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Impact Of Demonetisation On Various Sectors – And What Can Be Done

Impact Of Demonetisation On Various Sectors – And What Can Be Done

8 November, 2016, shall be marked as the day when the largest democracy in the world declared 86% of its currency base as dead. INR 500 and 1000 notes were declared useless. By this sole move, the Govt has intended to handle few most gruesome issues. The issues being parallel economy (the black market in common parlance), fake currency notes circulation and terror funding. However, the aftermath of this move seemed to have divided in the country into parts. While there is no doubt that the intent of the Govt is true to its core, various gaping loopholes in the implementation of this scheme cannot be ignored.

The impact of this move will be felt across sectors with differing intensities and across varied time zones.

Impact On Unbanked/Inadequately Banked Villages

These are times when even the most blessed of the metros are facing cash crunch in their bank balances. What would be the condition of the rural areas in the most interior of the country? Every bank branch in rural areas caters to more than double the number of people in an urban and metropolitan centre. According to a December 2015 Reserve Bank of India survey, each rural and semi-urban bank branch serves 12,863 people compared with an urban and metropolitan branch which serves just 5,351 people.

Many of these branches open just for a day or two in a week. ATMs again are most concentrated in the urban areas. Delhi, for instance, has 9,070 ATMs, more than Rajasthan, the largest state in terms of size. (Source: Media Report).

This is one of the primary reasons why cash dominates small businesses in these areas. Demonetisation in India hasbrought these sections to a standstill. Leaving aside the farmers, most small scale businesses here are managed by just one person. The sector appreciates the need to move to a cashless economy.

However, like every change, it needs time to settle in. It simply cannot move to Paytm in a week or so. Some things cannot be pushed to the extent that the system chokes and the outcome is distorted.

Impact on Seasonal Workers/Daily Workers

Seasonal/Daily workers will be among the worst hits of the demonetisation move. Mostly daily workers receive their wages on the basis of work they did per day. Cash crunch is very likely to result in delay or withholding of their payments. Apart from them, a large section of rural population depends upon the sale of their produce like vegetables, milk, eggs, etc which are perishable. There will be severe impact on these producers whose daily bread & butter depend upon their daily sale. Most of these people do not have sufficient savings to sustain their daily lives.

Impact On Farmers

Most of the relief that has been provided to farmers by the Govt are applicable for farmers having a KCC/Agricultural loan account. Small farmers who have no KCC/Agricultural Loan Account cannot avail the exemptions provided by the Govt to the farmers.

They will be largely affected as they do not have the facilities of withdrawing INR 25,000 in cash. Generally small farmers do not prefer keeping lump sum deposits in bank accounts. This is partially due to low income and partially due to lack of awareness.

Impact on Mandi

A related impact has been observed in the vegetable market in India. Trade has been hit hard at the largest vegetable market in North India – the Chandigarh vegetable market as per Times Now Report.

Drivers who have come from far off places like Indore and Nasik say it takes 2 to 3 days for unloading to happen since there is no money in the market to do transactions. They say they are not able to sell perishable produce like vegetables and fruits.

People and traders here make transactions with cash are suffering due to the demonetisation move initiated by the Government of India.

Traders who bring vegetables in vehicles complain that sales have dried up as cash has dried up. They also say they do not have money even to go back to their homes.

Impact On Real Estate

Real estate is expected to be one of the most affected sectors. The number of buyers are expected to come down and consequently low demand will bring about lower prices in the short term. However, it will subsequently help in improving the sector’s prospects. Unorganised builders will be most affected and the sector will drag down cement and ceramic sectors also along with it.

Another view point is that a majority of purchase transactions in this sector are backed by loan financing. Hence, it is unlikely that this sector would be much affected. Secondary market of this sector is supposedly driven by a large cash component. Hence, in short term, this particular sector may suffer. Consequently, demand for residential real estate in the primary market may be improved.

Impact On Dabba Trading (Bucketing):

Demonetisation is likely to kill Dabba Trading. Trades done outside Satta Bazaar & Illegal Betting market may die a natural death as currency gets a new face.  Demonetisation was a jolt for Dabba traders, who were thriving in equity markets for many years now.

Impact On Bond Markets

Indian banks witnessed over INR 11 Lakh Cr entering into the system till 30 November after the demonetisation exercise kicked off on 8 November, as per a CNBC report. This increase in deposits will create more demand for government bonds and other high-rated bonds. This will lead to lower bond yields especially in the shorter end of the curve. This in addition to the reduction of scope for open market transactions.

Cross Sector Credit Impact

Linked sectors like real estate, cement, steel is likely to run negative credit. Consequently, daily wage employment and job contracts will be impacted adversely. The construction sector is one of the biggest employers of such seasonal workers. The key segments of the economy where cash transactions play a vital role are real estate, gold and the informal sectors, which may face near term contraction. However, this situation is likely to get neutralised in the medium to long term.

Impact On Online Transactions & Payment Wallet

Online transactions and payment wallets are seeing a surge already. Paytm, one of the largest payment wallets in India today said that it has seen 35 million transactions for mobile and DTH recharges on its platform post the government’s move to scrap INR 500 a 1,000 notes. Apart from this, 20,000 small businesses in Hyderabad alone have adopted Paytm.

