Demonetisation: Business takes a hit but poor back move; GDP growth estimates cut from 7.8% to 6.4%

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New Delhi | Published: December 19, 2016 6:04:08 AM

GDP growth estimate for H2FY17 cut from 7.8% to 6.4%, with maximum impact likely in the third quarter

Villagers line up in front of a SBI branch to withdraw cash in Mirzapur.Villagers line up in front of a SBI branch to withdraw cash in Mirzapur.

We embarked on an exhaustive on-the-ground analysis of demonetisation’s impact on the economy — Over 512 meetings were held across 58 key urban/semi-urban/rural stops (covering ~7000kms) by a 33-member team to discuss key developments, emerging themes/trends and expected recovery time. In this report, we discuss key takeaways across sectors and stakeholders. Our analysis suggests that North/ East/Central India were more impacted than South/South-western parts—also, rural regions were more affected than urban areas. Similarly, the unorganised space was hit more than the organised segment and the discretionary sector suffered more than staples. Also, traders, retailers and wholesalers were affected more than the manufacturers. While the liquidity crunch did lead to disarray, the situation is expected to mend as currency gets replenished.

Nevertheless, despite hardships, we observed massive acceptance of the move from the ‘bottom of the pyramid’ population — Many felt that this move would help check corruption and black money. Moreover, we also observed wide acceptability/movement of transactions to formal banking channels — if properly directed, this may boost the Indian economy both structurally and on the fiscal front in the long term.

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However, undoubtedly, a few days into demonetisation, business activity has been hit significantly. Pre-dated sales, acceptance of old currency notes by some traders and credit extension might initially offset the demonetisation impact somewhat, but it would be reflected Dec-16 onwards. Below are the key gleanings from our interactions.

*The great regional divide: The regional divide was very clear — North India is witnessing the maximum impact on business activity, given that the region’s economy is more cash based. The impact was relatively lower in South.

*Urban-rural divide: Urban areas have seen quicker demand recovery versus rural regions. Recovery has been slower in tier 2/3 cities versus metros/tier 1 cities.
w Essentials consumption—recovering swiftly: We observed that essentials consumption has been the quickest category to pick up. Discretionary consumption (especially big-ticket items) is expected to take 3-6 months to recover. We believe the recovery order would be trade, manufacturing and construction in terms of economic activity. Consequently, sector-wise recovery order could be Essential Staples, Impulse Category Staples, Telecom, Petroleum Products, Consumer Durables, Autos, Cement, Home-improvement and Realty.

*Organised players to gain market share: Given increased acceptability of plastic money, government’s focus on digital cash and GST push, organised players should gain market share. This was visible post demonetisation.

* Keenness to accept digital payments: We observed that acceptance of digital payment modes by traders was wide-spread.

Impact on economic activities

* Agriculture: Vegetable prices have been hit the most given their perishable nature and a bumper crop due to the early onset of winter. Wholesale vegetable prices were down 70-80% across India, while retail prices were down only 20-30%. Grain prices have been stable so far. There is some productivity loss in farms.

*Construction: Retail construction has been halted, while institutional construction is going on, at a slower pace.

*Trading: Dealers/stockists have seen an inventory build-up of 1.5-1.8x across sectors. New orders have been muted. Wholesalers, especially in North India, have seen an impact on trade. Cash retail sales were impacted the most.

* Manufacturing: We visited various manufacturing hubs across India and observed a sharp decline in activity in the unorganised sector.
Impact on GDP

Overall, we have reduced our GDP growth estimate for H2FY17 to 6.4% from 7.8% earlier. The maximum impact will be seen in Q3FY17. The sectors likely to be hit the most are Construction, Trade, Electricity and Manufacturing. GDP growth for FY17 is expected to be lower at 7% (7.6% earlier) and for FY18 at 7.6% (7.8% earlier).

*Transactions approach, an alternative way to assess the impact on economy: As per this analysis, we expect that transactions growth (22% till Oct-16) might fall to 16.1-19.4% for FY17.

Sector calls and top picks

The impact of such an enormous exercise is difficult to determine. We had recently increased weights for B2B, utilities, Oil & Gas and sectors that have businesses outside India. We had reduced our weightage on Financials and sectors facing the retail consumer (Autos, Consumer discretionary etc.). Our ‘on-the-ground study’ reiterates the sectoral recommendation shift. We would like to emphasise that over the next six months, we will have more of a ‘bottom up’ approach to stock selection as the impact of demonetisation could vary.

Meanwhile, we maintain our sector calls — Our top picks are HDFC Bank, SBI, Tata Motors, HPCL, Adani Ports, Sun Pharma, Godrej Consumer, Aurobindo Pharma, Motherson Sumi, Infosys, Tech Mahindra, Power Grid, Adani Transmissions, UPL, EIL, Nava Bharat Ventures, TeamLease, PI Industries, Sintex, Kaveri Seeds and Suzlon. Our top sells are Nestle, Bajaj Auto, HMCL, Titan, BHEL, CCI, DLF and Gujarat Gas.


Demonetisation has affected unorganised trade and manufacturing, discretionary consumption, construction and real estate the most in the economy. Below are the takeaways from our discussions with stakeholders across these categories.



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