How does the demonetisation affect different sectors?
Mitul Patel 09 November 2016
As Indians struggle to come to grip with the second de-monetisation of currency since independence (the previous one was in 1978 and restricted to Rs1,000, Rs5,000 and Rs10,000 notes), the scale and scope of this action is significantly bigger. 
 
The demonetisation move seems to have widespread support from ordinary people; however there are pockets of hardship despite attempts by the government to exempt crucial needs such as hospitals, tolls, chemists, crematoria and petrol pumps.
 
Let analyse the sectors that will be most affected by de-monetisation because of the high level of cash spending. 
 
Real Estate will be one of the most affected sectors. Everyone believes the same and hence the Nifty Realty Index closed at 175.2, down 11.60%.It is a popular bet in the fresh and resale market dominated by black money holders. The number of buyers will come down and low demand will bring about lower prices in the short term. However, it will subsequently help in improving the sector’s prospects. Unorganised builders will be most affected and the sector will drag down cement and ceramic sectors also along with it.
 
Gold prices: As investors rushed to invest in safe havens, Gold Futures touched a high of Rs31,376 and was trading at Rs30,500 up 2% on Wednesday evening. Local shops have stopped selling gold in exchange of old notes and prevailing prices are Rs31,800 per 10gm against Rs30,700 per 10gm on Tuesday. “It will create havoc for a little while and the economy will also destabilise. But overall, it is going to be good for the country. In fact, the jewellery industry will thrive as people will have more trust on jewellery than currency notes,” says Gitanjali Gems Chairman and Managing Director Mehul Choksi. 
 
However S Subramaniam, CFO of Titan Company contradicted saying “The Indian jewellery market will be the worst hit with the ban on Rs500 and Rs1000 currency notes. This is due to the preference of shoppers to pay amounts over Rs2 lakh in cash.”
 
Banks: Banks are the back bone of this entire process and also the biggest beneficiaries. Post complete exchange of currencies, banks should benefit from higher deposits and transaction volumes, lower cash handling costs and greater acceptance of digital channels. There are likely to be secondary benefits for the insurance, asset/wealth management companies through higher financial savings. While the Nifty closed 1.31% down, Bank Nifty closed higher by 0.09% giving a confirmation of the same.
 
Entertainment/Restaurants: One of the most common areas, where undisclosed income is utilised, is the entertainment and restaurant industry. There are plenty of restaurants out there that accept Credit and Debit Cards.  Since a majority of the transactions are in cash form in here, it will be exciting to see how people react to it. Will they continue to opt for entertainment at the same scale that they did earlier?
 
Beauty parlours: This has been a booming industry that works largely on cash. In the past few years, beauty parlours have mushroomed on almost every street of urban and semi-urban India. Although a few of the larger, organised parlours do accept credit and debit card payments, most parlours transact mainly in cash because it is often seen as a luxury spending fuelled by unaccounted income. 
 
Tourism: Favourite foreign Tourist Destinations of Indian people like Thailand, Singapore, Malaysia, Maldives, Hawaii, Vietnam, Sri Lanka, Nepal, China, Indonesia and Dubai will see negative impact in tourism revenues all black money sponsored trips will come to a halt. Indian Local Tourism will also get affected as they lose large chunks of the pay-in-cash-only clientele. Illegal foreign currency conversion is also reported to be badly hit, because they were big acceptors of Rs500 and Rs1000 denomination currency.
 
Luxury items will have a drastic negative impact. Majority of the people spend their undeclared income on such products. After the decision, it is likely that all luxury segments like clothing, electronics, luxury car, furnishing and allied business will take a hit. Media and hospitality industries are also likely to get affected.
 
Sectors that we feel will not be affected are– Pharma, FMCG, Education, Agriculture, Hospitals, Energy and Telecommunication. Modi-haters will hate him more, but it will be a watch game for all of us to see what he comes up with next.
 
Comments
Mayank Chheda
5 years ago
On ground, Microfinance (MFI) and asset finance/ individual focused NBFCs are the most impacted companies by demonetization. MFIs are not able to collect from the borrowers and simultaneously they have limited their disbursement plans. NBFCs with liquid cushion are able to stick to their plans while others are in the process of short term funding (commercial paper) from Private investors or Institutional NBFCs.

Individual focused NBFC and MFI will face liquidity issues in the short term and are expected to face higher delinquencies level for H2FY17 period.

Despite, NBFCs and MFI will sail through in long term given strong penetration with regards to unorganized borrowers (not targeted by banks) and much more effective credit appraisal as compared to banks.
Ramesh Mehta
5 years ago
This assumes that corruption/black money will not be created in future...Post the transition period...life will be back to normal.
saumya lathi
Replied to Ramesh Mehta comment 5 years ago
Exactly I guess it will stir an increased need post December to accumulate more black money and recover their lost fortunes
The government must take the necessary measures to prevent that from happening again as they have only targeted the accumulated black money and not the techniques through which the money was accumulated. Although it is a positive step in the right direction.
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