The Centre’s demonetisation move has hurt private consumption and impacted sectors such as real estate, automobiles and FMCG, which in turn has altered the economy’s recovery path in the short-term, economists said.
But it could yield some benefits in the medium to long-term, provided follow-up measures are taken and there’s no return to an era of inspectors and tax terrorism, according to economists.
“One big reason for the slowdown post-demonetisation is that it came in at a time when the spending cycles should have started, which have now slowed down on account of the shortage of currency, which has affected quite a few industries especially consumer goods, automobiles, real estate, FMCG goods, and textiles,” Madan Sabnavis, chief economist at Care Ratings told The Hindu .
“Several sectors that rely on household consumption have gotten affected by demonetisation so therefore there will be a push-back on the overall growth of industry.”
Mr. Sabnavis added that even spending by the farming community, which was expected to pick up due to the higher kharif output and the stronger monsoon, has gotten squeezed due to despair sales taking place because of the unavailability of cash and the fact that all mandi transactions are carried out in cash.
Demand hit
“The sector-specific immediate effects of demonetisation have been mostly negative,” Rajiv Kumar, Senior Fellow at the Centre for Policy Research said. “Demand has taken a hit, whether it is in automobiles, motorcycles, real estate, or construction. Except, of course, as the Finance Minister pointed out on Thursday, unexpectedly, the airlines have shown improvement.”
In the run-up to the demonetisation announcement on November 8, private sector investment was on the cusp of a recovery on the back of recovering household demand, easing inflation, and the boost to agriculture due to the stronger monsoon. This momentum has since been lost, and will likely begin to return only in the next financial year.
“It looked like consumer spending would continue to improve in October and November and so private investment could pick up,” Mr. Sabnavis said. “But that is something that has gotten thwarted.”
“Private investment prior to demonetisation was subdued, but we were on the precipice of seeing something happening,” Mr. Sabnavis added.
“A major reason investment is not taking place is because we have surplus capacity. We have surplus capacity because there is low demand for products. So if demand picks up then capacity utilisation can improve and that’s when you go in for fresh investment.”
Message against graft
Mr. Kumar, however, believed that demonetisation will have medium-to-long term benefits for the economy as an increasing share of economic activity gets formalised, not to mention the message such a policy move will send against corruption and black-money hoarders.
“If this move has been successful in capturing a part of the informal, black economy, which is estimated to be 40 per cent of GDP, those numbers will now be reflected in the formal GDP numbers, so that will likely lead to an increase in the growth numbers,” Mr. Kumar said. “So, the effect could be an uptick in the GDP numbers in the third or fourth quarter.”
“However, its success will be dependent on the follow-up measures which have to be persistent and yet not heavy-handed, so that we don’t need an emergence of ‘inspector raj’ or tax terrorism in the country,” Mr. Kumar added.
