Post Modi's UP victory, analysts sing a different tune on demonetisation

Predictions of slower economic recovery and job loss appear to have been turned on their heads

Analysts at top brokerages seem to have changed their views about the impact of demonetisation on the economy, including that on key parameters such as jobs. 

Prime Minister Narendra Modi had on November 8 announced the demonetisation of the old series Rs 500 and Rs 1,000 notes. 

Analysts and economists had predicted that the exercise, which sucked out about 86 per cent of the cash in circulation from the economy, would adversely affect growth.

But, estimates of gross domestic product (GDP) growth for the third quarter (October to December, Q3) of the current financial year (2016-17), at 7 per cent, released on February 28, had sowed the seeds of doubt in the minds of doomsayers. 

The overwhelming victory of the Bharatiya Janata Party (BJP) in the Uttar Pradesh Assembly elections — and, the party forming the government in three other states — seems to have turned them into believers.

Recent reports by Edelweiss and Nomura, citing ground surveys and changes in certain in-house indices, claim ill-effects of the note ban, such as a fall in growth and loss of jobs, are either fading or did not happen at all. If the results of the state elections played on their minds, the analysts did not say it aloud.

More such reviews could be on the way, say Street watchers.

In a report on March 17, Edelweiss analysts, led by Manoj Bahety, wrote, “During demonetisation, unorganised players, across ceramics and plywood, operated at sub-optimal capacities, as the cash crunch had made it difficult for them to procure raw material and meet other costs. However, there were no incidents of job cuts in any sector.”

Edelweiss analysts had travelled across five states to assess the on-ground impact of demonetisation and check preparedness of unorganised players to tackle the proposed goods and services tax (GST) regime. They interacted with about 50 manufacturers and dealers of ceramic tiles, plywood, plastic products and electrical equipment. 

“Most unorganised manufacturers and dealers conceded that demonetisation significantly disrupted business for a brief period of two months, as most sales and purchases were earlier settled. However, with relaxation of cash withdrawal limits, the industry is fast returning to normalcy,” Bahety and his colleagues wrote.

Noting that billed sales, which had risen to 75-80 per cent, soon after the note ban have fallen back to half that number, the analysts said, “large unorganised players have realised the importance of brands and have started spending on low-cost brand-building activities such as newspaper advertisements, outdoor hoardings, etc.”

Similarly, Nomura, in a report titled “Proprietary indices suggest waning demonetisation effects”, on March 20, said the adverse effects of demonetisation on growth were gradually waning. The percentage of indicators showing acceleration rose to 50 per cent in January from 34 per cent in December. “Urban consumption is recovering faster than rural consumption. Passenger vehicle sales, a proxy for urban demand, rose at an average of 11.6 per cent year-on-year in the January-February period, returning to double-digit growth, observed before demonetisation. Two-wheeler sales, considered to be reflective of rural demand, also emerged from contraction in February, but reported flat growth in February 2017, compared to 20.5 per cent in Q3,” the report said. It concluded, overall, the lean patch in Q3 FY17, led by the demonetisation drive, was transitory. 

On February 10, following the release of industrial production numbers, Nomura had said, “The moderation in industrial output growth is not a surprise; weak demand since demonetisation has likely forced companies to cut production in order to clear the excess inventory.” 

It added that it expected growth to remain subdued in Q4 of FY17, as the activity level remained below its recent peak. 

“Thereafter, we expect a V-shaped growth recovery to take hold in H2 (second half) of 2017, due to remonetisation, wealth redistribution and the lagged effects of lower lending rates,” Nomura had said then. 

Edelweiss had in its December report, titled “Demonetisation Ground Zero — better seen than heard”, said smaller and unorganised players, where cash is the predominant source of transactions, were perturbed. “Most were of the view that a lethal combination of demonetisation and GST could permanently dent their businesses.”

It had also indicated job cuts. “Apart from this, many businesses also hinted that they may be forced to relieve a few temporary workers if demand fails to recover in the next two-three months. From the long·term perspective, job losses in the unorganised segment are a key monitorable to assess if the anticipated consumption demand recovery will have to be tempered.”

In a January report, Edelweiss analysts had predicted the unorganised sector would lose out to the organised one. “As a result, unorganised players will gradually lose their competitive advantage over their organised counterparts. While demonetisation is bound to negatively impact discretionary spending in the short term, we expect it to engineer a meaningful shift in trade to organised players over the medium to long term. It will increase transactions via the digital channel, thereby reducing tax evasion by the informal sector and providing a level playing field for organised players,” they had said.