Economy
Demonetisation to cause sustained downturn, hit recovery prospects: CMIE
Expecting the demonetisation to cause sustained downturn, the Centre for Monitoring Indian Economy Pvt Ltd (CMIE) says it sees India's real gross domestic product (GDP) slipping to 6% in FY2016-17. The Indian economy is unlikely to achieve a growth of 7% anytime during the coming five years, it said in a note.
 
Says CMIE, "Before the demonetisation shock, the Indian economy was expected to gradually accelerate its real GDP growth rate from 7.5% to over 8% per annum. The immediate impact of demonetisation was a sharp reduction in private final consumption expenditure, a corresponding fall in retail prices of perishable commodities, a substantive dislocation of labour and corresponding losses in wages and a breakdown of supply chains in many parts. Compared to our earlier forecast, this year’s growth estimate has been scaled down 164 basis points following demonetisation."
 
"However," it says, "we expect the long-term damage to be greater than the damage caused to growth during 2016-17. On an average, growth during the coming five years up to 2020-21 has been scaled down by 187 basis points compared to our earlier forecast for the same period. We now expect this growth trajectory to shift down to about 6% per annum for the next five years. The economy is unlikely to achieve a growth of 7% any time during the coming five years."
 
Demonetisation would damage recovery prospects, CMIE says, adding, "Demonetisation has further damaged the prevailing bleak investment prospects. Consumer demand has fallen and liquidity is constrained. Entrepreneurs also face a business environment where the government talks of raids and punitive actions. While these intentions could be good, the effect could be increased litigation and depressed demand."
 
Pointing out towards the huge cash deposits in banks, CMIE says there should be no dearth of funds for investment in such a scenario, but credit growth is very poor. "As more new currency notes are introduced, some of the deposits with banks will reduce as people who cannot get cash today will start withdrawing it successfully when the cash becomes available. Thus, banks will be less flush with funds towards the end of 2017. It is likely that their non-performing assets (NPAs) will rise because of demonetisation. The government has already announced a relaxation of repayment of loans. The flood of cash notwithstanding, banks’ balance sheets are stressed with large NPAs and their ability to lend aggressively still remains constrained. In fact, the banks’ financial position is somewhat messed because of demonetisation."
 
"...an investment environment that was already plagued with poor demand and low capacity utilisation is now infested with fears of a further depression in demand, prospects of inspections and raids and a somewhat messed up banking system. Investors are likely to wait for demand to be restored, supply chains to be repaired, the spectre of raids to go away and banks to return to normalcy before they display any enthusiasm regarding the creation of new capacities," CMIE added.
 
According to the economic think-tank, private final consumption expenditure declined because the available cash on hand to transact retail purchases reduced sharply following the removal of 86% of the currency in circulation. The cash to GDP ratio is high at 12% and reportedly over 90% of the transactions in India are cash-based. As a result, the sudden and sharp reduction in currency had an immediate and significant impact on consumption expenditure.
 
The fall in retail inflation to 3.6% in November and the fall in sales reported by several fast-moving consumer goods (FMCG) companies are early indications of the fall in consumption expenditure.
 
Says CMIE, "Labour has been dislocated from productive work as they were forced to line up in front of banks to convert their old currency notes into new ones. Given that banks did not have sufficient new currency notes, this led to substantial dislocation of labour and a corresponding loss of wages. The fall in consumer demand combined with fall in availability of cash also led to a fall in the demand for labour. This sets in a vicious cycle of low demand for labour and low consumption expenditure."
 
"We expect this low demand to persist till three conditions are met. First, liquidity is fully restored, secondly, confidence in liquidity is fully restored and thirdly, consumers are yanked out of their equilibrium at lower levels of consumption of non-essential commodities," it added.
 
