Positive Negative Effect
of Currency Rupee Ban Of 500, 1000 Rupee Notes India
·
Money supply will get reduced for the
short to medium term which will have impact in terms of lower growth rate of
money supply.
·
Approximately 15 lakh crore Rupees 500
and 1000 rupee notes are in circulation and almost half of them are expected to
be unaccounted or black money which is expected to be vanished from the system.
The real figures will be known only in next 6 months. The government has
collected in excess of 2 lakh crore so far in 4 days since currency ban.
·
Currency ban’s Long term impact sector
specific than economy specific.
·
This is only transitory shock but no
medium or long term negative impact.
·
Very good move for the medium to long
term for the entire economy.
·
Businesses in the micro finance sector
like bharat finance, ujjivan finance will be affected badly for the short to
medium term. They will revive only when the new currency notes come back to
circulation in full fledged manner.
·
Real estate sector and jewellery
sector are two sectors which will be hit hard. These sectors were booming due
to black money and most black money were parked and circulated as well as
stored in investment in or through these two sectors. However the long term
impact cant be assesses right now in practical terms. In theory all sectors
are going to benefit from this move as more and more money comes into main
accounted stream and hoarding of money gets reduced in terms of cash stashes
and unproductive uses like jewellery and real estate and other such sources.
·
Companies which are in sectors like automobiles
batteries which are dominated by unorganized sector will gain on the back of business
becoming sluggish in unorganized segment.
·
Number of people filing income tax
return will increase and in turn tax collection will increase. Which in turn
increase the revenue of government and it can spend more for the growth of the
economy and welfare schemes and also reduce its fiscal and budgetary deficit
and balance of payment situation can also be helped.
·
It will take time for the stock
markets to digest this event and its consequences fully before it starts
reacting. But over the mid to long term this event will help the market rise as
the stock market has been long fortified from the circuits of unaccounted money
and it will have close to zero impact save and except sector specific and stock
specific impact on real estate and jewellery etc.
·
The most important take away is that
one doesn’t need to think that the cash economy will die. The government is
going to issue new notes in place of the old notes in different small and big
denominations. Yes, a big chunk of cash will become useless, thus slackening
the cash economy to that extent.
·
This move will bring 100 fold rise in
online or digital transaction in various segment of the economy, and thus will
increase businesses for those segments and companies giving services to such
companies.
·
All corporate businesses will benefit
who are facing competition from unorganized business in their sector.
·
Use of black money in elections will
be reduced, especially in upcoming elections in Uttar Pradesh and other 3
states.
Impact of
demonetization
Pros and cons (short
term and long term)
What is the effect of
Currency Ban/500, 1000 Rupee Note Ban On Economy/Stock Market
1. Immediate
impact: is expected to be negative all round:
a. In
the short term it will be a logistical nightmare to manage the cash replacement
in banks and smooth functioning of the banking system
b. slowdown
in consumer spending due to limited cash availability
c.
severe liquidity issues in cash based sectors like Real Estate and Jewellery
d.
GDP will decline in the next 2 quarters due to reduction in overall
spending
2. Over the next
4-5 months:Those having legitimate income will deposit it in
banks and apart from the initial hassles associated with the banking
system, they will have nothing to worry about.
However those
having unaccounted money will face several problems as follows:
a.
Those who choose to do nothing with the money, their notes will expire
worthless. Every note is a liability of the Government (RBI), and
thus notes becoming worthless will benefit the Government by extinguishing
its liability.
b.
Those who declare their unaccounted money, approx 60- 70% of the money
will go to the Govt in the form of taxes and penalties.
c.
There will be a third category who will try to launder their money, but
which will entail severe risks including penalties and prosecution.
However, the money sought to be laundered will anyway enter into circulation
and remain therein.
It
is expected that even if 50% of the around 14 lakh crores of old notes are
legitimate, the remaining 50% or around Rs 7 lakh crores of unaccounted money
will see around 60 to 80 % thereof or approx Rs 5 lakh crores coming to
the government in the form of extinguished RBI liability (point a above) and
taxes and penalties. This Rs 5 lakh crores is enough to take care of India's
entire fiscal deficit for one year or more.
3. Overall
Economic Impact:
a. GDP
growth is expected to be negative for around 6 months. However subsequent
2 years will see sharp "hockey stick" revival in growth.
b. Inflation is
expected to fall sharply with fall in Real Estate prices and transaction costs
thereof.
c. Government
Deficit will see a huge windfall in the next 2 years.
d. Currency is
expected to strengthen as inflation drops and economy gets a boost.
e. Banking
System will get a boost, as around Rs 7-8 lakh crores base money (new
legal money) will enter the system, which will further create around 3-4 times
more money due to re-circulation.
f. Real
Estate and Jewellery sectors, though battered initially will stabilize in the
next 6 months.
4. Effect on
various Asset classes:
a. Bond prices
will rise as interest rates drop.
b. Real
Estate is expected to fall by around 20 -25 % and stabilize thereafter.
c.
Effect on Gold is a bit uncertain, and may be neutral/ negative.
Lower black money will depress demand, but at the same time Gold is a hedge
against uncertainty and those still wanting to park black money may prefer to
put it into Gold instead of cash.
d. Equity is
expected to benefit the most due to three reasons. One, there will be
a gradual shift from physical assets (real estate/ Gold) to financial assets.
Two, the organised sector (corporates, expecially listed ones) will benefit due
to less cash transactions. Lastly, lower inflation and interest rates will
benefit listed corporates through lower borrowing costs, thereby
increasing their profitability and valuations.
Thus Asset
Allocation and re balancing thereof will now play an even more important
role, making proper financial planning imperative.
Lastly, the question
may arise as to whether the new Rs 2000 Rupee notes will create more black
money or not. While that is always a possibility, it should be noted that
this demonetization would have created a psychological impact especially
on large scale evaders who will definitely think twice before taking such
action.
