Impact of U.S. polls & demonetization on

Indian economy.

Prepared by:-Ashutosh Thareja

Impact of US Polls

The US Presidential elections took the markets by surprise with Trump winning the polls. The markets initially went into some tailspin as there have been previous concerns about possible trade barriers with other nations. We have heard talks of Mr. Trump speaking in favor of restricting entry of skilled labor from overseas countries with a view to protect jobs in US. Hence, IT sector could remain under pressure, at least in the near term.However, Pharma stocks have fared better today since there has been lesser mention on cutting down of healthcare costs. Having said all this, the tone of the introductory speech was more welcoming where he did mention working with all nations together though there was a distinct mention of keeping US interest in the mind first. Markets will watch closely now about what president elect says over the next few weeks

TradeTrump’s vision of a Great America is very outdated and conservative. Trump sincerely believes that the world is robbing the Americans of their jobs and thus, wants to close its doors to trade. To do so, he plans to implement tariffs and quotas. Any tariff that Trump proposes to either China or Mexico will affect India as well. Also, many a times, Trump has also expressed his displeasure on the work that is outsourced by America to India.

During the election process, Trump promised to lower taxes and increase military expenditure. It is assumed that to fulfill these promises, Trump will use government money that may lead to a debt burden and a falling dollar. And a recession in US, would obviously adversely affect investment and growth across the world, including India.

Impact of DemonetizationOn the domestic front, Government has clamped down on the prevailing black money issue by imposing a ban on the existing Rs.500 and Rs.1000 currency notes. Even as this step may impact the near-term GDP numbers because of a possible slowdown in economic activity, the longer term impact will be significantly positive. A large part of the parallel economy is likely to flow in to the formal system, which in turn will boost the GDP.

What just happened? New Rs.500 or Rs.2000 notes will replace the role of the old Rs 500 or Rs 1000 notes. Large value notes will not go away. This is a surgical strike against those people who have inventories of the old notes that can’t be shown to the authorities. Those people will find ways to fence those suitcases of cash, and suffer monetary loss in the process.How do we interpret this move?

Money is the lubrication that makes the market economy possible.In the short run, this will be a disruption for cash-intensive business models. The November 9 stock market returns of various firms and industries will pick up this disruption. As an example, the real estate business will suffer. Firms which have built a business model that does not involve cash will fare better. If, in the same industry, you have two firms where one uses less cash than the other, this will show up in the stock market returns. Similarly, if this disrupts the working of criminal organisations in the short run, perhaps there may be some impact visible in the crime data.

Unaccounted money is not synonymous with cash. Contrary to the depictions in movies, a lot of unaccounted money works through front companies that have bank accounts. It is not correct to equate corruption and tax evasion with physical cash. The impact of this move upon the black economy is smaller than we think.

The impact upon corruption will be small. Controlling corruption is not about blocking access to a non-traceable store of value. There will always be precious metals, US dollars, bitcoin, and jars of Tide. The facts on the ground could potentially evolve where women on the street ignore the government and continue to use Rs 500 and Rs 1,000 notes as a tool for their transactions. As long as people agree to use something as a currency, this suffices at a practical level, even without the state enforcing it as legal tender. Solving the problem of corruption requires deeper changes to institutions.

When the sources of corruption are unchanged, people will require some methods for their transactions. To the extent that people in India build business processes and business models that de-emphasise the use of Indian currency, that will increase the cost of doing business, and reduce the seignior age income of the government [that is, the profit made by the government from the printing of money, literally the face value of the money minus the cost of physically making it]

This will not take us closer to the cashless world. This could be viewed as a way of pushing the post-cash electronic payments world forward. However, the institutional foundations of the new world have to be laid, and only at the tail end of that process, a certain use of coercion works okay.

Impact of Demonetization: Sectors which can get positively impacted

The banking sector is expected to benefit as more money will flow into the formal sector. We expect banks to benefit in terms of more deposits, especially low cost deposits. However, in the near term, banks may witness higher stress on assets in the real estate sector.

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Apart from these, we expect those sectors to benefit, which have a higher presence of unorganised sector – for eg. Plywood, tiles, batteries, etc.  The building materials sector may get impacted on the back of slow demand in the near term to medium term as all transaction to service providers like architect, carpenter, painter, labor will get impacted as a large proportion of service providers don't provide bills. However, over the longer term, organised players will be positively benefited with this move as a large part of unorganised market will now shift to organised since the price differential between the two is will come down. Unorganised segment form about 80% of the plywood business, 40 per cent in laminates and 50 percent in ceramic. This is in line with the government's plan to implement GST and weed out the players who are avoiding taxes. We were expecting organised players like Kajaria ceramics, Somany ceramics, century plywood, Greenply industry, Greenlam, Cera sanitaryware to benefit post GST implementation but PM's move will benefit the sector earlier than expected barring near term impact on demand due to lower transparency.

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Impact of Demonetization: Sectors which can get negatively impacted

Real estate sector is likely to witness pressure, on expectations of a slowdown in sales. With a squeeze on cash availability, the sector may witness lower sales which, in turn, might lead to lower prices. Volumes may get impacted as potential buyers postpone purchases on hopes of reducing prices. Large players who do not have cash dealings may feel limited impact.

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Housing finance companies is likely to witness some stress on loans given to real estate developers who is likely to face liquidity crunch in the short term.

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Jewelry companies will also get impacted as they see slow-down in sales

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Consumption sector may feel the impact as there is a temporary slowdown in spending. These companies had got impacted in the past when PAN card was made mandatory for high-value transactions.

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Some percentage of sales in the auto sector happens on all cash basis and that will negatively impact the sector – especially the two wheeler demand. Liquidity crunch will likely impact passenger car demand. Ban will also impact economic activities and that could impact commercial vehicle sales.

Market ImpactVolumes may see a dip in the near future especially from the retail investors. However, the HNI and institutional volumes may not be impacted significantly. The volumes will pick up over medium term to long term.

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