India could well lose its “world’s fastest-growing economy” tag, thanks to the impact of the de-monetisation of high-value currencies on its economy. This is so because real estate, gold and the informal sectors that see a high element of cash transactions are expected to slow down, according to India Ratings (Ind-Ra).
The move to scrap the old series of Rs 500 and Rs 1,000 notes with effect from November 8 midnight and replace them with a new series of Rs 500 notes and introduce a new denomination (Rs 2,000) was described by Prime Minister Narendra Modi as a significant step in the fight against black money.
“The sudden decline in money supply and a simultaneous increase in bank deposits is going to adversely impact consumption demand in the economy in the short term. This coupled with the adverse impact on real estate/construction and informal sectors may lead to lowering of GDP growth,” the rating agency said in a note on Friday.
It also said that the decision also needed to be seen in the context of “disappointing” response to the Income Declaration Scheme (IDS) 2016, a four-month window for people with undisclosed income to come clean. The scheme ended on September 30, 2016.
“Income Declaration Scheme 2016 unearths Rs 65,250 crore of hitherto Undeclared Income and Assets; 64,275 declarations filed under IDS-2016 up to the midnight of 30th September 2016,” the finance ministry said on its official Facebook page on Saturday evening.
High End Retail Demand to Fall
The impact on high end fashion retail and luxury goods is expected to be more pronounced as discretionary demand in this segment will be curtailed. In case of Quick Service Restaurants, although 60%-70% of the transactions are currently in cash, the impact is likely to be moderate due to the low ticket size of purchases and high likelihood of patrons adapting to plastic money. We expect a limited impact on the food and grocery retail sub-segment, given the non-discretionary nature of purchases in this segment, as well as since the buying cycle for the current month would have been largely completed. Ind-Ra expects demand across the retail sub-segments to shift to the organised segment over the medium term.
Positive for banking sector
A large amount of cash in circulation will be brought within the purview of the formal banking system by way of deposits. This is structurally a positive for banks as part of this cash gets deposited as current account and savings account (CASA) deposits, reducing banks dependence on higher cost borrowing. Deposit deployment remains a challenge in the short to medium term due to the current tepid demand for credit, thus pushing deposit rates lower.