PRIME MINISTER Narendra Modi’s announcement derecognising Rs.500 and Rs.1,000 notes came when most shops in Mumbai were seeing end-of-day sales or were about to down their shutters. “Within an hour of the announcement there was a massive rush and we remained opened till close to midnight,” says Navin Jhaveri, a jeweller in the Opera House area which houses upmarket jewellery stores.
The days and nights that followed November 8 at the city’s Zaveri Bazaar, one of the central points for precious metal and jewellery trading, resembled the week before Deepavali when people buy a lot of jewellery. Apparently, many jewellers were willing to take cash and give backdated bills for sales. Jhaveri said, “The big loophole in the gold and ornament business is that you can buy jewellery or bullion up to Rs.2 lakh without having to give a PAN [permanent account number]. If the price of the product is above that, the seller has a way of splitting the bills. Therefore, this was an easy way to dispense cash and still hold a good investment.”
Nothing was illegal about it as the seller was giving valid bills and VAT charged, says Jhaveri. “Everything was kosher.” But for the seller who might have, say, 80 per cent of the payments in cheque and 20 per cent in cash, it spells trouble. He does not pay taxes on that cash.
A diamond merchant with a leading company says, “People were going nuts. They would rather take a hit and have something in their hands than lose all the money.” On November 8, gold was selling at about Rs.31,500 for 10 grams. When the currency crisis hit, the price peaked at Rs.60,000 per 10 grams.
According to market estimates, such has been the demand for gold that as much as $1 billion worth of gold, or around 30 tonnes, was imported from November 9 to November 15. On an average 30 tonnes of gold is imported in a month.
It did not take long for the Directorate General of Central Excise Intelligence (DGCEI), an arm of the Finance Ministry, to begin cracking down on various jewellers across the country. Many have been served notice seeking details of gold sales and the stock for those days.
The year has not generally been good for jewellery shops or companies. According to industry data, sales have been slow because of sharp increases in gold prices. Excise duty imposed on gold jewellery in the Budget led to a further slowdown in demand. However, the situation perked up during Diwali and with the onset of the wedding season, sales were showing an improvement. But the currency crisis, says Jhaveri, has crippled the sector.
Apart from bullion/jewellery, another sector that will really feel the knock is real estate. Both are largely driven by cash, says an analyst with a leading bank.
Real estate and related businesses (cement, ceramic, building materials, and so on) are perhaps the most affected. It is anticipated that sale of homes, already affected by a slow economy, will slow down further to a trickle. This will bring down prices in the short term. However, the sector long needed a clean-up, and in the long term it will improve, says an analyst.
Industry observers say the general feeling is that though the long-term implications of the government’s move are likely to be positive, in the short to medium term several businesses and livelihoods will be affected in varying degrees.
It has been a mixed bag for financial services. Banks being primary recipients of cash deposits have been winners. Other lending businesses have not been that lucky as they are closely linked to real estate or discretionary spending or the informal sector.
Corporate thumbs up Along with Donald Trump’s victory in the United States election, the government’s move jolted the stock markets so severely on November 9 that the BSE index plunged 1,600 points (more than 5 per cent) in the opening hour. It recovered substantially as the day wore on. However, in the week following the announcement, the market progressively lost value and overall dipped a little more than 4 per cent. This has been the most significant correction in the stock market this year, says a stockbroker.
In spite of the toll the move took on the stock market, the pressure on banks and the confusing economic consequences, corporate India applauded the government for its decisive action against black economy and the plague of counterfeit money. Companies came out with statements saying that the bold decision would take India’s economic reforms to another realm.
Most people Frontline spoke to in the corporate sector believed a clampdown on black money and a move to a more transparent economy is the only way to go forward and it would benefit the country in the long term. However, they are unhappy with the way it was executed and the hardship it has brought to people. A good number of the people said this socio-economic experiment should have been timed better and that it could have been executed more efficiently. Yet if it brings good change, then the pain is worth it, they say.
“Hopefully, now we will see a more equal distribution of wealth. We work hard, put our blood and sweat into looking after a family. It’s unfair to see the lifestyle business people lead because of their undeclared income. Additionally, we pay taxes. But where does the money go? Our quality of life in the cities is miserable,” says Mihir Desai, a sales executive with an advertising firm. “More people need to be in the tax net and the money has to be spent on improving the country. That will be real change,” adds Desai.
To the middle-class salaried person, it was redemption time. It was time tax evaders were brought to book and some manner of balance restored, say several of those interviewed.
An investment banker says: “From the moment it was announced, it was expected to create some amount of dislocation to the ‘aam aadmi’ and corporate India. It was felt that since the government promised quick action to replace the old notes, the dislocation would be for a relatively short period. As always, the challenge of this monumental task was sorely underestimated and it now looks like the disruption is likely to last a lot longer than estimated. I think that is where they failed.”
“I think there is a lot of confusion in the industry. This took everyone by surprise. For instance the stock market plummeted and ideally people buy stock in a low situation, but no one knows which sector will take a beating with this move and hence are keeping away from the equity market as well,” he says. “But the overall mood is that this is for the better and will help curb inflation and increase economic growth.”
Industry statement The Confederation of Indian Industry’s (CII) statement on the demonetisation sums up corporate India’s views. Terming the move a “masterstroke”, the CII says the domestic economy will emerge stronger eventually. After a short period of pain when the economy adjusts to the sudden withdrawal of cash, the CII expects a much stronger economy. “India’s cash dependence is extremely high with a currency-GDP ratio of around 12 per cent compared with 4-5 per cent in other developing countries,” says Chandrajit Banerjee, director general of the CII.
He says: “High levels of cash usage tend to slow down the flow of money through the economy. As we transition to a greater usage of fintech for payments, spending will rise, leading to additional economic growth. This is an economic masterstroke by the Prime Minister and must be allowed time to play out.” Moreover, he says lower cash use will have a dampening impact on inflation and this will be a further positive for India’s macro-fundamentals.
The CII’s statement says the prevalence of cash use has also made India prone to high inflation, adding that corruption and excessive cash use tends to erode the purchasing power of money. “Currently, the costs of informality are evident in the low tax base which impacts government revenues, lack of economic control through monetary instruments, and lower economies of scale. India’s tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent, which is much lower than about 21 per cent in other emerging economies,” it said.
The day following the announcement, several business houses and banks issued statements. Chanda Kochhar, managing director and chief executive of ICICI Bank, said: “I welcome the announcement made by the Prime Minister to derecognise Rs.1,000 and Rs.500 notes. It is perhaps the most significant move ever taken to curtail the parallel economy. This will give a sharp boost to all formal channels of payment which in turn will help the formal economy to grow.”
Uday Kotak of Kotak Mahindra bank said this one significant stroke would help cleanse Indian society. This was a turning point for Indian industry, where the economy would grow stronger, he told the media.
One sector that stands to benefit immediately from the currency clean-up is digital finance services. Online payment wallets are now the next best thing to credit and debit cards, says an analyst. Kunal Bahl, CEO of Snapdeal, released a statement saying: “We welcome the government’s bold and courageous move to weed out black money, which will have significant long-term benefits for the economy. With this, the quantum of India’s economy moving through the digital pipes will witness massive growth.”
The jury is still out on whether the adverse effects of the government’s action will last a few months or more. However, it will take a couple of quarters to fully understand the impact of the move and which sectors are less affected than others. In the meantime, it is likely that the stock markets will be volatile and the economic recovery that people anticipate will start soon is going to be further delayed, he says.