Demonetization: Short-Term Pain but Long-Term Gain

Taking the whole country by surprise, Narendra Modi has pulled off a shocking move to demonetize higher value currency notes as he waged war on the evil of black money in Asia’s third biggest economy.

While it’s hard not to overlook the short-term repercussions of wiping out Rs 500 and Rs 1000 notes which comprise 86 per cent of total value of currency in circulation, the long-term implications of demonetization are seen as positive.

Demonetization has sent out a strong message about the country’s anti-corruption drive which will improve investment sentiment in the long-run.

While the sudden cash crunch may have crippled the common man, demonetization marks a crucial step in India’s bid to transform into a cashless economy.

With cash-intensive sectors such as food, transport, real estate and restaurants likely to be severely hit, this fiscal’s GDP could be squeezed by 0.8 to 1 per cent. In the longer term, demonetization may help bolster economic growth as more and more of the informal economy becomes formal and the Goods and Services Tax comes into play.

Successful unearthing of unaccountable money could propel tax gains for the government, good news for India’s fiscal deficit.

An interest rate cut also looks likely on the cards in the coming months as a cash squeeze exerts downward pressure on consumer food prices amid lower purchases. Lower borrowing costs will augur well for India Inc. particularly rate-sensitive sectors such as auto and banking. Also, the withdrawal limits on cash will propel faster growth of bank deposits, supporting lower long-term deposit and lending rates.

 Looking beyond the long queues outside banks and ATMs, wobbly stock markets and short-term consumption & growth squeeze, Modi’s latest reform is a well-thought out one. The key to its success lies in its implementation.

The bottom line -No gain without pain!

Latin Manharlal Group

Uptick in Manufacturing PMI underpins India’s Economic Recovery

India’s factory activity expanded at its fastest pace in almost two years in October, with a robust rise in new orders as well as output, supporting the strong growth story of the Asia's third largest economy.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector spiked up to 54.4 in October, a 22-month high, from September's 52.1, marking the biggest monthly jump in almost five years, with a reading above 50 signaling expansion.

The manufacturers attributed the latest rise in production to solid growth of the new orders, which surged significantly in October, pointing towards the strength in the underlying demand.  While, foreign orders continued to contribute to the upturn in the total new work, the rate of growth in new businesses from overseas eased to a three-month low.  

Meanwhile, the output increased for the tenth straight month and at the quickest rate in nearly four years in October.  The output sub-index, which measures the overall production, was at 57.2 in October, the highest since December 2012, and up sharply from 53.3 in September, the report noted.

The survey showed that consumer goods producers outperformed their intermediate and investment goods counterparts, registering stronger rates of expansion for both output and new orders. Despite the robust growth in new work, employment sub-index was left unchanged. Meanwhile, buying levels grew at their strongest rate in 14 months, while stock levels increased at the fastest pace since July 2015.

Moving ahead, input costs grew at its fastest rate since August 2014, part of which was passed on to the consumers by way of higher selling prices. It is likely to continue on an upward trend. This shows that risk of inflation is gathering steam yet again which had cooled to a 13-month low in September due to moderating food prices.

The increase in the inflation rate will also affect the prospects of any further easing from the Reserve Bank of India (RBI), which earlier this month surprised markets by cutting its benchmark repo rate by 25 basis points to 6.25 per cent. The next meeting of the Monetary Policy Committee (MPC) is scheduled on December 6 and 7.

Latin Manharlal Group