Impact of Demonetization Across Different Sectors in India

It is already beginning to have its impact on India Inc…

The focus of the previous week was largely on the merits and demerits of the demonetization drive. This week was more of a reality check. Industry is already feeling the pain even as consumers find themselves check-mated in the process. Here are 4 major sectors that are impacted…

Consumer goods are down…

Consumer goods are sharply down in the last 1 week. The reasons are not far to seek. Suddenly, there is a liquidity imbalance in the economy. The gateway to put money into banks is freely open but the exit gate to take money out is constricted. Practical problems like banks running of cash, servers crashing and ATMS shutting down has only worsened the problem. All this has created a cash squeeze in the economy and consumer goods are the worst hit. Considering the uncertainty, most consumers are not willing to splurge too much on their debit or credit cards.

No cash for finance sector…

Even as banks are making hay with a sharp rise in deposits, the NBFCs, MFIs and other finance companies are feeling the pinch. MFIs give small ticket loans and hence collect repayments in cash. That window is closed. Even NBFCS collect their EMIs and repayments in cash. That is not possible any longer. The liquidity squeeze has in fact pushed many smaller finance companies to the brink of default. Larger MFIs like Ujjivan have already warned of a payment default due to the squeeze.

Curious case of realty…

Officially, realty prices have not exactly crashed. Remember, realty in India is still a cash-centric business. The squeeze has made it virtually difficult for the realty sector to function smoothly. Currently, the impact is being absorbed by the stock price of realty stocks which have corrected sharply. But sooner, rather than later, this impact will show on realty prices too. If the squeeze continues then realty sector may soon find itself with negative equity in its ongoing projects. That is when the desperate selling will actually begin and the cookie may actually start crumbling!

Banks may not exactly gain…

Prima facie, this demonetization appears to favor the banks. That is right in that it will lead to a surge in deposits. However, the real worry may be on the assets side of the balance sheet. With the liquidity squeeze, banks may face a default risk not only on their corporate portfolio but also on their retail portfolio. As of now, the euphoria seems to be on the liabilities side of the bank’s balance sheet. But bad loans may multiply if the liquidity squeeze continues for a few more weeks. That will be the acid test for the Indian economy in preventing an overall slowdown in the economy.

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