Skip to main content

Demonetization: India's economic growth unlikely to improve till second half of 2018, predicts Motilal Oswal

People waiting to exchange hard-earned income in Ahmedabad
By Rajiv Shah
Motilal Oswal, one of India’s topmost financial services firms, has predicted that the economic growth of the economy is likely to slow down in the second half of 2017, and is unlikely to improve in the next one year because of demonetization of Rs 500 and Rs 1000 notes. In a sector update, it says, “Overall, while economic growth in the second half of 2017 could be lower than expected, fundamentals of the economy should improve from the second half of 2018.”
Noting that on two earlier times when demonetization was announced – in 1946, just before Independence, and 1978 – it had little impact, as the notes that were withdrawn, of Rs 1,000 and Rs 10,000 (both in 1946 and 1978) and of Rs 5,000 (in 1978) were of high-value and “rarely held by the common public.”
Thus, in 1978, the macroeconomic impact was “negligible”, the firm recalls. “Real GDP growth was 7.7% in financial year 1978 and 7.5% in financial year 1979”, while the “industrial sector grew ~6% and 11% in these two years.”
As for the current demonetization of Rs 500 and Rs 1,000 notes, the firm says, they account for over 86% (or Rs 15 trillion) of the total currency in circulation (over Rs 17 trillion). Unlike in 1946 or 1978, these are held by almost every Indian for day-to-day purchases.”
“The weekly household grocery bill in a tier-II city could easily be INR500”, it says, adding, “Given the ubiquity of the demonetized notes, this time, the impact could be significant.”
Therefore, the firm says, “For a common household, virtually everything from grocery to maid services is paid for in cash. According to some estimates, almost 80% of the economy still runs on cash. The decision will, therefore, leads to some suffering for all in the next few weeks.”
It adds, “Not only Indian citizens, but foreigners (traveling in India) too will face difficulty – tourism might be adversely affected.”
At GPO Ahmedabad: To exchange "old" notes
“Our interactions with the management of non-banking financial companies (NBFCs)/ Banks and people in the value chain suggest that the loans against property and construction finance segments are more vulnerable to the demonetization Rs 500/1,000 notes”, the firm points out.
“In the microfinance (100% cash), and gold and vehicle finance (partially in cash) segments, collections and disbursements will be impacted”, it says, adding, “NBFCs and banks are contemplating suitable representations to the RBI.”
“For banks, near-term administrative hassles and resultant loss of management bandwidth would impact near-term asset growth”, the firm says, adding, “Reserve Bank of India (RBI) decision on allowing NBFCs to accept old denomination notes and normalization of liquidity in the market with circulation of new denomination notes are the key things to watch out for in the near term.”
“As many NBFCs, especially those in rural and semi-urban geographies, deal in cash, there could be temporary issues with respect to disbursements and collections”, the firm says, adding, “Growth could slow down and there could be asset quality problems in the shorter term.”
It further says, “Cash collections could get delayed. NBFCs whose collections come from post-dated cheques (PDC)/ electronic cash systems (ECS) would not be impacted much.”
In case of banks, the firm says, “administrative hassles are likely to take maximum bandwidth, impacting asset growth in the near term. Some risk in loan against property (LAP) and vehicle finance segments NBFCs, housing finance companies (HFCs) and Banks dealing in loans against property (LAP) could see some volatility with respect to collections, as most of their borrowers are small traders who do a significant portion of their business in cash.”
“This is also true for vehicle finance players in semi-urban and rural markets, where cash is the primary source of repayments. This could pose temporary asset quality issues”, the firm predicts, adding, “However, disbursements/ collections by cheque/ electronic transfer would be unaffected.”
“Resumption of business as usual would depend on how quickly and effectively the new currency comes into circulation, as liquidity is key for most borrowers”, the firm says, adding, “Most small traders deal in cash on a day-to-day basis. We expect some uncertainty over the medium term. We also await clarity from RBI on developments of the same.”
“On the positive front”, the finance firm notes, the step would “encourage electronic transactions”, adding, “Over time, the tax base should widen, boosting tax collection”, though noting, it would “dampen purchase of high-ticket items.”

