised sector consumption-linked companies could structurally benefit and, two, a potentially weak rupee coupled with a potential expansionary US fiscal policy could actually make export plays interesting in 2017," said Rajesh Iyer, head of investment advisory services and family office at Kotak Wealth Management.

"Volatility is expected to continue and, thus, we recommend sticking to one's strategic asset allocation. The core mutual fund allocation in equities should be in large cap coupled with bottom-up based managed strategies diversified across carefully selected equity managers. In the case of debt, the core should be built around a mix of high rated and credit accrual strategies," Iyer added.

"As of now, we expect one rate cut of 25 basis points in the first quarter of 2017. However, the road could by bumpy on the way," Iyer said.


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