Note ban led to financialisation of economy and decline of manufacturing

The demonetisation of high-value currency notes on November 8, 2016, was a big economic and monetary shock and its impact can be felt even today. A deep dive into macroeconomics and market data suggests it accelerated the financialisaton of the Indian economy and reduced the role of manufacturing and industry.

The end result was a steady decline in economic growth rate despite large expansion in the government sector and good show by the farm sector. On bourses, retail lenders became the dominant force as the gush of liquidity into the banking system, after the note ban, led to an unprecedented boom in personal loans. But industrial credit suffered. This resulted in a decline in profitability and m-cap of firms in sectors such as auto, capital goods, power, infrastructure, metal, mining & energy.

Another fallout is a rise in market concentration in many industries as bigger firms grew faster while mid- and small-cap ones lost out.

Sensex is up 50 per cent in the last four years while the BSE mid-cap and small-cap indices are up just 15 per cent and 12 per cent, respectively.