Talk on After effects in Indian & World Economy with Demonetization policy

On 17 November, 2016 from 4.00 pm to 6.00 pm at VIA

Forum: Economy & Finance Forum

Speaker: Dr V Aditya Srinivas & CA Dr T S Rawal

Dr. V. Aditya Srinivas, Chief Operating Officer and Chief Economist from the BSE Brokers Forum & Dr. T S Rawal, renowned Economist & Chartered Accountant, delivered a talk on After effects in Indian & World Economy with demonetization policy” at a program organized by VIA Economy & Finance Forum at VIA.

The government has pulled off arguably the most significant reform measure in its tenure. While this expeditious move to boldly counter the black money and parallel economy threat is likely to have significant repercussions, importantly, this effort will have a visible impact on how the current government’s policies are perceived in international circles of economic power. Most of the macroeconomic impact will be felt in the short-term, though there are larger implications in the medium- to long-term.

He said “National GDP will fall below 6% in the aftermath of the demonetization,” said chief operating officer and chief economist at BSE Brokers Forum V Aditya Srinivas during a discussion on the after effects, in India and world economy, of the demonetization policy. The event was held at Vidarbha Industries Association (VIA).

This, Srinivas said, will happen because a large sum of money has been removed from circulation, inhibiting purchases of fast moving consumer goods, which are usually purchased in hard cash. Srinivas, along with economist and chartered accountant Tejinder Singh Rawal, explained the implications of demonetization to students, professionals and businessmen present at the discussion.

He also said, “The movement of currency has stopped after demonetization, which is slowing the economy down.” Workers in the steel, aluminium, construction and real estate sectors are not getting paid and as a result work in these sectors has stopped, said Srinivas.

Highlighting the benefits of this slowdown, Srinivas opined that current scenarios are favourable for buying real estate and automobiles, since RBI has slashed repo rates to the banks. However, he cautioned that this benefit can only be availed if banks are willing to pass it down to consumers. He also cautioned against buying land as an investment since there will be no returns.

Srinivas spoke briefly about the impact the recent US presidential elections will have on world economy. He said, “US contributes to 23% of the world GDP and because its share is the highest of any other country, the current political instability there will have severe consequences on global economy.”

During his talk, Dr. Srinivas explained how the Monetization Policy of Indian Government coupled with Trump win in US Elections would have an impact on the world economy and the Indian economy. Mr Shriniwas pointed out that with this monetization policy, India’s GDP growth would come down as 70% of economy runs on cash. When consumption stops GDP of nation goes down. A lot of money is entering the Banking systems which will followed by reduction in interest rates of deposits but reduction in interest rates of advances as well which would be beneficial for industry as a whole. Banks Balance sheet would improve and this would be beneficial for the banking industry on a whole. He elaborated that Construction industry / Daily wages workers are suffering a lot and that real estate industry is badly hit and demand would be corrected by at least 20% downwards. Mr Shriniwas pointed out that Gold has got inverse relationship to Stock Market. Gold becomes volatile when there is uncertainty in Global Economy. Long term view for stock markets in his opinion would be good but there would be short term uncertainty. He pointed out that this monetization policy is anti inflationary for the economy. He shared that if the US economy grows, outsourcing sector would be hit. The effects of this monetization are creating hassle for the public at large but in the long run it is good for the economy as a whole. He pointed out that supply of currency notes were being hit as the ATM machines of Bank’s were not able to recognize new notes hence all ATMs are not working. A team of IT professionals are working day and night to make these ATM’s compatible for use by customers. IT section will see boom and provide employment to more than 80,000 IT people. 70% of the working population in India is less than 35 years of age which means that there is huge demographic dividend advantage to the economy. There is huge disposable income which leads to a consumption driven economy and therefore the effects of this demonetization are widely felt.

There will be a disruption in the current liquidity situation as households are likely to get affected by the note exchange terms laid by the government. Though clarity is unfolding on this, commodity transactions and general cash market transactions are likely to feel an immediate impact. Unorganized sector proceedings, including small trade market activities, will remain volatile in the short-term.  It is important to note that a significant percentage of the Indian workforce is employed in this sector, which is likely to be affected by immediate liquidity issues. Overall, negative impact on disposable income is expected along with likely disruption in the consumption patterns of the general populace.  It is estimated that there will be a negative GDP impact in the current quarter as consumption gets a shock in the immediate term. However, quantum and degree of this impact cannot be ascertained at this time.

An elevation of uncertainty is always a negative for equity markets. As such, markets have reacted negatively to this latest news though part of this may be attributed to the US election results. Markets will recover in the medium-term as the uncertainty eases out.

