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Currency demonetisation: Recession at gate or GDP at 9 percent
14 Nov 2016 06:42 PM | Source: Moneycontrol.com
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Currency demonetisation: Recession at gate or GDP at 9 percent
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Demonetisation has happened. Rs 500 and Rs 1000 notes are banned. There are serpentine queues outside banks/ATMs and experts are busy. There are high pitched videos, columns, tweets and Facebook posts by every expert about how poor are hurt and how this will kill trade. Roll back demands are being made from every arm chair economist, citizens dining in five star hotels but extremely concerned about poor, many chief ministers. Overall, air of the nation is thick with not only smog but also with pro poor and small business friendly experts and politicians.
There is a view propelled by gang of astrologers masquerading as economists that demonetisation is going to hit hard economy as cash will be sucked out of system and trade will stop. This hypothesis does ring true if one notices the plugging sales at e-commerce ventures, lack of crowd in markets and drop in foot falls at malls. No wonder all ‘Captain Obvious’ are at top of lungs on the incoming slowdown hitting Indian economy due to this demonetisation.
History tells us that events rarely follow obvious path and are shaped by unforeseen and unpredicted. Demonetisation is such an event. It is not going to slow down the economy but going to put this economy in high pedestal of growth. A jump by 2 to 3 percent in GDP, if not more by demonetisation is very much possible and for the first time in the world, we will see trickle up-effect in the economy than usual trickle down.
The first foremost and obvious effect of demonetisation is elimination of cash economy and shift towards banking system. Lot of people even without illegal money were not using banks and were saving in cash at home for variety of reasons. Now, all this money will go in formal banking channels and will find its way to formal earning mediums like mutual funds, fixed deposits, saving accounts etc. This will create a push and boom as the cash lying idle at home will be at work and will create contagion effect. Thosedormant ‘Jan Dhan’ accounts will now be kicking with life and in big way.
Even if 10 percent cash lying idle at household level, translates into Rs 1.4 lakh crore (USD 21 billion). Now this, USD 21 billion will be available in banking system and hence available to government/industry to kick start new projects/ build infrastructure. To get a relative perspective, FDI inflow in India in FY2015-16 was USD 40 billion while in FY 2014-15, it was USD 30 billion so the amount coming from dormant accounts to banking system alone is 53% of this year FDI and almost 70 percent of FY14-15 FDI.
The second kicker to the economy will come from fall in real estate prices. As per exerts and general perception, real estate prices are going to fall by 20 to 30 percent in general (black component of a deal). In India, in FY 2015-16, if one just take top 8 cities, USD 14 billion worth (Rs 90,000 crore) was invested in real housing (3 lakh houses in 8 cities at a 30 lakh average price though in reality numbers are much higher).
As per experts, real estate prices are expected to crash by 20 to 25 percent. This drop in prices even if we take 50 percent drop in number of transactions will leave more than 9,000 crore (USD 1.3 billion) money at the hand of these end users in just 8 cities and this amount will be 10x more higher if one account for whole country. This extra cash available with the consumer will go in other discretionary consumption and will either build the saving rates or drive consumption of services as well as consumable goods.
The third and not so obvious kicker will come from attempt of all back money hoarders trying to convert it in white. As per data released by RBI, India has Rs 14 lakh crore (USD 210 billion) in circulation in Rs 500, Rs 1000 bank note denominator. For a moment, if we assume on a very aggressive basis that 50 percent of it is white and declared income (fully tax paid), still there is Rs 7 lakh crore (USD 105billion) in black money. Now, these cash hoarders will try to use people with low income to transfer Rs 2.5 lakh in account. As per financial ministry data, India has opened 25 crore (250 million) ‘Jan Dhan’ account for poor people as on today. If black money hoarders were able to use 50 percent of these accounts (12.5 crore) to deposit cash, one just needs to deposit Rs 70,000 in each account. So apparently all this cash will flow back in system in next 50 days without any collateral damage to these money bags. However, the cost of organising this deposit program will range anywhere from 20 to 40 percent (as per figures being circulated in media/social media). Even if we take a nominal cost of this transaction at 10 percent being paid to these accounts (against 30 percent), it will be a commission of Rs 70,000 crore (USD 11 billion) or Rs 8,000 per ‘Jan Dhan’ account.
This 8,000 will immediately find its way to consumption as this is massive cash for these account holders and even if just 50 percent is spent, Indian economy will see pumping of USD 6 billion (Rs 40,000 crore) being spent in next 3-5 months. This class will binge on clothes, consumer goods and will create massive multiplier effect. However, for the first time multiplier will not trickle down but will trickle up as rural or low cost goods will drive the industry. So in a way, PM Modi has imposed huge wealth tax on the rich people and accomplished direct cash transfer to poor people.
Foreign investors pumped USD 10 billion in 20 months in Indian startups which put India on world map as third best country for startups and changed the whole mood of nation while creating many multi-billion enterprises. Payout of USD 6 billion in arrears to government employees in 2008 as per sixth pay commission, triggered consumption boom in India and insulated it from economic crisis which impacted every country. Hence, this total amount of USD 40 billion hitting the banking andconsumption sector in next 3-6 months is not just going to finish black economy but going to put India on an autobahn of economic growth.
PM Modi in his usual total out of box thinking, has just put India on growth orbit of a different level where a minimum jump in GDP by 2 to 4 percent is not ruled out.
