Demonetization effects: A welcome move – scrapping of Rs. 500 and 1000 notes will clean up a significant chunk of the black money that has been stashed and was not finding its way into the formal economy.
This will have 2 broad impact in terms of monetary flow
(a) Erosion of stashed wealth earned through illegal means or undeclared income.
(b) Flow of black money into the formal system as informal sector might report higher income (in proportion to the previous records of income declaration).
With sudden disappearance of currency due to erosion, the government will now have more room to print new currency and create multiplier effect through nation building spends.
Besides, the due impact on severely corrupt politicians, govt. officials and businessmen, the most affected will be the ‘aam’ businesses
1. Temporary Liquidity crunch will be faced by many as the cash cycle comes to a screeching halt in the short-term – while demand for fundamentals goods is likely to stay constant, they will suffer because of unavailability of cash (time to convert to acceptable currency and loss on cash in the system that can’t be declared) to pay small vendors or laborers who are not used to non-cash transactions and may be reluctant initially.
2. Movement to POS machines & digital payments esp. of retails will be encouraged by faster changing preference of customers to adopt digital modes of transaction and avoid currency exposure or need to carry larger stacks of Rs. 100 notes (at least till February). This will in turn push the wholesalers to accept cheques from retails who now have a higher portion of revenue coming in from non-cash payments.
3. Sustained spike in Income declarations will be witnessed. While most traders will end up over reporting sales to deposit cash, this will also lead to re-setting of the bar on their income reporting going forward. Leading to higher reported incomes going forward – good news for the analysts tracking GDP growth rates.
4. Compression of margins will trouble several un-organized businesses that have based their competitive advantage in tax and regulatory arbitrage. With the double-whammy of transparency hitting them hard with GST and higher income declarations mandated due to the de-monetization of Rs. 500 and 1000 notes.
5. Slowdown in Real Estate, Luxury goods, Jewelry and such high ticket discretionary spend industries. Businesses associated with such industries such as brokers, vendors and artisans to these businesses will be most impacted by the erosion of unaccounted wealth as many these spends or investments will be put on hold. On the contrary, liquid investments might see a spurt as higher income declarations might make more capital available to deploy in liquid investments.
6. Credit flow to small traders will see a shortfall as informal lending sectors shrinks and banks re-evaluate their lending strategies and policies under these uncertainties. The demand for credit is likely to be high due to temporary liquidity crunch. Banks, NBFCs and Online Lenders that are digitally equipped and efficient will be best positioned to service such a surge in demand.
While there will be some temporary hiccups, we’ll witness the emergence of cleaner businesses, higher digitization of transactions and a significant multiplier effect from the movement of stashed (illiquid) money into main-stream either through conversions and deposits or through the Reserve Bank printing more notes to compensate for undeclared and rotting black currency (or now just paper).
By Rohit Lohia, CoFounder and COO of CoinTribe Technologies Pvt. Ltd.