Demonetization – The big question is; after demonetization what next?

The demonetization officially ended on December 30th, after which one cannot surrender old notes of specific denominations. But the impact of the demonetization exercise is likely to last for much longer. Here is how…

Liquidity shortfall will stay… 

While the government has impounded notes worth Rs.14 trillion, fresh notes worth Rs.5 trillion are only out in the financial system. That is a huge liquidity imbalance and the crunch will continue for some more months before the gap is filled up. Also the irony is that this cash crunch has forced people to hoard cash and use digital payments resulting in much lower velocity of circulation of cash in the economy. The crunch is evident from the fact that the government has extended cash restrictions into January 2017 too.

A shift to digital… 

The good news is that the shift towards digital seems to be here to stay. The number of card transactions and the usage of digital wallets have gone up geometrically in the last couple of months and if it is anything to go by, the trend is here to stay. Indians have taken to digital money quite rapidly and we can see this trend accentuated as we go ahead. From a macro standpoint it will be positive as it will create a clear audit trail of transactions in the economy ensuring better compliance.

Growth may be a casualty…

It is hard to project the impact on growth unless the data on IIP, PMI and quarterly corporate results are out. However, initial indications are not too positive. The PMI for November fell sharply and the December PMI will be the one to watch out for. IIP is already under pressure and demonetization could have only made it worse. The feedback from retail outlets and customer facing businesses hints at a sharp reduction in footfalls. The impact on top-line numbers will be known when the quarterly results start coming out from January onwards. Growth surely looks to be taking a hit!

Next steps will be critical…

Demonetization will be really useful if next steps are expedited. Firstly, the government has to move fast with attacking benami realty transactions if black money has to be penalized. Secondly, there is a mismatch between the government’s push for digitization and the reality at the grassroots. That needs to be addressed urgently. Thirdly, there has been tremendous public support for the move considering its larger intent. However, putting the public to trouble may not go down well for too long. Lastly, the government has gone soft on political funding. That has been one of the principal sources of black money. That may be the real battle for the current government! ©

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