Dr Tejinder Singh Rawal, renowned CA of the city said that Demonetization is the act of stripping a currency unit of its status as legal tender. The legal basis for the order demonetizing currency can be found in Section 26 of the Reserve Bank of India Act, 1934. The only procedural requirement is that the Board of the RBI recommends the same to the Union Government. Currently India’s black money economy is about 20% of its GDP.  He said Supreme Court on Tuesday refused to stay the Modi Government’s notification demonetizing Rs 500 and Rs 1,000 currency notes but asked the Centre to file an affidavit giving details of steps taken to ease inconvenience faced by citizens due to long queues at banks and ATMs.

Rawal believes it was inevitable that a large section of the society will face problems after demonetization since they have never used banking services. Those who were able to exchange their old notes will hoard new currency until they are confident that enough money is in circulation for them to use the highest denomination, which was recently issued, said Rawal.

Whether we can become a cashless economy was the topic Rawal touched upon and said, “With Jan Dhan Yojna, the government has made an effort to open as many bank accounts in rural areas as possible. But it will still take a lot of time to transition over to a cashless system.”

Rawal also pointed out that money held by the common man will see its value appreciate, since most of the unaccounted wealth is now deemed redundant. “Approximately Rs400 crore was in circulation before demonetization which was affecting the economy badly. Now, since that money is no longer of any value, the legitimately acquired cash will gain more value than before,” said Rawal.

He also brief about the History of Demonetisation. The first was when Rs.1,000, Rs.5,000, and Rs.10,000 notes were taken out of circulation in January 1946. These two denominations account for a whopping 86% of all banknotes in circulation. The government chose to suffocate the house to eject murky mice.

Among India’s middle class, Modi’s “surgical strike on black money” still appears to be popular. “If something tastes terrible, it must be good for you.” Enough Indians are suffering that they believe it must be in a greater cause. It’s a moral project, not an economic one. Stand in line, we’re told, and you honour our brave soldiers at the border. Short term pangs may have long term repercussions. The effects demonetisation have been largely felt by households, shopkeepers and other microenterprises. These economic agents have, to a limited extent, adjusted to the new situation through variations of a system, wherein purchases and sales previously made in cash are increasingly being replaced by credit transaction. Hardly a tenth of India’s workforce comprises organised employees receiving salaries credited to their bank accounts every month. If non-availability of currency makes it impossible for factory owners to pay wages, they are left with only one option: shut down their units and lay off workers. When that happens — which may not take too long — that’s when things can turn really serious. The conclusion is inescapable: Without cash to immediately replace the now de-monetised notes, we are in for troubles whose effects may not take too long to be known.

He said the government’s move is bold in its intent and massive in its measure. Arguably, this is Modi’s biggest move since he was elected prime minister. While the intent is clear, the implementation and impact is yet to be seen. One thing is sure though – the Indian economy just had a massive disruption overnight. Encouraging electronic payments is most welcome as the spin offs include automatic audit trails, transparent accounting and minimising the risk and cost of handling cash. But India is a vastly unbanked country. Many of the poor do not have bank accounts.

He asked the participants will it put an end to black money? People with large amounts of black money might succeed in converting it back to legal money. The real way to stamp out black money is to disincentivise fresh generation and clean up political funding. Mega-rich don’t stack black money in cash. Rather, they stash it in undisclosed accounts in Swiss Banks. There would be Tax impact on declaration.  All an assesse has to do to escape penalty is state that the amount has been received in the current financial year and tax has been paid on it. This business of taxing the unexplained is spelt out in section 115BBE of the Income Tax Act.

He said the much-awaited trigger for making homes affordable for end users is here. The government’s decision to ban Rs 500 and Rs 1,000 currency notes is expected to hit the real estate sector hardest.  As a sector that’s known for menace of black money, real estate is now likely to move towards improved transparency. Banks get funded. More money available for development. Business Opportunities for cashless vendors. He said The Curse of Cash Harvard professor Kenneth Rogoff, in his recent book ‘The Curse of Cash’ has made a case for a completely cashless economy and how monetary policy will operate in that scenario. Maybe that is still some distance away for India, a working RBI paper on money velocity, back in 2011 is more relevant—which argues that while velocity of money for India has been persistently falling, financial deepening and inclusion can possibly help reverse the trend.

The programme was attended by members, businessman, budding entrepreneurs, management students and a large section of general public.

Earlier, Dr. V. Aditya Srinivas was welcomed by Prafull Doshi, Immediate Past President–VIA with a floral bouquet and Dr T S Rawal was welcomed by Naresh Jakhotia, Jt Secretary – VIA.  O S Bagdia, Vice President -VIA in his opening remarks said speakers must focus and elaborate on the present economic scenario now,  demonetization, after US Elections its impact and affect to Indian economy.. Lots of industrial communities felts that present economic scenario is depressing and hope that it will be doing well in the coming year. CA Saket Bagdia, Convener of VIA Economy & Finance Forum conducted the proceedings of the session and coordinated the question and answer session which was very interesting and satisfying for the participants.

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