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Thursday, November 17, 2016

Congratulations to Mr Modi for Creating Mini Recession

A little more than a month after the 'shock and awe' by Prime Minister Modi,the football match between Government and opposition,economists on each side as well as the debate in the street is still on.

Initially what looked like a brave step in the fight against corruption is frankly turning out to be a damp squib.Almost 75% of the cash seems to be back in the banking system(11 lakh Crores) and there is still half a month left.

It just shows how successful the Prime Minister has been in his 'PR" that people on the ground despite hardships have not rioted or been impatient in a big way.That feeling is slowly giving way to some anxiety although the person in the street is still unable to do the maths.

I hear those defending 'demonetisation' say that the 'pain is short term but gain is long term".Yet no one seems able to define the short term?

Worst is the new line taken by PM Modi which basically is a climb down and the government is seen pleading with the corrupt to bring in the unaccounted funds.From levying a penalty of 200% of the funds found now the new scheme says pay 50% tax and hold the remaining for 4 years to get away with your income from corruption!

An average working person in the highest tax bracket gets 30% deducted at source so those who did not choose the path of corruption might be feeling let down.

Rural India

As per Newslaundry.com -  5.3 bank branches per one lakh Indians in rural India 15 years ago. Today the figure stands at 7.8 bank branches per one lakh Indians.


This shows that a majority of rural India has very little access to banks and the organized financial sector. They rely heavily on cash and the informal credit system. 

Then, we have just 2.2 lakh ATMs in the country. For a population of over 1.2 billion people, that's a very small number. And guess what? A majority of ATMs are concentrated in metros and cities.


 For instance, Delhi has more ATMs than the entire state of Rajasthan

Given the poor penetration of banks and formal sector financial services in rural India, we believe that Modi's cashless economy ambitions are a distant dream. 


Its like Modi trying to promote a sprinter who cannot even break the national record yet is being told to break Usain Bolt's Olympic record.

I am not even commenting on the bungling by the RBI and consequent domino affect on all Banks.The new Guvernor,Mr Urjit Patel has been silent other than press releases to say that they are taking measures to tackle the situation.

Modi who promised to set things right within 50 days now says that the situation will improve slowly!!Its like his pre poll comitment to bring all the 'blackmoney' stashed abroad so each Indian gets 15 lakhs in his or her bank account.All of us are not waiting with bated breath!!

Even RBI projects a 50 bps de growth in GDP.The general consensus is >100-200 bps.

Point to be noted is that things were working with a lag so the effect did not seem so bad in the first month but now with supply chains cashless,farmers not able to plant in the winter(Rabi) season the inflation and price growth will come in to bite.

I fear stagflation due to these policies.Rise in inflation - fall in demand.Unemployment.Fall in discretionary spending.I think Mr Modi should be congratulated for creating a mini recession.

Rural India has been worst hit and all these emergency measures of putting up more POS terminals in villages cannot work before One Year as the financial institutions do not have the bandwidth.

The Banks spent years trying to keep customers out of bank branches and this currency demonitisation has shown how stretched their resources are.It will not improve immediately.

Bottomline...

This pain will become systemic and likely stay till Q2 of 2017 as RBI,Banks,NBFCs do not have any solution.

Cost of printing and replacing 85% of the currency is quite large

Unemployment in seasonal and manufacturing,lack of spending and consequent lack of growth in revenues for sectors will remove the positives of a good monsoon after two drought years.

Positively the banking system has been flushed with 'dead money' and the fear factor might force a lot of businessmen to do away with cash hoarding and follow a straighter path.

Interest rates 'may' come down although the Bank NPAs do not signify too much of a rate cut in the short term.

I doubt this step has dealt an ultimate blow to corruption or blackmoney by a long shot.India has paid a higher negative price than any estimation for this and will continue to do so.

Let us see if the Budget on 1st February 2017 can be an unexpected gamechanger?