However, it sees none of these conditions to be fulfilled in a hurry. It says, "Estimates of restoration of full liquidity range from mid-January to September 2017. The Rs2,000 currency notes do not provide liquidity like the decommissioned currencies provided and so we believe that liquidity is likely to be restored only towards the early second half of 2017. It would take a little longer to gain confidence that the liquidity is for real. The government or Reserve Bank of India (RBI) have not taken steps to scotch rumours of demonetisation of theRs2,000 currency notes. As a result, the effective liquidity in the markets is much lower than is measured by the issuance of new currency notes. The Rs2,000 note is less liquid than it would be without the rumours regarding its lifespan."
 
Further, it says a flight from currency in hand to other asset forms because of a fear of potential loss of liquidity through further demonetisation and a fear of raids or enquiries could structurally reduce the propensity to spend on consumption goods.
 
"As a result, we expect the hit on consumer spending to last much longer than just a few quarters. Private final consumption expenditure grew 7.5% in 2015-16. This marked a recovery from the much lower growth rates of around 6% in the preceding four years. We had expected private final consumption expenditure (PFCE) growth to accelerate to 7.8% in 2016-17 and then to over 8% going forward. Now, we have scaled back the PFCE growth estimate to 5.5% for 2016-17 and to 6.8% per annum going forward," the note added.
 
This trend shift in consumption expenditure will delay a revival in investments, CMIE says, adding, "We expect capital formation to shrink by nearly 2% in 2016-17 as against an earlier expectation of a 2.3% increase in the same. We had expected investments to pick up pace each year thereafter to reach 10% growth only in 2020-21. Gross fixed capital formation was expected to remain around 29% and reach 30% of GDP only in 2020-21. Now, we believe that the investments-to-GDP ratio would be only around 27-28%."
 
"Assuming that private final consumption expenditure does rise at 6-7% per annum, we project that capacity utilisation will rise sufficiently to drive at least some investments. We do not expect any big changes in government or private spending on infrastructure. The push for infrastructure development has been a constant since the mid-1990s. We expect this to continue similarly without any particular acceleration from the trend. We expect government spending to offset part of the impact of demonetisation through increased spending. But, government has a smaller role and can contain the damage only partially," CMIE concluded.

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COMMENTS

shrinivas

6 months ago

With the way the Govt., talking that there is no damage at all till now and if the damage is there, it is created by the opposition, we will never know what really happened ! The Govt., will manipulate figures and prove that the demonetisation is really a success story !
Even now the RBI governor is saying that he does not know how much currency has come back !

PRANAV DAMANIA

6 months ago

I agree with you Ramesh

Ramesh Mehta

6 months ago

Readers may want to read Howard Marks latest memo on "expert opinion"
Nobody really knows the impact. Only time will tell, but being too negative & listening to media is often harmful to investors...
https://www.oaktreecapital.com/insights/howard-marks-memos

Nifty, Sensex still in a bullish mode – Weekly closing report

The markets continued to rise this week. Nifty ended the week with a gain of 1.90%. It witnessed continuous buying during the week before selling pressure forced  Nifty to close at 8400.35 down 60.7 points from its high on Friday. The trends of the major indices in the course of the week are given in the table below:

Profit booking, coupled with rupee depreciation subdued the Indian equities markets on Monday. Pharma tumbled 1.5% whereas Metal and Auto turned negative with 0.1% of marginal losses. All eyes were on third quarter earnings season and macro data especially after the currency demonetisation. Asian markets rose on Monday tracking strong closure from main three indices of Wall Street. The Markets remained buoyed post US jobs data and ahead of policy measures under the reign of newly elected President Trump.
 
Hopes of positive third- quarter results, along with expectations on more spending support from the upcoming Union Budget and a strengthened rupee lifted the Indian equity markets on Tuesday. Eight sugar stocks hit their respective 52-week highs on the BSE with heavy volumes. BSE Metal and BSE Industrials were the top performers with the indices gaining by 1.42% and 1.57%. Britain's FTSE 100 continued its climb to record highs on Tuesday while Europe's top benchmark failed to hold early gains with financials the biggest drag.
 
