Setback only temporary

Sushma Ramachandran

JUST three weeks after banning Rs 500 and Rs 1,000 currency notes, the entire economy is reeling from the shock of this sudden measure. The announcement came as a surprise, as it was meant to be, and chaos was expected initially at banks as people surged to exchange old notes into the new legal tender. But three weeks into the exercise and the chaos has only abated marginally. Queues at banks may have got smaller in urban areas but rural areas are still facing a cash crisis. Currency is being airlifted to remote areas but the shortfall continues in most hilly areas and the Northeast region. Farmers have been left without ready cash at a time when the rabi sowing season should be under way. Seeds, fertilisers and pesticides need to be bought and payments have to be made to landless workers in the field. Reports of unscrupulous elements charging 50 per cent to convert farmers’ old currency are appearing in the media. This is apart from the numerous reports of hardship faced by those needing hard cash for medical expenses or just to buy food to survive.

The question is, will this all translate into a slowing down of the economy. The expected 8 per cent growth rate projected for the 2016-17 fiscal is now being downgraded by several investment and credit agencies. It is anticipated that the pain of demonetisation may affect large segments of the economy over the next six months. This in turn, these agencies feel, could bring the growth rate down from the projected 8 to 7.5 per cent.

This scenario may be overly pessimistic as the impact of demonetisation is likely to be a short-term one. There is undoubtedly short-term panic with the stock markets showing a bearish trend for several weeks now. The rupee is diving too but this will ultimately help exports pick up. The suffering will, however, be most in the agricultural sector where the demand for inputs is urgent over the next few weeks. Unless the situation eases soon, it may not be possible to achieve the expected 4 per cent growth in agriculture this year. Agricultural growth contracted two years ago and rose by a mere 1.2 per cent last year, but it was expected to rebound this year. Existing constraints on funds have been raised for farmers, but it has to be seen whether banks in rural areas have enough cash to disburse under the new liberalised guidelines. 

There will also be considerable pain in the real estate sector where valuations are expected to fall by at least 30 per cent. This is all to the good, of course, as this is the area where parallel currency economy has been flourishing for decades. The resulting inflated property prices had led to a freeze in transactions for the last two years as well as the expectations that there will be a crackdown by the new government on this sector. With demonetisation, real estate valuations will now come down to realistic levels and the black money component in transactions will fall significantly. 

The jewellery sector will also face lower sales as this is another area where all-cash transactions are common. The FMCG industries as well as other consumption-oriented sectors will equally face a slowdown as consumers switch gradually to electronic transactions.

Small retailers will also take a hit in the short run as most of their dealings are in cash. These may not all be in the realm of black money, but it is well known that small shopkeepers avoid paying income tax. This is not so much a way of earning more revenue but to avoid the complexities and harassment that are perceived as part of the tax system in this country. It had been anticipated that much of this sector will come into the tax net after the introduction of the Goods and Services Tax which is supposed to make tax payments easier. But it is clear that they will now have to willy-nilly opt for cashless transactions and thus come into the purview of the tax authorities. It would be wise of the Finance Ministry to direct tax officials to avoid harassment of newly minted taxpayers. Tax terrorism has become an authentic phrase in the Indian lexicon and it is high time to replace it by a rational and compassionate approach to the general public. 

At the same time, there will be a bonanza in growth in the e-commerce sector. E-wallet companies are reaping the benefits as consumers are quickly moving on to make payments through electronic transactions. Buying online of a wide range of commodities has also risen exponentially in recent times. This is a sector that is on the cusp of a boom right now. Similarly, there are a wide range of industries in the organised sector that will not be affected significantly by the demonetisation. These normally make payments by cheque or directly into bank accounts of employees.

A wide swathe of consumption linked sectors as well as agriculture will thus be affected by demonetisation. This could lead to a marginal slowing down of growth over the next three to four months. But there are no signs that the slowdown will last longer despite many doomsday predictions being made about the fate of the economy. Signs of a pickup in consumption have already appeared with demand for automobiles having risen slightlyrecently in urban areas. Rural areas are still facing a dip in demand for two-wheelers, the vehicle of choice in these areas. But outlook is not considered bleak even by foreign rating agencies who are expecting a growth stimulus in the next budget to counteract any depressing effects of demonetisation in the short run.

Demonetisation will therefore bring a considerable degree of pain to the economy over the next three to four months but this is not likely to translate into a long-term slowdown in growth. Implementation of this measure has undoubtedly been inefficient and caused a great deal of hardship to the common man. In the medium and long term, however, it will have a cleansing effect on some critical areas of the economy like real estate, and such an impact must be welcomed by all.