Market Overview India: Demonetization Effects in the New Year

Author / Editor: Kruti Bharadva, Copy Editor, Vogel Business Media India Pvt Ltd / Susanne Hertenberger

A brief look at the after effects of the currency demonetization in India: The beginning of the year is usually a time for renewal and regeneration – especially true for India and its industry, as it recovers from a major policy change.

The new Rs 2000 note
The new Rs 2000 note
(Source: Deposit Photos)

A few weeks ago the country woke up to some very important news, news which threw economists, industries, media and the general public into a frenzy never seen before – and that’s saying a lot for a country which usually runs in a frantic manner seldom understood by the rest of the world! Overnight, the government of Prime Minister Narendra Modi had put into effect a demonetization policy – which meant that all high denomination currency notes of Rs 500 and Rs 1000 were no longer acceptable as legal tender. The general public had approximately 50 days to turn in the existing notes and exchange them for the new currency notes and/or deposit all cash into bank accounts. Withdrawal limits from ATMs were also set up.

The reasons for this demonetization drive, according to the government, were primarily to curb the parallel ‘black’ economy and corruption, root out counterfeit currency and throw a spanner in the works of terrorism financing. Specialists flocked to commend this historic decision in the days which followed, upholding it as a bold move which would definitely push India towards the economic growth it seeks. But like all best laid plans, flaws showed up almost immediately. India is a cash hungry country, especially outside its major cities, where digital banking is unheard of. It’s also an agricultural country which relies heavily on its inflow and outflow of cash to keep running. Cash, is essentially its lifeline. To describe the effect of demonetization as chaos in the days following the announcement would be an understatement. Lines stretched for miles on end outside banks – banks which were unprepared for the herculean task set upon them.

Optimistic preview for 2017

But weeks down the line, with time to analyse and settle down, how are industry and the economy responding? Optimistically is the general consensus. With the short term troubles receding, everyone is looking forward to the long term gains which were planned for. A comprehensive report on Asia’s outlook for 2017 by HSBC has in fact predicted a growth of 7.1 per cent for India in the fiscal year 2018 – significantly ahead of other Asian countries. For the current fiscal year, ending March 2017, growth is expected to be 6.3 per cent, due to the short term cash crunch. The report further estimates that India will shrug off any lasting effects of demonetization by 2019.

Locally, the auto and automobile industry, which forms a major part of Indian manufacturing, is less joyous. Demand is down by 40 per cent according to two of the largest car manufacturers, and they have been forced to incorporate ‘no production days’ to balance out inventory. The rest of the industry seemed equally subdued towards the end of the year with the Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) – an index which measures manufacturing performance – falling to 52.3, in November down from October's 22-month high of 54.4. But looking at the timeline, this could be one of the short term results.

With major events such as The Vibrant Gujarat Global Summit, which took place in the second week of January and saw a record number of 25,578 trade MOUs signed, and IMTEX 2017 – a premier manufacturing event in Asia – with 750 national and international exhibiting companies, industry in general does seem to have put on its optimistic attire for the new year to come, with hopes that demonetization was indeed the reset the economy needed to soar to greater heights.