Post Demonetisation: What to expect

As we had claimed that the Nov 8 decision of currency change was no demonetisation in the strictest sense. It was also claimed, per the analysis of this humble author, that it was no step on Black Money either and further stated that the impact, if at all on Black Money, will hardly be of any significance.

With time, more and more political analysts are converging on this opinion. The data now available from various sources also indicates that there has been minimalistic recovery of black money. Most significant of the fact being total deposits already touching 11 lakh crore in banks which is almost 75% of currency in circulation(of 500s & 1000s).

So this has clearly been a PR gimmick by PM Modi and something that will pay him well in the UP elections as you can see from the approval ratings as per this study in 5 states of India including poll bound UP and Punjab.

To reiterate the fact that PM Modi could call it a strong move against Black Money and none of the opposition & media could counter it effectively speaks volumes about the inability of both. Perhaps the risk of losing their own money played well on the psych of these people.

Nevertheless this is still a welcome move from various associated points and will have short term & long term impacts. Most noted being:

  1. It will for temporary terms wreck the economy of terrorists & arm dealers that rely on fake currency. As already noted, violence has gone down visibly and further many Naxalites have surrendered.
  2. From the approval ratings and studies, it is clear that Modi has received good support from people who have mostly ignored the short term inconveniences. People of Bihar & UP, anyway were expected not to be too much rattled by the ban of 500 notes and indeed that has been the case. Also reiterated from the fact that the people of Punjab have been slightly less accommodating of this. Punjab being more prosperous state was expected to behave in that manner. Thus this has been a populist move & Modi did surely gain from it.
  3. Push for digital: Although, I do not like the reasons & motivations behind this push for digital and believe that it should have been done in much more constructive manner after right building infrastructure. But the fact remains that this will be a big push towards digital economy & many companies will benefit from it. Also, this will in the long run reduce huge admin & maintenance cost for the system and bring in much more transparency.
  4. Better books for banks & PSUs: This push will give big time boost to our public sector banks particularly SBI. A lot of state enterprises have been unlikely gainers of these schemes as defaulters paid in old currency notes.

But all these are minor achievements compared to the likely scenario that can play out from now. The anticipation of which has given me goosebumps and can unleash the potential of Indian economy. This is what can happen.

Chunks of money most people earned through legitimate lawful means that was virtually out of circulation as many chose not to deposit in banks has come back in circulation. This has created big reserves in the respective banks and with RBI. With such high reserves, RBI is in a definite position to cut down interest rates drastically, even to the extent of 300–400 bps.

This was indicated when SBI brought down FD rates in last few weeks to as low as 3.75%. While many middle class people particularly the service class may not like to earn low on their money in banks and from savings like FDs, NSC, etc. But the reduced interest rates can be big boon for many businessmen.

With low interest rates on loans too, they can finance their business with less strain on cash flow. With so much reserves with the banks, the banks will be compelled to push their loan books which means loans will be much accessible for common man. With this, many can plan to start and grow their business and save a lot of business costs.

This will not only help many businesses in growth but with reduced costs also help them survive the onslaught of foreign funded Indian e-commerce companies & many MNCs particularly helping our small traders & businessman fight the likes of Walmart & Amazon. It can also help our exports and help counter the Chinese products in the market.

High worth individuals & upper middle class would also, due to lower deposit rates, be compelled to look for other avenues of investments. Thus anticipate a lot of fund flow towards equity markets and mutual funds. This will be a great news for startups as many more early and late stage VC & PE funds might come up.

The scenario if it plays out as above, can have a combined effect of lower commodity prices and higher economic growth in the medium run of next 1–2 years. Coupled with high agri output and potentially a good winter crop and we might see India touching again 10% growth figures.

The year 2017 will indeed be an inflection point of Indian economy and the economy, in all likelihood, might just shoot up North from here.