The move to cancel high-denomination currency notes of R500 and R1,000 — totalling R14.2 lakh crore — might disrupt small businesses, crimp consumer spending and inconvenience households in the near term, thereby slowing down the economy. However, over the long run, less black money would lower real estate prices, boost retail financial savings and push up tax collections. “We estimate this could see disclosure of 1-2% of GDP. This should lead to lower yields as well as lower rates. After all, R100 of cash that will be disclosed will result, in the first instance, of R55 of bank deposit mobilisation and R45 of taxation (assuming IDS 2016 tax rates) and by extension, lower fiscal deficit,” Bank of America economist Indranil Sengupta wrote. As some of the black money finds its way into the formal channel, the currency in circulation will come down, thereby helping rein in inflation, economists point out. “If money supply declines temporarily because of these measures, then assuming no immediate change in velocity of circulation, we could either see some deflationary tendencies or lowering of real demand or economic activity,” Citigroup economist Samiran Charaborty observed.
Meanwhile, the mere expectation that property prices could moderate will keep them down, say experts, who predict a drop in sales as consumers wait for a correction. “Corruption is the reason why real estate prices have been high. I expect prices to come down in the medium term,” HDFC chairman Deepak Parekh told FE.
Secondary market sales could remain sluggish for about a year, say industry watchers, pointing out there will be fewer takers for apartments costing above R5 crore. “The crackdown is very likely to hurt the real estate market which is already reeling under high inventory in top tier cities such as Mumbai and Delhi,” Sonal Varma, economist at Nomura wrote.
Bank deposits are likely to see an increase, as old currency notes are deposited while currency in circulation will moderate — a positive for banking sector liquidity. With more rural households opening new bank accounts, initially to deposit old notes, and later to transact regularly, there would be greater financial inclusion. “This will change the way people spend and keep their money,” finance minister Arun Jaitley said at a press conference on Wednesday.
Corporate sector experts cautions there could be disruptions in supply in the wholesale channel — which accounts for 40% of the market — since a big share of the transactions take place in cash. Receivables at companies could see a spike in the near term as smaller suppliers find themselves short of liquidity and ask for a longer repayment period.
Moreover, discretionary spends — especially for high-value items such as jewellery — will likely slow down in the immediate term.
Households with large amounts of cash would find themselves short of liquidity and would be wary of depositing these in banks for fear of attracting the attention of the tax authorities.
Between 2011 and 2016, circulation of R500 and R1,000 notes rose by 76% and 109%, respectively, far outpacing the economic expansion (30%). According to Reserve Bank of India data, R500 and R1,000 denomination notes accounted for 86% of total value of bank notes in circulation as of March 2016.