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.

 

Rs14 lakh crore -- or $217 billion, 86 per cent of the value of Indian currency currently in circulation -- became useless from midnight of November 8, 2016, part of the governments crackdown on black, or unaccounted, money.

 

Rs500 notes amount to Rs7.85 lakh crore (approx. $120 billion), while Rs1,000 add up to to Rs6.33 lakh crore ($97 billion), according to Reserve Bank of India data.

 

Here are three ways in which this move should affect the black-money economy, which according to an 2016 report by Ambit Capital, a financial research company, forms a fifth of the Indian economy:

 

The sudden announcement will directly affect black money hoarded by Indians, and will possibly present them two alternatives: either deposit the money after identifying themselves to banks, or exchange the money by November 24, 2016.

 

According to basic calculations, with a daily limit of Rs4,000 a day, a maximum of Rs60,000 can be exchanged by a person, in 15 days from November 10 to November 24. From November 24 onwards, the exchange process will be eased for convenience, meaning the exchange limit will be increased. However, there is no limit on deposits.

 

As the deadline for Indian individuals to declare undisclosed income -- the Income Declaration Scheme -- ended on September 30, 2016, no ‘unaccounted for' money can be declared now. It ceases to be money, instead it will be a ‘worthless piece of paper', as PM Modi termed it in his speech.

 

Instances of cash-for-vote prevalent in Indian elections -- in the form of bundles of cash in deligitimised denominations -- may not work anymore.

 

While bank notes increased 40 per cent from 2011 to 2016, Rs500 notes increased 76 per cent and Rs1,000 notes increased 109 per cent, the finance ministry said.

 

New notes of Rs500 and Rs2,000 will be introduced for circulation from November 10, 2016. Rs2,000 notes will be monitored and regulated by RBI.

 

The Rs2,000 and Rs500 do not have ‘nano chips' and cannot be tracked, as WhatsApp forwards have been claiming. 

 

The government had earlier withdrawn old Rs500 notes from circulation, in effect, demonetising the currency two years back, IndiaSpend reported in January 2014.

 

Cheaper money now illegal, costlier money stays

 

The Rs1,000 note was the cheapest note produced in India. It required only 0.32 per cent of its face value to produce but a Rs100 note requires 1.8 per cent of its face value, a Rs50 note 3.6 per cent and a Rs10 note 9.6 per cent to print.

 

There are 15.7 billion notes of Rs500 and 6.3 billion notes of Rs1,000 in circulation in India. Thus, 22 billion notes in the country have been junked.

 

The move will also have a positive byproduct: individuals and households with no bank accounts -- keeping all income in cash and at homes -- will now have to create bank accounts to deposit money, making financial inclusion indirectly inevitable.

 

Some relaxations on the use of Rs500 and Rs1,000 notes have been given to account for special situations, for example, pay hospital bills, transport expenditure and petrol pumps till November 11, 2016.

 

The sectors that could probably be hit the worst in the short-term could be bullion and real estate since they handle a lot of transactions in cash.

 

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.