demonetisationThe buzz word is around and making news every nook and corner of the town. Let’s find out some bare facts pertaining to the ‘Demonetization’ phenomenon. Demonetization (Demo’) refers to an economy being replaced by its existing currency followed by channelization of new currency.  So it is more like invalidating the current legal tender. Generally, for ensuring smooth switch over old currencies are allowed to be converted in to the new ones. If we look for examples, European Monetary Union nations agreed to take Euro as their currency. Other countries that went for demonetization included – Philippines, Zimbabwe, Singapore and Fiji.

The ones at the pedestal of the pyramid are using currency primarily to meet their daily needs. The informal sector of the economy like daily wage earners, small traders, laborers tend to use cash frequently. Lack of liquid cash deprives them of their income. The labor cost would be curtailed in case of cash stringency.  Nearly 86% of the circulating currency consisting of Rs.500 and Rs.1000 notes was withdrawn. This withdrawal didn’t have any bulk replacement. The available denomination, immediately after withdrawal was Rs 2000. This made Rs. 2000 more as a store currency rather than as a transaction currency.

Let’s Assess The Impact On Some Of The Sectors Of Indian Economy

Real Estate: Starting with Real estate, a fall in the enquiries to the extent of 40% is witnessed. The secondary market is also stagnant, buyers and sellers are in –‘Wait and watch’ mode.

Auto: The sales at wholesale level suffered less of shock in comparison to the retail sales; however in the two-wheeler rural markets where cash is the primary mover, a sharp decline happened. Telecom: Demand for Smart phones along with the ordinary was hit. Fall in Shipments and inventory pile up signaled the same.

Agriculture: Villages adapted with the demo’ move better, the tax incentive to the tune of 20% offered by GOI further strengthened the situation. Crop planting rather increased w.r.t. previous weeks.

Metals: Construction and Building Infra where steel and other metals like aluminum, zinc etc are used will be adversely impacted, owing to a hit on the real estate sector.

Aviation: One of the world’s fastest growing markets will have a drop in the level of sales. Small town flights where cash is one of the key ingredients may experience negative growth. Falls in bookings were notified post demonetization move.

Tourism: The crest season of November-December were hit badly by the move. Shortage of cash at hotels and airports made the situation worse. Lack of acceptance of credit cards and other payment alternatives at historical sites and monuments made visitors face odds.

Consumer Spending: Organized retails fared better. Impulse and personal product purchased suffered badly. Analysts say – It may take tenure of two quarters to improve the situation.

E-Commerce: Food delivery ventures and grocery store are doing usual. GMV (Gross Merchandise Value) fell by 40% to 50%.

Now looking forward to some solutions- Low interest housing loans with a fall in the corporate tax rate to the tune of 25% may boost the sentiments. Then a surge in the public sector investments may add to the push. The budget could act as a ‘good signal’.

IACT Global IACT Global (51 Posts)

IACT is India's largest education company for working professionals having trained more than 60,000 professionals till now. IACT is also an ISO 9001 certified company (by TUV-SUD) and recipient of the prestigious Red Herring Top 100 Asia Award for 2012. IACT has collaborations with top Indian institutes & global certification bodies and offers more than 80 courses in different domains.

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