Demonetization

IMF, in its global world outlook, forecasted Indias growth to be 7.8%. However,
with the current slew of events unfolding, RBI has revised it to 7.1%. It was a
bold, but uncalculated step on the part of PM to demonetize the denominations
of 500 and 1000, which formed about 86% of currency in circulation. Although,
time was given to exchange these notes (within prescribed limits which kept on
being revised/reduced to tackle the demand for new notes).
As a result, Indian economy, where about 90% transactions take place in cash,
were affected. Construction, Infrastructure, Unorganized retail, logistics,
restaurants, Jewellery, were the sectors, which were affected the most in
starting days, because these sectors have much of their transactions taking
place in cash and in receivables. This resulted in halting of construction
activities, real estate transactions, retail business to a great extent. The
announcement came at a time, when farmers were ready to sow Rabi crops and
with their currency being illegalized, it has taken a toll on farming sector as well.
And rural consumption, which was expected to be on high side, owing to good
monsoon this year, couldnt take the much-needed plunge. The effects of cash
crunch can still be felt after more than a month, when tea plantation owners are
unable to pay the workers, with no bank accounts and digital literacy. The
industrial sector, which was already suffering from weak global demands took a
further hit with IIP declining by 1.9%. With private consumption taking a dip and
huge inflow of funds in banks, the inflation (WPI) has declined, giving an
indication of further rate cut, which was not realized by RBI. The situations are
going to be further worsened by cut in global oil productions, causing a price
rise and Fed rate hike, resulting in disinvestment by FIIs. However, Indias chief
economic advisor Arvind Subramanian says that India, with its strong forex base
of $360bn is well cushioned for the fed hike. However, the effect of
demonetization and oil rate hike will be evident, at least for upcoming 3-4
quarters. Sectors like FMCG are also showing a decline in their advance tax
payments for 3rd quarter, clearly indicating a decline in propensity to consume.
With investors backing out of market, stock market has declined, rupee has
weakened. Sectors like automobiles, two-wheelers, FMCG, real estate are
showing huge decline in sales. Combining these adverse effects, GDP of India
may contract by 0.5%
The aim behind this overambitious change was declared to curb black money,
which is estimated to be 20% of the GDP and is mostly held in big
denominations. Out of 15lakh crore rupees in high denominations, 12.44lakh
crores had been deposited by 15-16 th Dec and this count is going to go up at the
end of deadline, which poses a question, where exactly is black money. The
government had expected a big chunk of money not to be reported, which
would have resulted in reducing of liabilities of banks, which could have been

used to finance the budget deficit, tackle NPAs or other development purpose.
But that dream seems far from realization and now, the focus of the move has
been shifted from black money to cash less economy. Although, cashless
economy, if achieved even up to a certain extent would be able to curb
unreported transactions, track money, reduce the chance of counterfeit
currency, increase financial inclusion, credit access and reduced cost of
managing paper money. But going to this extent, just to achieve cashless
economy in a country with more than half of population without access to
internet is a highly miscalculated move.