Comments

Megha said…
Thanks for sharing informative post. Keep Posting.

Share Market in India

Sheela said…
Great Stuff
rakesh said…
amazing content, thanks for sharing this informative article

online stock broker

TRENDING

Importance of Bangladesh for India amidst 'growing might' of China in South Asia

By Samara Ashrat*  The basic key factor behind the geopolitical importance of Bangladesh is its geographical location. The country shares land borders with Myanmar and India. Due to its geographical position, Bangladesh is a natural link between South Asia and Southeast Asia.  The country is also a vital geopolitical ally to India, in that it has the potential to facilitate greater integration between Northeast India and Mainland India. Not only that, due to its open access to the Bay of Bengal, Bangladesh has become significant to both China and the US.

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

'BBC film shows only tip of iceberg': Sanjiv Bhatt's daughter speaks at top US press club

By Our Representative   The United States' premier journalists' organisation, the National Press Club (NPC), has come down heavily on Prime Minister Narendra Modi for recent "attacks on journalists in India." Speaking at the screening of an episode of the BBC documentary “India: The Modi Question,” banned in India, in the club premises, NPC President Eileen O’Reilly said, “Since Modi came to power we have watched with frustration and disappointment as his regime has suppressed the rights of its citizens to a free and independent news media."

Chinese pressure? Left stateless, Rohingya crisis result of Myanmar citizenship law

By Dr Shakuntala Bhabani*  A 22-member team of Myanmar immigration officials visited Rohingya refugee camps in Cox's Bazar to verify more than 400 Rohingya refugees as part of a pilot repatriation project. Does it hold out any hope for the forcibly displaced people to return to their ancestral homes in the Rakhine state of Myanmar? Only time will tell.

China ties up with India, Bangladesh to repatriate Rohingyas; Myanmar unwilling

By Harunur Rasid*  We now have a new hope, thanks to news reports that were published in the Bangladeshi dailies recently. Myanmar has suddenly taken initiatives to repatriate Rohingyas. As part of this initiative, diplomats from eight countries posted in Yangon were flown to Rakhine last week. Among them were diplomats from Bangladesh, India and China.

Natural farming: Hamirpur leads the way to 'huge improvement' in nutrition, livelihood

By Bharat Dogra*  Santosh is a dedicated farmer who along with his wife Chunni Devi worked very hard in recent months to convert a small patch of unproductive land into a lush green, multi-layer vegetable garden. This has ensured year-round supply of organically grown vegetables to his family as well as fetched several thousand rupees in cash sales.

Over-stressed? As Naveen Patnaik turns frail, Odisha 'moves closer' to leadership crisis

By Sudhansu R Das  Not a single leader in Odisha is visible in the horizon who can replace Chief Minister Naveen Patnaik. He has ruled Odisha for nearly two and half decades. His father, Biju Patnaik, had built Odisha; he was a daring pilot who saved the life of Indonesia’s Prime Minister Sjahrir and President Sukarno when the Dutch army blocked their exit.

Hillary Clinton, Al Gore, Ban Ki-moon, others ask Bangladesh PM to 'protect' Yunus

Counterview Desk  A campaign has been launched to support Bangladesh-based economist, micro-finance guru and Nobel laureate Muhammad Yunus, seeking signatures from citizens across the globe in order to “protect” his work, life and safety.

Electricity sharing opens up new window for India’s eastern neighbourhood engagement

By Sufian Asif* Today, challenges like climate change, pandemics, energy reliance, economic crisis, and many more are concerning us. No nation can overcome these obstacles without the assistance and collaboration of other nations. Most importantly, many of these problems have international repercussions. South Asia is facing much more difficulty when compared to other regions. In South Asia, we have some regional organizations, but they are ineffective.