There is no doubt that
present Modi Government came to power on the issue of corruption and black
money. In last two and half years they have tried many things to curb the black
money. Government also announced two declaration schemes. One in 2015 for
Foreign Assets and in 2016 for assets held in India which ended on 30th
September’2016. There was no major breakthrough in any of the efforts made by
them. At last on 8th November’2016, Government decided to abolish
500 and 100 notes to curb the black money. I strongly think that it’s a master
stroke to teach lesson to the people who holds black money but at the same time
I also feel that it is poorly executed. Without going deep into the short term
problems let us understand the impact of the decision on our economy and equity
investment.
I support the move from
the bottom of my heart but would like to assess the situation as financial
planner so that people can take informed decision. It is believed that out of
total Rs. 15 lakhs crore worth notes which were in circulation around 10 lakhs
crore may get deposited in the banks and balance Rs. 5lakhs crore will not come
in the system as people holding this notes will never like to be caught in
public. Yes there are many positive impacts of this. This move will also
largely impact the terrorism funding and also solve the problem of duplicate
notes. There will be huge liquidity available in the banking system which will
result in sharp rate cuts. The Government’s fiscal position will also improve
and give them room for major reforms and infrastructure spending. But there is
other side of the coin as well which needs to be understood. If everything was
good then there was no reason to panic in stock market. The fall in stock
market tells us there is something which needs to be looked into. To me there
are 3 major risks of demonetisation.
1) Economic slowdown:
You might have noted
that after the announcement major trade activities have stopped. Everybody is
busy in settling their accounts and depositing the cancelled notes in the bank.
People have postponed their lifestyle expenses and the demand has reduced to
half which will reflect in third quarter results. Except for the necessity of
the life every other decision is either on hold or postponed as there was no
enough cash available. There is no doubt that it will result in economic
slowdown which will directly impact GDP growth of the country. I am sure that
India will not grow at 7.80% in this fiscal as targeted but it can reduce to around
5 to 6% this year. There are forecast even below this level which I think is very
early to predict.
2)
Threat of Deflation:
As there is no demand
definitely prices of all commodities are likely to fall which will impact the
inflation. Till date we were targeting inflation to around 5% but after this
mega event nobody can predict where the inflation will go. The Wholesale Price Index
(WPI) is likely to be negative in coming months but if Consumer Price Index
(CPI) goes negative then it will create more panic. Government will try it’s
best to reduce the rate of interest and also announce various measures to
increase the purchasing power of the people but it is going to be tough if the
mood of the people does not change. We have witnessed cancellation of many pre
and post marriage events, the expense of which runs in lakhs. I have also seen at
my native that crops of the farmers are not getting sold at half of the price
for the shortage of the cash. Construction activity is also stopped in most of
the parts. This will result in low to negative inflation. No country wants
deflation or very low inflation. Let us hope that Government will take
aggressive steps to overcome this.
3)
Create unemployment:
Experts believe that
the cash or black economy was much more active compared to legal economy. The
size was believed to be 3times legal economy. Overnight many small and medium
scale industries will stop working as it will be difficult for them to change
to banking system overnight. Angadia services have to close down there business
overnight. There will be slow down in construction industry and similar
industries where the cash component was more. Slow down in trading activity
will directly impact transportation business as well. Cars, Scooters, Electronic
items, Catering, Tours and Travels; Hotels and entertainment industry will also
see a slowdown in their business. All this tell us that it will create a mass
unemployment in the country. Is 14000 layoffs by the Larsen and Toubro is just
the beginning? This is really going to be challenging for the Government.
Sooner they take some strong actions better for country.
There is no reason to
panic yet but to know the consequences of the major move. Government might be
prepared for this in advance and can take several steps to overcome the issues
at earliest. But as an equity investor you should be careful before you take a
major decision. The investors should avoid the noise and rumors around them and
consult a professional. They should continue their SIPs. For lump sum
investment it is always advisable to invest in ultra short term funds and give
STP in equity funds for around 12 to 18 months. It is important to stay
invested for longer period as it is rightly said time spent in the market is
more important then timing the market. The move can backfire if Government fails
to take proactive steps.
This article first appeared at indianotes.com
http://www.indianotes.com/Analysis/3-major-risks-of-Demonetisation/205069/2/T
