Will growth slow down for India post Demonetisation?

Going by the CMIE estimates, liquidity could hurt growth badly…

The serpentine queues outside ATMs and bank branches may be gradually reducing but the squeeze is far from over. The redoubtable Dr. Manmohan Singh has already referred to a 2% loss in GDP and global FIIs are concurring. How bad could it really get?

CMIE throws a scary number…

The CMIE has estimated that the total loss due to the liquidity squeeze could be as high as Rs.128,000 crore ($20 bn) and this is just during the 50 days. The biggest loss will be to business followed by loss of bank productivity and loss of individual wages. Even the most conservative estimates by HSBC peg the loss to GDP at anywhere between 0.7-1%. But the bigger worry would be the collateral damage caused by these three segments. Let us look at them…

Visible slowdown in business…

Auto dealers are already complaining that the footfalls have fallen by 50% in urban areas and by 70% in rural and semi-urban areas. Retail outlets and malls have also experienced a similar squeeze. The quantum of money demonetized is a multiple of fresh money introduced into the system. This has created a huge liquidity imbalance in the system. That is slowing business. If demand does not pick up after the liquidity stabilizes, that could be the real collateral damage for future GDP growth and quarterly net profits of India Inc.

Banking business falters…

Talk to any bank manager and the immediate reaction is that all activities other than CASA transactions are almost at a standstill. The huge liquidity imbalance will ensure that by the time the balance comes back into the system, the damage to the banking system could be huge in terms of business loss. But the bigger worry for banks is the potential of higher NPAs. With consumer driven sectors like FMCG, jewelry, automobile and NBFCs facing a squeeze, Indian banks are likely to be hit on the last mile. SME NPAs and retail NPAs may start mounting. That is something banks need to carefully watch out for!

Damage to retail demand…

As a journalist put it very succinctly, “The demonetization could be the reverse of the Indian consumption story.” India’s growth story over the last 2 years, its premium valuations and its edge over China were all justified on the grounds of the India consumption story. That is hardly visible today. The problem is not just retail demand. The uncertainty caused by the exercise may force consumers to conserve cash and develop a bias for saving rather than consumption. That is not great news for sectors like automobiles, FMCG and banking, which were looked upon as the harbingers of the India story. The last few days may be the tip of the iceberg. The real damage may now unfold!

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