Gear up, the age of India has arrived.
http://m.moneycontrol.com/news/sme/currency-demonetisation-recession-at-gate-or-gdp-at-9-percent_795
14 Nov 2016 06:42 PM | Source: Moneycontrol.com
Share:
Currency demonetisation: Recession at gate or GDP at 9 percent
Font Resize: A A
Demonetisation has happened. Rs 500 and Rs 1000 notes are banned. There are serpentine queues outside banks/ATMs and experts are busy. There are high pitched videos, columns, tweets and Facebook posts by every expert about how poor are hurt and how this will kill trade. Roll back demands are being made from every arm chair economist, citizens dining in five star hotels but extremely concerned about poor, many chief ministers. Overall, air of the nation is thick with not only smog but also with pro poor and small business friendly experts and politicians.
There is a view propelled by gang of astrologers masquerading as economists that demonetisation is going to hit hard economy as cash will be sucked out of system and trade will stop. This hypothesis does ring true if one notices the plugging sales at e-commerce ventures, lack of crowd in markets and drop in foot falls at malls. No wonder all ‘Captain Obvious’ are at top of lungs on the incoming slowdown hitting Indian economy due to this demonetisation.
History tells us that events rarely follow obvious path and are shaped by unforeseen and unpredicted. Demonetisation is such an event. It is not going to slow down the economy but going to put this economy in high pedestal of growth. A jump by 2 to 3 percent in GDP, if not more by demonetisation is very much possible and for the first time in the world, we will see trickle up-effect in the economy than usual trickle down.
The first foremost and obvious effect of demonetisation is elimination of cash economy and shift towards banking system. Lot of people even without illegal money were not using banks and were saving in cash at home for variety of reasons. Now, all this money will go in formal banking channels and will find its way to formal earning mediums like mutual funds, fixed deposits, saving accounts etc. This will create a push and boom as the cash lying idle at home will be at work and will create contagion effect. Thosedormant ‘Jan Dhan’ accounts will now be kicking with life and in big way.
Even if 10 percent cash lying idle at household level, translates into Rs 1.4 lakh crore (USD 21 billion). Now this, USD 21 billion will be available in banking system and hence available to government/industry to kick start new projects/ build infrastructure. To get a relative perspective, FDI inflow in India in FY2015-16 was USD 40 billion while in FY 2014-15, it was USD 30 billion so the amount coming from dormant accounts to banking system alone is 53% of this year FDI and almost 70 percent of FY14-15 FDI.
The second kicker to the economy will come from fall in real estate prices. As per exerts and general perception, real estate prices are going to fall by 20 to 30 percent in general (black component of a deal). In India, in FY 2015-16, if one just take top 8 cities, USD 14 billion worth (Rs 90,000 crore) was invested in real housing (3 lakh houses in 8 cities at a 30 lakh average price though in reality numbers are much higher).
As per experts, real estate prices are expected to crash by 20 to 25 percent. This drop in prices even if we take 50 percent drop in number of transactions will leave more than 9,000 crore (USD 1.3 billion) money at the hand of these end users in just 8 cities and this amount will be 10x more higher if one account for whole country. This extra cash available with the consumer will go in other discretionary consumption and will either build the saving rates or drive consumption of services as well as consumable goods.
The third and not so obvious kicker will come from attempt of all back money hoarders trying to convert it in white. As per data released by RBI, India has Rs 14 lakh crore (USD 210 billion) in circulation in Rs 500, Rs 1000 bank note denominator. For a moment, if we assume on a very aggressive basis that 50 percent of it is white and declared income (fully tax paid), still there is Rs 7 lakh crore (USD 105billion) in black money. Now, these cash hoarders will try to use people with low income to transfer Rs 2.5 lakh in account. As per financial ministry data, India has opened 25 crore (250 million) ‘Jan Dhan’ account for poor people as on today. If black money hoarders were able to use 50 percent of these accounts (12.5 crore) to deposit cash, one just needs to deposit Rs 70,000 in each account. So apparently all this cash will flow back in system in next 50 days without any collateral damage to these money bags. However, the cost of organising this deposit program will range anywhere from 20 to 40 percent (as per figures being circulated in media/social media). Even if we take a nominal cost of this transaction at 10 percent being paid to these accounts (against 30 percent), it will be a commission of Rs 70,000 crore (USD 11 billion) or Rs 8,000 per ‘Jan Dhan’ account.
This 8,000 will immediately find its way to consumption as this is massive cash for these account holders and even if just 50 percent is spent, Indian economy will see pumping of USD 6 billion (Rs 40,000 crore) being spent in next 3-5 months. This class will binge on clothes, consumer goods and will create massive multiplier effect. However, for the first time multiplier will not trickle down but will trickle up as rural or low cost goods will drive the industry. So in a way, PM Modi has imposed huge wealth tax on the rich people and accomplished direct cash transfer to poor people.
Foreign investors pumped USD 10 billion in 20 months in Indian startups which put India on world map as third best country for startups and changed the whole mood of nation while creating many multi-billion enterprises. Payout of USD 6 billion in arrears to government employees in 2008 as per sixth pay commission, triggered consumption boom in India and insulated it from economic crisis which impacted every country. Hence, this total amount of USD 40 billion hitting the banking andconsumption sector in next 3-6 months is not just going to finish black economy but going to put India on an autobahn of economic growth.
PM Modi in his usual total out of box thinking, has just put India on growth orbit of a different level where a minimum jump in GDP by 2 to 4 percent is not ruled out.
Gear up, the age of India has arrived.
http://m.moneycontrol.com/news/sme/currency-demonetisation-recession-at-gate-or-gdp-at-9-percent_795
