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Financial News: Is It Time To Look Beyond Demonetization?

Is It Time To Look Beyond Demonetization?

02/06/2017 - 00:05:00 (RTTNews)

(RTTNews) - There is no denial of the fact that the Modi government's demonetization announcement on November 8 to get rid of evils like black money, fake currency and the corruption came as a rude shock to Indian Inc. already reeling under growth pressures.

The middle class, farmers, daily laborers, self-employed or small and medium businesses were hit hard by demonetization as expected, due to sudden decline in money supply, restrictions on cash withdrawals, a lack of smaller denomination notes and the collusion of bank officials to illegally exchange old notes.

There wasn't much resistance to the original idea of demonetization, but noted economists and the opposition parties found a common ground to make statements critical of the government following the short-term cash chaos.

The black money the government was targeting couldn't be unearthed, but the Modi regime has proved to be successful in shifting the goal posts to digital payments, improved tax collection and long-term growth.

While the full impact of demonetization is not yet fully reflected in economic data, it can be said that the near-term negative impact is wearing off. Many economic indicators as well as the December-quarter earnings of some prominent companies, especially better earnings from banks, indicate that the negative impact of demonetization may have been overblown.

Key segments of the mines and mineral industries, which provide raw material for a range of manufacturing activities, posted a sharp increase in output in November-December.

Automobile manufacturers including Maruti Suzuki, Hyundai, Tata Motors, Toyota and Nissan posted robust passenger vehicle sales in January, suggesting that the market is reviving on the back of new launches, hefty discounts and falling interest rates.

According to preliminary reports received from the States, the total area sown under Rabi crops across India crossed 645.12 lakh hectares till February 3 this year as compared to 610.44 lakh hectare at the same time in 2016.

India's core sector output, comprising nearly 38 percent of the weight of items included in the Index of Industrial Production (IIP), expanded at a faster pace of 5.6 percent in December 2016 on the back of healthy output recorded by refinery products and steel.

Survey figures from IHS Markit showed that the downturn in India's private sector activity softened in January, as manufacturing orders gained at the start of the year and business confidence improved on hopes that market conditions will soon normalize.

Income taxes rose post demonetization because of increased disclosures. Payments to local bodies and electricity distribution utilities increased because demonetized notes remained legal tender for tax payments and clearance of arrears.

Despite volatility in December, strong inflows in equity mutual funds schemes have helped the sector end 2016 on a positive note. Amid Trump uncertainty and Brexit concerns, FII money is also slowly coming back to Indian markets.

Digital transactions among new users increased sharply since the demonetization, giving a further impetus to digital transactions modules such as Aadhaar Pay and Unified Payment Interface (UPI).

While presenting the Union Budget for the 2017-18 in the Parliament last week, Finance Minister Arun Jaitley said that a mission would be set up with a target of over 2,500 crore digital transactions for 2017-18 through UPI, USSD, Aadhaar Pay, IMPS and debit cards.

The Budget sought to put more money in the hands of the people through income tax breaks in the low income bracket amid hopes that the move will boost spending and revive growth.

Also, it is expected that tax collections will increase as the Income Tax Department gets down to scrutinize cash deposits made in banks post demonetization.

The real-estate sector, long considered a black money safe haven, took a big hit from demonetization, but developers are seeing some signs of confidence emerge on the back of falling interest rates and a series of policy directives unveiled in the Union Budget 2017-18.

With banks flush with funds and retail inflation hovering near a three-year low, bank lending rates are coming down. Most economists expect the Reserve Bank of India (RBI) to cut rates by 25 basis points to support growth when it reviews its monetary policy on February 8. This will further help keep interest rates on the softer side in the medium term.

Japanese financial services major Nomura expects a V-shaped recovery for India from second half 2017 due to the release of pent-up demand after remonetization, wealth redistribution and lower lending rates.

In Jaitley's words, "negative effects of demonetization are not expected to spill over to next year." The surplus cash available to banks is expected to increase liquidity and benefit all sections of society.

The government believes that the demonetization coupled with GST will ensure much larger revenues for states and the central government in the days to come and expand the size as far as the formal economy is concerned.

The state poll results won't come in until March 11, but if the BJP-led coalition wins U.P., it will boost Prime Minister Narendra Modi's brand image.

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