In a historic move, the Modi government decided to cancel the legal tender of Rs 500 and Rs 1000 notes in a bid to curb and eliminate black money and counterfeiting, which is also likely to impact various sectors of the economy. There are short-term implications for cash-intensive sectors such as real estate, construction, and consumption. However, in the medium term, benefits through higher government spending, better transmission, greater financial inclusion and movement of household savings from physical to financial would be beneficial for boosting potential growth, says a recent research report by YES Securities.
Here we are taking a look at how demonetization will impact the top six sectors of the nation’s economy:
Agri and related sectors:
The sector typically sees high cash transactions and therefore near-term impact could be seen till liquidity is infused in the rural areas. As farmers face a temporary shortage of cash in hand, it could lead to a delay in payment which in turn would hurt the related companies in the short term. As liquidity eases and cashless transactions gain acceptance, the fundamentals would be driven by the longer term drivers of normal monsoons and positive traction in acreage.
Autos & Auto Ancillaries:
Two Wheelers: Clampdown on cash transactions and temporary cash crunch could hurt purchases particularly in the economy segment of the two wheeler space where the percentage of cash transactions have been high. However, as companies learn to work around it, demand may pick up by overall growth in consumption on the rural as well as the urban side.
Passenger Vehicles: The seasonal slowdown seen during November and December months could get more pronounced as consumers delay purchases due to temporary liquidity crunch and expectations of rate cuts. However, as most passenger vehicles are financed through loans, the blip would be temporary and demand may recover on the back of growth in demand in rural and urban areas as well as trickle down benefit of the 7th Pay Commission Payouts.
Commercial Vehicles: Slackness in the economy on account of demonetization could have a negative impact on the commercial vehicle volumes which have been under pressure in recent times. However, this slowdown may be short lived and demand may pick up, led by pre-buying in response to the changes in emission norms as well as a pickup in overall economic activity.
Consumption-related sectors like consumer durables, FMCG, etc.
The outlook is near-term negative as cash sales account for a significant chunk of sales for companies in these sectors. As customers and companies migrate to the cashless platforms, demand should come back making demonetization near term neutral. In the long term, demand may shift from the unorganized players to the organized players.
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Land parcels are usually paid for in cash. With restrictions on cash transactions, land prices would fall, extent of which would depend on the concentration of players in the subject market.
Cities/Areas where speculative buying (or buying for investment) is high could see demand come under pressure.
As smaller/unorganized players get affected, demand for real estate may decline.
Developers could see cash crunch.
Long term: As prices correct, the market could see an expansion in terms of demand as affordability increases. Increase in transparency, lower incidence of speculation should would lead to an entry of genuine buyers which could help drive long-term growth in the sector.
Building Materials, Metals, Cement, etc.
These sectors could see a slowdown in near-term demand due to their high dependence on real estate. Slowdown would be more pronounced for unorganized players wherein cash transactions are higher.
Over time as demand for real estate improves, we would see growth come back for these sectors as well. Organized players would also see an expansion in market share on the back of the shift in demand from the unorganized to organized.
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Banks: A rise in deposit base will allow banks to lower the blended cost of funds as higher CASA deposits help to replace the high cost of borrowing and lower overall cost of funds. The new regime of MCLR will immediately take into account the lower cost and will thereby lead to a decline in lending rates and improved transmission.
Digital wallet providers and payment banks would benefit from increased focus on cash less transactions both in terms of volumes as well as in terms of value.
NBFCs: In the short term there would be a negative impact on NBFCs that make disbursements in cash and/or do most of their collections in cash. These include gold financing companies, microfinance institutions, etc. However, as these companies migrate to the cashless business models, the pain would ease off.
NBFC lending against property (LAP): This is the segment that could face severe pressure in the near to medium term as fall in property prices combined with longer time for liquidating property could put add pressure on the financers in this segment.