This has by far been the most positive impact, eventually leading to the strengthening of such systems.

Impact On Pension Holders

A large section of the Indian population is constituted of significant number of pension holders. A large section of these pension holders are above 80 years of age. Standing in long queues for prolonged hours is a sign of potential casualties. Further, the withdrawal limit for such sector is also restricted to current limit. So, for withdrawing the entire pension, most of these persons have to go on multiple trips to banks.

Impact On Health sector

As of now, private hospitals are not under any mandate to accept old notes. As a result, people are facing too much of trouble dealing with them. Reports have been made that they are blatantly refusing treatment. While we do not vouch for the accuracy of the reports, we cannot, however, disagree that the chances of the same are very much present.

Impact On High-End Retail & White Goods

It is expected that the high-end fashion and luxury items market may see a slump in near future. Sale of White Goods like TV, Refrigerator & Washing Machine could slump as well as a good portion of the market is driven by cash. A marginal impact will be there in food and grocery sector since these are non-discretionary in nature.

Impact On Private Educational Institutions

Huge amounts of donations ranging from 50-60% of tuition fees are taken by private educational institutions. This entire amount is usually transacted in cash. Hence, it is expected that these institutions will face the brunt.

Impact On Political Party Election Funding

It is a known fact that political parties are major movers of black money transactions. The sources of most of such funds are never disclosed. The majority of this funding is in cash which is 40% to 50%, and when it comes to Regional Parties it goes up to 50% to 60%. (Source: Media Reports). An assembly seat candidate spent on an average Rs. 4-5 Crores on Campaigning that is likely to go down drastically. This move will surely desiccate most of the parties of their resources.

Impact On Household Sector

It is a common practice among Indian housewives to be setting aside petty amount of cash from the total sum given to run the household. This little amount, concealed from everyone, usually grows as time passes and is used in the time of needs. The unprecedented move of scrapping the currency notes was no less than an assault on these personal savings.
The monetary treasure stashed away in secret places have now been unveiled by the housewives as it is of no worth unless exchanged. However, relief has been given to housewives with respect to small amount of deposits up to INR 1.5 Lakhs-INR 2 lakhs.

In all, the key segments of the economy where cash transactions play a vital role are likely to get impacted in short term. A sudden demonetisation will adversely impact these segments of the economy and it will witness immediate contraction, though this impact will neutralise over time.

What Can Be Done

Special relief measures like mobile ATMs should be made more widespread to reach rural areas: We have seen this impressive concept of mobile ATMs by the various banks in collaboration with cab aggregators like Ola. This is indeed an appreciable move considering the stress the current banking system is going through. However, the reach of these mobile ATMs is most concentrated in metros. Special measures can be taken for extending these to the rural areas where even ATMs are not present.

Some relief have to be provided to pension holders: For example, special days in a week can be marked exclusively for pension holders. The withdrawal limit can be relaxed up to the amount of their respective pensions. Banks can be notified to provide special infrastructural support specifically for this purpose.

Relief to Health Sector: This might be a difficult situation to handle. Legally, there is no way by which private hospitals can be compelled to accept old notes. However, the same might be possible through alternative means like providing incentives, exemptionsetc. However, this might open the avenues of black money circulation in a number of ways. Hence, this remains a tricky situation till now.

Employers should take more and more steps to help employees in smoothly transitioning from old to new currency: Some big employers have come up with helpful innovative solutions to help their employees swim through this period. For example, Flipkart, based in Bengaluru has tied up with a bank to set up desks at their office premises where old notes can be exchanged for the new ones, in accordance with RBI guidelines. This facility has been really useful and more than 60% of the employees have benefitted from this.

Godrej Group has also taken up similar initiatives in Mumbai. It has partnered with ICICI Bank to set up a currency exchange desk at its headquarters in Mumbai. All the employees could swap old notes with valid official identity documents. They also upgraded all the ATMs in the premises making them fully functional to dispense new notes. These kind of public private collaboration is highly appreciable and is bound to help general public in their plight.

The Govt has already taken some steps to help ease the problems faced by the citizens. Some of those are mentioned below:

  1. Toll tax collection on National Highways was ceased till November 14, 2016, which was later extended to December 2.
  2. All ATM charges have been waived off till December 30.
  3. Daily ATM withdrawal limit was hiked.
  4. Parking Charges at airports had been waived till November 21.
  5. Relief had been provided to farmers including permission to purchase seeds with old notes, extension of deadline for payment of crop insurance scheme.
  6. A special task force has been set up under the chairmanship of RBI deputy governor S S Mundra, to make sure ATMs across the country are ready to dispense higher denomination notes in the shortest time.
  7. Government Group-C employees received Rs 10,000 cash as an advance of their salary for the month of November.

To Conclude

India being the largest democracy in the world is bound to face some problems in one way or the other. It is simply not possible to ensure 100% smooth compliance for any scheme. However, as a result of this scheme, there is a sudden short term decline in money supply and with bank deposits. These, coupled with regressive impact on real estate and other consumption sectors is expected to lead to a reduction of GDP growth.

However, this is mostly a temporary and virtual shortfall and demand is expected to get deferred and replenished in the system once cash situation normalises. In all, if the liquidity problem is not solved at the reasonable earliest, i.e. by January at the least, demonetisation will have negative impact on the GDP.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.