Positive global cues, coupled with healthy third quarter (Q3) results pushed the
Indian equities markets higher on Wednesday. Besides, higher global crude oil prices and anticipation of sops to be announced during the Union Budget enhanced investors' risk-taking appetite. Healthy buying was witnessed in banking, metal and capital goods stocks. In the broader market, BSE Midcap index (up 1.4%) outperformed the headline indices. BSE Smallcap index gained 0.9%. Metal index rose on account of rise in international coking coal prices and China’s expected cut down of steel output in the next fiscal. Investors awaited the key quarterly corporate results from software services firm TCS and Infosys. The Asian markets was trading on a two-month high as investors were on the edge watching for President-elect Donald Trump's news conference later in the day for any clues to his policies on tax, fiscal spending, international trade and currencies.
 
Anticipation of budgetary sops, coupled with a strengthened rupee, buoyed the Indian equities markets on Thursday. Buying was witnessed in capital goods, IT and TECK (technology, media and entertainment) stocks. However, negative European indices and caution ahead of the release of the Index of Industrial Production (IIP) and Consumer Price Index (CPI) data for December capped gains. Pharma index pared earlier losses but still settled the day 0.60% lower. The index was down after Trump said yesterday pharmaceutical companies are "getting away with murder".
 
The US dollar nursed widespread losses on Thursday after President-elect Donald Trump's long-awaited news briefing provided scant clarity on future fiscal policies, disappointing bulls wagering on major stimulus. European shares fell, bucking gains in Asia and Wall Street overnight and weighed down by a 2% slump in healthcare stocks after Trump said pharmaceutical firms had been "getting away with murder" with their prices.
 
Profit booking, along with disappointing earning guidance from IT major Infosys, dragged the Indian equities markets marginally lower on Friday. The key indices provisionally closed the day's trade on a flat note - marginally in the red, as selling was witnessed in IT, automobile and Teck (technology, media and entertainment) stocks. The wider 51-scrip Nifty of the National Stock Exchange (NSE) shed 6.85 points or 0.08% to 8,400.35 points. The Sensex touched a high of 27,459.75 points and a low of 27,143.07 points during the intra-day trade. The BSE market breadth was tilted in favour of the bears -- with 1,490 declines and 1,237 advances. Sensex closed the week with gains of 1.90%.
 

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Prosecutors to decide on Samsung heir's arrest by Sunday
Prosecutors investigating Samsung heir Lee Jae-yong's possible involvement in a corruption scandal that led to the impeachment of South Korean President Park Geun-hye will decide by Sunday whether to arrest him, media reports said on Friday.
 
"It appears that a decision on Vice Chairman Lee's arrest will be made tomorrow or the day after tomorrow," Yonhap news agency quoted investigation team spokesman Lee Kyu-chul as saying at a press briefing. 
 
Lee Jae-yong returned home on Friday after a marathon questioning session by prosecutors all night over suspicions that the country's largest family-run conglomerate gave financial support to Park's confidante Choi Soon-sil.
 
Choi, nicknamed the "female Rasputin", is being considered the apparent brain behind the plot involving business favours using her close relationship with Park.
 
The prosecution believes that the Samsung group signed a contract worth $18.6 million with a company based in Germany owned by Choi and also provided financial support for the equestrian training of her 20-year-old daughter.
 
Samsung also donated $17.3 million to two non-profit foundations operated by Choi. 
 
However, the Samsung chief insisted that they thought the money was given for good causes such as promoting local culture abroad and the sports sector.
 
It was suspected that the contract was signed in exchange for support from the National Pension Service for a major merger agreement between Samsung's subsidiaries in 2015.
 
Samsung admitted the donations but denied that they had been made to secure return favours in the merger process.
 
Lee Jae-yong took over the reins of the Samsung conglomerate after his father Lee Kun-hee in May 2014 suffered a heart attack, which still keeps him hospitalised and speechless.
 
The "female Rasputin" case sparked outrage in South Korea and led to Park's impeachment in December 2016. Park is now waiting for the South Korean constitutional court to decide whether the impeachment vote against her is valid.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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