Demonetisation impact decoded: Gainers and losers

The government has pulled off arguably the most significant reform measure in its tenure. While this expeditious move to boldly counter the black money and parallel economy threat is likely to have significant repercussions, importantly, this effort will have a visible impact on how the current government's policies are perceived in international circles of economic power. Most of the macroeconomic impact will be felt in the short-term, though there are larger implications in the medium- to long-term. We have tried to answer some of the more immediate questions:

What are some of the short-term impacts?
There will be a disruption in the current liquidity situation as households are likely to get affected by the note exchange terms laid by the government. Though clarity is unfolding on this, commodity transactions and general cash market transactions are likely to feel an immediate impact.


Unorganised sector proceedings, including small trade market activities, will remain volatile in the short-term. Roadside vendors, cab drivers, kirana stores, etc., have already stopped accepting Rs 500 and Rs 1,000 notes. It is important to note that a significant percentage of the Indian workforce is employed in this sector, which is likely to be affected by immediate liquidity issues. Overall, negative impact on disposable income is expected along with likely disruption in the consumption patterns of the general populace.

It is estimated that there will be a negative GDP impact in the current quarter as consumption gets a shock in the immediate term. However, quantum and degree of this impact cannot be ascertained at this time.

How are the equity markets likely to be affected?
An elevation of uncertainty is always a negative for equity markets. As such, markets have reacted negatively to this latest news though part of this may be attributed to the US election results. Markets will recover in the medium-term as the uncertainty eases out. While there exists a possibility of a broad based decline, there will be some sectors (with linkages to the unorganised economy) that would feel the brunt while some niche technology sectors related to fin-tech and e-commerce could gain. The long-term outlook remains positive.

What could be some of the sectoral impacts?
While sectors with linkages to the unorganised economy are likely to be affected, technology and financial services are expected to gain in the medium to long term. On a sectoral basis, the commodities and agricultural sector, including the market for consumer durables and non-durables is expected to feel the heat. In the short to medium-term, large denomination purchases will likely be made via electronic purchases rather than through brick and mortar outlets. This will impact the retail sector adversely.

The real estate sector is likely to see a significant negative impact in the medium- to long-term, particularly in the repurchase market. There are expectations of a revaluation of current real estate transactions across the board representing possible losses to players in the sector. The luxury goods market is also likely to get affected as this move represents an erosion of real wealth to a large number of people. Areas of sub-sectoral impact will be felt in luxury cars, SUVs, gems, jewellery, gold and high-end branded products.

On the positive side, there is likely to a reset of spending patterns as this move represents indirectly a significant push towards a cashless economy. Businesses in the fin-tech sector, including payment banks, mobile wallets, electronic transfer providers, etc., are expected to see gains.

Positives
E-commerce and Fintech
1) Payment gateways
2) Cards
3) Mobile wallets
4) Online retail
5) Net and payment banks
6) e-marketplace

Negatives
Agriculture
Luxury goods
Real Estate
Commodities
Traditional Retail
1) Consumer durables
2) Consumer non-durables

Will exchange rates be affected?
We could see some appreciation of the domestic currency in the forex markets as notes in circulation will decrease. Though the RBI will be monitoring and taking remedial action, negative impact on international trade cannot be ruled out at this point. Counter moves by the government are expected to ease this impact.

Will there be an effect on Inflation and what are the policy implications for it?
We are likely to see some decline in inflationary pressures as demand along with household inflation expectations are likely to go down. This would make the RBI more comfortable on managing inflation in the future increasing the possibility of rate cuts in the future.

What are some of the longer-term implications?
This essentially represents a change in regime for the real and financial economy. Domestically, there could be some turmoil as the effect will be disproportionately felt by the lower and upper income classes. Internationally, the government is likely to get a thumbs up for the move and more countries could potentially see this as a viable option to curb black money and stem illegal financial activity.

Last, though this move by the government may not be a first, having being tried by earlier governments as a tool to fight corruption. Such an action achieves larger significance for a globally connected India as it shows boldness in tackling an issue which has remained a thorn in the growth success story of this generation.

(The author, Anis Chakravarty, is Lead Economist, Deloitte.)