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The move to ban Rs 500 and 1000 notes may not curb the root cause of black money.
Even as most leading brokerages view the government’s decision to ban Rs 500 and Rs 1,000 notes as positive from a medium-term perspective, the short-term impact will be negative for most pockets in the economy.
As a result, the performance of India Inc as well as the economy is likely to be muted in the ongoing quarter, believe analysts.
“In the short run, the move can be disruptive for growth (via negative wealth effect for those losing net worth and transactional inconvenience for consumers and producers). Cash heavy sectors are likely to be disrupted most,” says Pranjul Bhandari, chief economist, India at HSBC, in a report.
There are many sectors having high proportion of cash transactions and these will be impacted even as receivables of companies in these segments will go up. Among these, real estate and jewellery sectors, though, would be the worst-hit because these are the preferred investments of Indian consumers for their black money.
Typically, the high cash component provided working capital for many builders and its absence could hurt their financials. Also, it could hurt demand emanating from customers inclined towards paying cash, and consequently force builders to lower real estate prices going forward.
“But, in the long run, due to affordable prices and low supply, this sector will experience positive demand scenario,” says Vinay Khattar, head of research at Edelweiss Securities.
Upcoming ordering as well as ongoing activities in roads, water, railways and transmission and distribution sectors, too, will be impacted as payment to labour is usually made in cash. The low number of bank accounts in remote, small villages and supply-chain disruptions could affect demand for consumer staples for a brief while, believe analysts. The demand impact of large-ticket consumer durables items such as apparels, white goods, apparel and the likes could also head south.
Likewise, purchase of fertilisers and agrochemicals; usually done via cash, too, could come down. All metal companies will be negatively impacted as a large part of trading in steel and other metals is carried on a cash basis currently.
The short-term debt servicing capacity of small borrowers could be reduced, which may impact the asset quality as well as credit growth of microfinance companies such as Bharat Financial Inclusion, Ujjivan Financial Services, Equitas, among others, believe analysts. Housing finance companies, too, could witness pressure on their credit quality as well as growth, as fall in real estate prices would impact the loan against property (LAP) business.
Even e-commerce players are likely to feel the heat in the near- to medium-term. Cash on delivery forms anywhere between 70 and 90 per cent of e-commerce players’ revenues and, hence, can impact valuations of retail e-commerce players, estimate analysts at JM Financial.
On the flipside, banks stand to gain meaningfully from implementation of demonetisation, but over a period of time. While operating costs could increase in the immediate future, there would be an increase in the low-cost current and savings accounts (CASA), which in turn will rub off favourably on the banks’ funding costs and liquidity.
Rising use of credit/debit cards, net banking and other online payment mechanisms will be another positive, as these would not only lower transaction costs but some of these could help earn some fee income as well.
Mining will be another sector to benefit from this move as the move to ban Rs 500 and Rs 1,000 notes will hurt illegal/unauthorised mining activities, aiding organised players such as Coal India, NMDC, among others, say experts.
While manufacturers of passenger cars and utility vehicles such as Maruti Suzuki, Tata Motors, among others, will not be impacted meaningfully given that most of their products (80-90 per cent) are sold on a credit basis, the smaller segment of second-hand cars will be impacted given the cash component involved in such transactions. About half the tractors and two-wheelers are sold on a cash basis and, hence, these could witness lower demand in the short term, believe analysts.
In the medium- to long-term, though, this move will provide an edge to organised players as unorganised players might not be able to bear the brunt of cash-less business. Overall, most of these issues are likely to iron out in the medium term and only aid performance of India Inc.
“This (demonetisation move) could affect the economic activity in the near term but will be more than outweighed by positive impact on improved transparency and tax compliance in the medium term,” says Chetan Ahya, Chief Asia Economist at Morgan Stanley. “We believe this move will help to reduce black money more systematically, and in the long term, improve the ease of doing business in India.”
While bringing inflation under control, it will also give the Reserve Bank of India some more room for cutting rates. “The move can be marginally positive for fiscal (as some scramble to deposit cash into banks by declaring as income and paying necessary taxes) and external accounts (by reducing the demand for cash intensive imports such as gold),” says Pranjul Bhandari, chief economist - India at HSBC.
Despite having many positives such as rising tax to GDP, higher GDP growth, lower inflation, higher financial savings, this demonetisation move may not curb the root cause of black money.
“This initiative addresses the ‘stock’ of black money but not necessarily the flow/fresh creation of black money unless some mechanism is built to track the movement of the new high-value currency notes,” wrote leading brokerage CLSA in a note to investors.
However, such a sudden and drastic step by the government might dissuade some -- if not all sections of the society -- from creating new black money reserves.
