India Report on Demonetisation

1 February 2017

The Government of India (GOI) has undertaken various initiatives over the last 5 years with the intention of controlling black money, combatting the financing of terrorism, and curbing the circulation of counterfeit currency in the economy. This includes:

  • Appointing a Special Investigation Team (SIT)
  • Implementing the ‘Black Money (Undisclosed Foreign Income and Assets) Act, 2015’. A 90 day compliance window was provided within which the GOI allowed a person to make a declaration of undisclosed assets located outside India.
  • Implementing the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, licensing of ‘Payment Banks’/ ‘Mobile Wallets’ as a measure of ‘Financial inclusion’
  • Linking bank account with Aadhar and subsidies through Aadhar- linked bank accounts
  • Requiring the disclosure of all bank account details in income tax returns
  • Implementing an income disclosure scheme (IDS)2016 

And the latest measure is as follows.

Demonetisation: 86% of Indian currency and 12% of GDP has been frozen overnight

With immediate effect as of November 9, 2016, the GOI has withdrawn the legal tender character of existing and any older series banknotes in the denominations of Rs 500 and Rs 1000. The announcement by Prime Minister Narendra Modi that the Reserve Bank of India was going to demonetise existing Rs 500 and Rs 1,000 currency notes has been universally termed as unexpected - a surprise and direct attack on black money. The demonetisation initiative stands out as one of its boldest measures so far with a far-reaching impact.

The move is expected to dent immediate consumption, especially of high-end goods, but will have a positive impact on growth and inflation in the long run. This integration of the parallel economy and main line economy will likely expand the country’s GDP. It will also help the government improve tax collection and by expansion of the denominator, lower the fiscal deficit to GDP ratio and fiscal debt to GDP ratio. 

In the short term, sectors with a sizeable magnitude of cash transactions such as microfinance, real estate, construction, jewellery, high-end retail, and travel and tourism are expected to be adversely affected.

We have summarised the impact of demonetisation across industry sectors as below.

Positive Impact
1. Government revenue collections 

GOI has imposed a high penalty for the deposit of cash which does not match the income tax returns filed by the individual. This will result in higher income declarations, which will boost tax revenues.

2. Cashless transactions & mobile banking

Orders for new card swipe machines have leaped 200 times. More and more debit cards are being used to buy goods in addition to cash. Mobile banking and mobile wallets have seen a spurt.

3. IT, utility and telecommunication

Sectors which are unaffected or less affected are IT services, utility services (power distribution, gas distribution) and telecommunication, which are more formal and cashless businesses.

Negative Impact
4. Automobiles 

There is a fall in the sales of two-wheelers, commercial vehicles and luxury cars, where distribution channels are primarily in cash. 

In December, automobile sales fell by 19%, the steepest dip in the last 16 years as a result of weak consumer sentiments and cash crunch post demonetisation. 

To offset the impact, manufacturers - through dealers and finance companies - have started offering lower interest rates and zero down-payment to push sales.

5. Real estate sector

Short term: market slowdown 

Demonetisation has led to a situation of there being little or no cash in the market to be parked in real estate sector. This has subsequently translated into an abrupt fall in housing demand. Money has become dearer, leading to more cautious spending and minimal transactions.

Liquidity has been severely impacted and this would result in deflation with limited sales over the next 3-4 months. It would take time for all stakeholders in the sectors – broker, buyers, owners, and developers to assess the  consequences on their business and decisions.

There will be further delays in ongoing real estate projects due to the massive cash crunch and minimal trading in the economy.

Medium term: reduced inflation, better housing ownership and improved rental landscape 

With limited money floating in the economy, the inflation rates are expected to fall in the next 2-3 quarters. With key policy development such as speculative repo rate cuts by RBI, this could mean better home ownership appetite. 

With the gap between the circle rates and market rates bridging, owners would reduce “ask price”, impacting the average housing prices. Resale of properties would become cheaper and could add pressure to the primary market as well. Developers might also offer discounted rates.

The dwindling demand for housing could benefit the rental market across metros.

Demand for affordable housing might witness an uptrend due to improved purchasing power.

Long term: transparency, revived trust and capital inflow 

The real estate sector is expected to get cleansed of its ailment in due course owing to the elimination of black money coupled with multiple regulatory changes such as the GST and Real Estate (Regulation and Development) Act.

Subsequently, project approval will be quicker, resulting in substantial reduction in the cost of construction. Developers can go for fresh sources of funding to complete their projects.

6. Steel & cement Industry 

The steel industry will be impacted as 30-35% of consumption is estimated from real estate, where demand will be affected.

The cement industry, where 60% -65% of demand is estimated from real estate will also be affected. 

7. Hospitality & travel 

In fine dining restaurants, cancellation and no show rates increased by 33%.

The number of inbound tourists visiting national monuments has also dropped significantly. Almost all of these places only accept cash, which leaves no other option for these travellers.

