50 days on, here are the pains and gains of Modi's demonetisation move

Motilal Oswal Chairman Motilal Oswal says currency circulation will gain normalcy in next 50 days

On November 8, 2016 when Prime Minister Modi announced the discontinuance Rs 500 and Rs 1000 notes, his strong words on trapping black money were met with enthusiasm. People hoped that in order to avoid regulatory action, those with black money would abandon their hoarded currency and the government would stand to gain.

But as the days passed, it became clearer that the Rs 14 lakh crore worth extinguished notes would find its way back to the banking system. This means that the success from destruction of hoarded currency is elusive but the government has to “tax its way to success” as it gets far richer data on bank account holders and their “actual” financial transactions. This would result in widening the tax base, especially when followed by the implementation of the GST regime.

The “jugaad (resourcefulness) of Indians didn’t disappoint as most of the currency afloat (ill-gotten or not) came back. The narrative around this unprecedented move has consistently evolved. The original strike on black money is now seen to have ancillary benefits such as blowing terror financing, enabling financial inclusion, and transitioning towards a 'less-cash' society. 

At last count the Reserve Bank of India (RBI) has come up with nearly 70 notifications, provisions of the Income Tax Act have been modified as the dynamic situation evolves.

Whatever consumption has been held up over the past 50 days due to lack of cash will eventually bounce back. That part of consumption which is impacted due to wealth destruction would take some time to recoup. But the likely redistribution of part of the existing currency should boost consumption. Then again, while redistribution would benefit the poor to some extent, not much can be done about the effects of elimination of businesses which did not adhere to rules of a level playing field.

Everyone has been focusing on the existing stock of black money but there is not enough discussion on how incremental flow will be constricted. There are arguments to both sides and drawing any conclusion at the current juncture is fraught with risk. 

Amidst all of this the “aam-aadmi” has been very stoic and resilient through the hardships, probably seeing this as a just strike on ill-gotten wealth.

As the market people say, this is all in the price. What is crucial in the next 50 days is that we are likely to witness the currency circulation gain normalcy, early signs of it are already evident. We are seeing consumption largely rebounding, as people adapt to alternate payment modes. It will be crucial to watch economic agents adapt to a new landscape and the faster they align the better.

Now, one expects a series of measures to kick-start the economy post the pain. Hence, the Union Budget becomes very important. The government is likely to kick-start the investment cycle and create job opportunities. Banks are flush with funds and with few avenues to channel inevstments in, retail sector is likely to gain as funds are pumped into investment products. One needs to view the November 8 decision as the first salvo and it is certain that there is a series of steps and an action plan behind the move.

As far as the businesses are concerned, the next few days will require them to be receptive, while keeping an eye on developments and grabbing every opportunity it gets. As we find ourselves batting on a sticky (economic) wicket, every ball (development) needs to be played on merit.

Fundamentals of the Indian economy appear to be strong with declining inflation and interest rates. With a relatively stable currency and higher taxation revenues, the markets would remain stronger in the medium to longer term period. However, shorter-term trend would depend upon the quarterly earnings.