Demonetisation Effect’s on International Trade

Demonetisation has given short term shocks to the economy across many sectors. One of
them is the EXIM trade of India. The sceptical economists have argued that such a shock
therapy to reinvent unaccounted wealth has given a shot in the arm for India’s
exports, whereas the imports suffer reduction too, bringing joy for India’s balance of
trade. Let us look at the short term effects of the demonetisation scheme on Indian exports
and imports. We are discussing only the short term effects because the long term effects on
the economy are very dynamic and depend on multiple factors which cannot be predicted
at this nascent stage.
Demonetisation | Effect on Exports
 In the short run, the overall exports may suffer due to lower liquidity in the
market. Lower liquidity means lower purchasing capacity of the exporters. An
exporter would find it difficult to arrange the factors of production due to liquidity
crunch, leading to lower productivity and hence lower volume of exports. All this is
happening in the midst of a situation when Indian exports became competitive in the
international market due to Chinese slowdown and lower crude oil prices.
 Exports from the primary sectors of the economy such as agriculture, animal
husbandry among others would find it difficult to market and service their
production for exports in the international market despite ample steps taken by the
Government. Liquidity crunch would force them to sell at below market price in the
domestic markets funnelling them into an enigma rural distress.
 The informal middlemen such as traders at the borders who procure the finished
goods for export in the international market will find it difficult to procure such
goods due to unavailability of liquid cash (an economy that works mostly on black
money) and it would be difficult for them to honour their previous commitments,
which would further lower the trust on Indian markets.
 

 Unavailability of liquid cash in the market will bring the price of rupee into a
stable frame due to lower demand of foreign currency in the international
market. This would be a boon for Indian exports in the long run, contain inflation in
the short run and improve India’s balance of trade in value terms.
 Lower exports in the short run would enable the competitive economies like
Bangladesh, Vietnam to penetrate deep into the international markets and replace
Indian exports as a sustainable and committed mode of supply. This might lower
down trust in Indian exports.
 Micro and small industries that thrive on export business would be the worst hit
because many of them are isolated from formal banking channels and the liquidity
crunch is bound to hit them the most.
  Exporters who thrive on procuring finished goods from a least developed country
(LDC) and exporting the same at a higher price after value addition to a developing
or developed country would find it difficult to sustain their business due to
unavailability of cash in the system and thereby lowering down their ability of
procurement.
 Demonetisation | Effect on imports
 In case of imports also, they would fall down because of usual cash crunch. Currently,
the domestic economy would start hoarding cash again (i.e. in savings mode) and
the people would not be willing to spend money freely which would reduce demand
of domestic as well as international products.
 Lowering down of imports would save India of its precious foreign exchange,
hence accelerating India’s foreign exchange currency basket. This would mean
stability of rupee and possible appreciation of the currency.
 In case there is an appreciation of the domestic currency, it would make our exports
costlier and seize off the tag of price competitiveness of our exports in the
international markets, hence affecting the overall exports from India.
 Decrease in essential imports like plant and machinery would seriously affect
business expansion plans of Indian companies due to unavailability of technology
required to start and expand a business. Note – Plant and machinery is one of the
major component of various factors of production.
 Businesses in India that thrive on procurement of raw materials from outside and
production of finished goods inside India would suffer a major blow in the short run
due to unavailability of cash. Hence, this cash crunch might force them for a
temporary shutdown and lower productivity in the near term.
 Again, those exporters who import finished goods from a least developed country
(LDC) to be further exported to a developing or developed country would find it
difficult to import the goods due to unavailability of cash in the market therefore,
hurting the entire chain of value addition business.
 The losing sheen of the Indian market and declining imports by India might push few
major business conglomerations outside India because of business losses to explore
other attractive markets. This would be a big blow to ‘Make in India’ dream.
 Demonetisation | Conclusion
Economists are discussing the long term effects of the demonetisation move. While some
are in favour, some are against this scheme in context of the Indian economy.
Commentators are making future predictions without taking all the factors into
consideration. An acceleration requires the catapult to be slowed in the beginning to
realise its maximum potential later when it is fired at the right time. This whole
exercise has pulled money out of the economy from both formal and informal sectors. It all
depends how the Government plans to push this hard earned economic resources back into
the economy and at what speed. Till then, it is an exercise in futile to speculate about the
long term effects of demonetisation on the economy.