Nov 13, 2016

Positive Negative Effect of Currency Rupee Ban Of 500, 1000 Rupee Notes India

Positive Negative Effect of Currency Rupee Ban Of 500, 1000 Rupee Notes India

·         Money supply will get reduced for the short to medium term which will have impact in terms of lower growth rate of money supply.
·         Approximately 15 lakh crore Rupees 500 and 1000 rupee notes are in circulation and almost half of them are expected to be unaccounted or black money which is expected to be vanished from the system. The real figures will be known only in next 6 months. The government has collected in excess of 2 lakh crore so far in 4 days since currency ban.
·         Currency ban’s Long term impact sector specific than economy specific.
·         This is only transitory shock but no medium or long term negative impact.

·         Very good move for the medium to long term for the entire economy.
·         Businesses in the micro finance sector like bharat finance, ujjivan finance will be affected badly for the short to medium term. They will revive only when the new currency notes come back to circulation in full fledged manner.
·         Real estate sector and jewellery sector are two sectors which will be hit hard. These sectors were booming due to black money and most black money were parked and circulated as well as stored in investment in or through these two sectors. However the long term impact cant be assesses right now in practical terms. In theory all sectors are going to benefit from this move as more and more money comes into main accounted stream and hoarding of money gets reduced in terms of cash stashes and unproductive uses like jewellery and real estate and other such sources.
·         Companies which are in sectors like automobiles batteries which are dominated by unorganized sector will gain on the back of business becoming sluggish in unorganized segment.

·         Number of people filing income tax return will increase and in turn tax collection will increase. Which in turn increase the revenue of government and it can spend more for the growth of the economy and welfare schemes and also reduce its fiscal and budgetary deficit and balance of payment situation can also be helped.
·         It will take time for the stock markets to digest this event and its consequences fully before it starts reacting. But over the mid to long term this event will help the market rise as the stock market has been long fortified from the circuits of unaccounted money and it will have close to zero impact save and except sector specific and stock specific impact on real estate and jewellery etc.
·         The most important take away is that one doesn’t need to think that the cash economy will die. The government is going to issue new notes in place of the old notes in different small and big denominations. Yes, a big chunk of cash will become useless, thus slackening the cash economy to that extent.
·         This move will bring 100 fold rise in online or digital transaction in various segment of the economy, and thus will increase businesses for those segments and companies giving services to such companies.
·         All corporate businesses will benefit who are facing competition from unorganized business in their sector.
·         Use of black money in elections will be reduced, especially in upcoming elections in Uttar Pradesh and other 3 states.

Impact of demonetization
Pros and cons (short term and long term)
What is the effect of Currency Ban/500, 1000 Rupee Note Ban On Economy/Stock Market
1. Immediate impact: is expected to be negative all round:
a. In the short term it will be a logistical nightmare to manage the cash replacement in banks and smooth functioning of the banking system
b. slowdown in consumer spending due to limited cash availability
c. severe liquidity issues in cash based sectors like Real Estate and Jewellery
 d. GDP will decline in the next 2 quarters due to reduction in overall spending

2. Over the next 4-5 months:Those having legitimate income will deposit it in banks and apart from the initial hassles associated with the banking system, they will have nothing to worry about. 
However those having unaccounted money will face several problems as follows:
a. Those who choose to do nothing with the money, their notes will expire worthless. Every note is a liability of the Government (RBI), and thus notes becoming worthless will benefit the Government by extinguishing its liability.
b. Those who declare their unaccounted money, approx 60- 70% of the money will go to the Govt in the form of taxes and penalties.
c. There will be a third category who will try to launder their money, but which will entail severe risks including penalties and prosecution. However, the money sought to be laundered will anyway enter into circulation and remain therein.
It is expected that even if 50% of the around 14 lakh crores of old notes are legitimate, the remaining 50% or around Rs 7 lakh crores of unaccounted money will see around 60 to 80 % thereof or approx Rs 5 lakh crores coming to the government in the form of extinguished RBI liability (point a above) and taxes and penalties. This Rs 5 lakh crores is enough to take care of India's entire fiscal deficit for one year or more.

3. Overall Economic Impact:
a. GDP growth is expected to be negative for around 6 months. However subsequent 2 years will see sharp "hockey stick" revival in growth.
b. Inflation is expected to fall sharply with fall in Real Estate prices and transaction costs thereof.
c. Government Deficit will see a huge windfall in the next 2 years.
 d. Currency is expected to strengthen as inflation drops and economy gets a boost.
e. Banking System will get a boost, as around Rs 7-8 lakh crores base money (new legal money) will enter the system, which will further create around 3-4 times more money due to re-circulation.
f. Real Estate and Jewellery sectors, though battered initially will stabilize in the next 6 months.

4. Effect on various Asset classes:
a. Bond prices will rise as interest rates drop.
b. Real Estate is expected to fall by around 20 -25 % and stabilize thereafter.
c. Effect on Gold is a bit uncertain, and may be neutral/ negative. Lower black money will depress demand, but at the same time Gold is a hedge against uncertainty and those still wanting to park black money may prefer to put it into Gold instead of cash.
d. Equity is expected to benefit the most due to three reasons. One, there will be a gradual shift from physical assets (real estate/ Gold) to financial assets. Two, the organised sector (corporates, expecially listed ones) will benefit due to less cash transactions. Lastly, lower inflation and interest rates will benefit listed corporates through lower borrowing costs, thereby increasing their profitability and valuations.

Thus Asset Allocation and re balancing thereof will now play an even more important role, making proper financial planning imperative.

Lastly, the question may arise as to whether the new Rs 2000 Rupee notes will create more black money or not. While that is always a possibility, it should be noted that this demonetization would have created a psychological impact especially on large scale evaders who will definitely think twice before taking such action.