Cashless in the country: SBI gauge hints at fall in economic activity, but it may be temporary

MUMBAI: A State Bank of India index tracking economic activity has plunged to a new low as retail demand fell by as much as 40% due to demonetisation. But the bank believes that this may be temporary.

The scrapping of Rs 500 and Rs 1000 notes as legal tender led to a collapse in demand, but barring a few sectors like real estate or gold jewellery there could be a rebound in activity in a few months, the bank’s chief economist said.

The yearly SBI Composite Index for Dec’16 touched 45.5 – indicating a moderate decline in manufacturing, compared to November’s revised index of 50. This is the lowest the index has touched since it was launched in December 2014.

The index aims to foresee the periods of contraction and expansion in the economy.

“The impact of demonetisation on different sectors of industries is largely negative in the short term,’’ Soumya Kanti Ghosh, economist at SBI wrote in a report.

“Rs Rs We feel that the effect of demonetisation is more of short-term in nature, say a quarter or two in most of the sectors, except real estate, jewellery, luxury goods etc., and will normalise thereafter.’’

Since the demonetisation of highvalue currency, demand for goods have slowed due to severe shortage of cash. Although digital payments have taken roots, it is unable to compensate for the loss of momentum in cash-based transactions.

Sectors such as FMCG, consumer durables, plantation and plantation products, fertilizers etc, which have rural bias, are expected to witness a moderation in consumer demand.

Retail sales plunged 20-40% in November due to the currency crunch and negative sentiments on account of uncertainty post the monetary initiative, said SBI.

The cash crunch has also impacted credit off-take which has touched a 54-year low. NBFCs, including Micro finance companies, are facing difficulties in collections.

Some of the micro-finance companies have stopped disbursement post- high value note ban.

“We may see weak Q3 sales as most of the sectors that do cash sales are either extending credit or are not doing sales. Weak sales would have a trickle-down impact on the supply chain, thus hampering economic activity across sectors and supply chain,’’ wrote Ghosh.