Airlines are also seeing a drop in bookings and an increase in cancellations.


FMCG companies are already staring at a 20¬-30% fall in sales after the note ban and much of it is coming from rural India. Rural markets account for 40¬-45% of revenue for all major FMCG focused companies.

Most equity analysts expect FMCG sales to drop 35-40% over the next 2 quarters. The only silver lining is the fact that many FMCG companies have managed to collect "pending pay-ins" (collection dues) from powerful wholesalers in old Rs 500 and Rs 1,000 notes.

9. Banks & NBFCs

Banks have received deposits in excess of Rs 6 trillion since the note ban. 

With most staffers handling the exchange and withdrawals, "revenue-yielding" operations such as vending loans and cross-selling investment products have taken a backseat in most banks.

Most banks will improve their CASA (current account, saving account) deposit counters, although not many analysts expect this money to remain in the bank for long. Flushed with cash, most banks would now be forced to cut rates ¬ on both deposits and lending ¬ over the next few weeks. This, in turn, may spur credit offtake for which banks will have to carefully select and deploy over the course of time.

10. Corporations

The cash crunch due to demonetisation has led to reduced consumption in the economy and delayed investment activity. There has been a significant change in the cash flow cycle with many corporates adopting a wait-and- see approach in anticipation of rate correction or any other governmental measures. Private placement of bonds in November has seen a major fall in the number of issuances. In the case of AIFs (Alternate Investment Funds), many have postponed registration as the investors community have deferred their plans.

Recent Statistics: Post Demonetisation
  • The outstanding credit in the banking system stood at Rs 73.4 trillion as of December 23. The year-on-year credit growth was just 5.1%, down from 10.6% a year ago. This is the lowest growth rate since 1962, where loan growth is a major indicator of economic activity. With 86% of the cash currency invalidated from November 8 and withdrawal limits imposed on the public, the cash crunch and uncertainty in the market is forcing individuals and smaller borrowers to postpone their spending and borrowing plans. Bank credit had already slowed down due to rising NPA (non-performing asset) and now further slowed down from a fall in investment activities due to demonetisation.
  • As per the latest SEBI report, private placement of corporate bonds in the month of November is 229 issuances, the lowest in the current financial year. Market expectation is that the trend will follow for the next 2 quarters, as issuers are delaying their investment activities and awaiting rate cuts by RBI which will reduce their coupon rate. This wait-and-see approach has delayed bond issuances. 
  • RBI, in its first monetary policy post demonetisation on December 7 2016, left the repo rate unchanged at 6.25% despite wide expectations for a rate cut to support growth. The RBI have decided to wait for a few months to understand the various macro and domestic factors such as uncertainties surrounding the US Federal Reserve’s rate hike, OPEC agreement to cut crude oil production, the award of seventh pay commission on retail inflation, and the latest demonetisation drive.  RBI intend to collate more data, and understand the situation before taking a more considered decision.
  • RBI and other major brokerage houses have revised India’s GDP estimate for the financial year 2017 post demonetisation.
    - RBI to 7.1% from 7.6%
    - World Bank 7.0% from 7.6%
    - IMF 6.6% from 7.6%
    - Fitch to 6.9% from 7.4%
    - Morgan Stanley to 7.4% from 7.7%
  • The foreign portfolio investors (FPIs) withdrew around Rs 39,300 crores in November, the highest since June 2013, and the trend continued in December with withdrawals of Rs 27,000 crores (USD 4 bn).
  • India’s manufacturing PMI (Purchasing Managers’ Index) fell to 49.6 in December 2016, down from 52.3 in November and 54.4 in October. This shows a slowdown in business activity. New orders and production volume rose at a slower pace in November and December.
  • Services Purchasing Managers’ Index sank to 46.8 and 46.7 in December and November respectively from October’s 54.5. This is the first time since June 2015 that the index has gone below the 50 mark. It was also the biggest one month drop since November 2008, just after the collapse of Lehman Brothers triggered the global financial crisis.
  • The real estate industry in India was badly hit by a drop in sales in the last quarter of 2016. It is estimated to have suffered a notional loss of Rs 22,000 crores as sales plunged 44% compared with the same period last year, according to real estate consultancy Knight Frank India. New projects fell by a massive 61% year-on-year during the same period. Similarly, the notional loss to the various state governments on stamp duty collection has been in excess of Rs 1200 crores. The fall in sales volume and new projects were so severe during Q4 2016 that it brought down the entire second half 2016 numbers by 23% and 46% respectively compared to the second half of 2015.
  • A study conducted by All India Manufacturers’ Organization (AIMO) revealed that manufacturers and micro-small industries segment in India have suffered a 35% loss in jobs and 50% dip in revenue after the first 34 days of demonetisation. They have also projected a fall in employment of 60% and loss in revenue of 55% until March 2017.