How is Demonetizing Going to Affect India Inc.?

BENGALURU: Government’s decision to ban 500 and 1,000 notes has met with mixed response from India Inc. While some analysts believe that it is good for the long run, some believe that it’s going to have a negative impact on the Indian economy in the short run. As a result, performance of India Inc. as well as the economy is likely to be sluggish in the ongoing quarter, believe analysts.

 

“In the short run, the move can be disruptive for growth. Cash heavy sectors are likely to be disrupted most,” says Pranjul Bhandari, Chief Economist, HSBC, as reported by Business Standard.

Real estate and jewelry sectors are going to be the worst hit by this measure, as they are the preferred destinations for Indians with huge amount of black money. Other sectors to be hit are railways, water, and distribution, where payment is usually made in cash. The demand impact of large-ticket consumer durables items such as apparels, white goods, and the likes could also see a downturn. Mining is another sector that’s going to be hit hard by the demonetizing move, as it will be a big blow for the ones involved in illegal mining.

The short-term debt servicing capacity of small borrowers could be reduced, which may impact the asset quality as well as credit growth of microfinance companies such as Bharat Financial Inclusion, Ujjivan Financial Services, among others, believe analysts. 

But, banks are going to gain much over a course of time. Rising use of credit/debit cards, net banking and other online payment mechanisms will be another positive. 

 While manufacturers of passenger cars and utility vehicles such as Maruti Suzuki, Tata Motors, among others, will not be impacted meaningfully given that most of their products (80-90 pct) are sold on a credit basis, the smaller segment of second-hand cars is going to feel the heat, as the transaction takes place in cash.

But, there’s also another side to the story, as it will give the Reserve Bank of India some more room for cutting rates.  Despite having many positives such as rising tax to GDP, higher GDP growth, lower inflation, higher financial savings, this move might not be enough to cut the root cause of black money, but it might act as a deterrent and dissuade certain sections of the society from creating huge reserves of black money.

Read Also:

Dell EMC, Pi Datacenters Announce Strategic Partnership

Reliance Group Invests $12 Mn In Realty Firm Square Yards