Real estate, luxury goods worst hit: Check out the winners and losers from demonetisation

Excerpts from a Deloitte report on the winners and losers from the government's bold move

In one of its most significant moves since assuming power, the Narendra Modi – led government demonetised Rs 500 and Rs 1,000 notes in a bid to curb black money circulation in the economy. 

According to reports, the proportion of Rs 500 and Rs 1000 notes were 86.4% of total value of notes in circulation on March 31, 2016, amounting to Rs 14 trillion. The growth rates in these notes were 76% and 109% respectively in the last five years versus overall currency in circulation going up by 40%.

Though the Rs 500 and the Rs 1000 note ban has inconvenienced the aam aadmi, experts say, the move will have far reaching implications for the Indian economy in the long-run. 

 

Here is an excerpts from a report by Anis Chakravarty, lead economist at Deloitte, on the winners and losers from the government’s bold move.

SHORT-TERM IMPACT

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, commodity transactions and general cash market transactions are likely to feel an immediate impact. 

Unorganised sector proceedings including small trade market activities will remain volatile in the short-term. Roadside vendors, cab drivers, kirana stores etc have already stopped accepting Rs 500 and Rs 1000 notes. 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.

IMPACT ON EQUITY MARKETS

An elevation of uncertainty is always a negative for equity markets. Going ahead, markets will recover in the medium-term as the uncertainty eases. While there exists a possibility of a broad based decline, there will be some sectors (with linkages to the unorganised economy) that would feel the brunt, while some niche technology sectors related to fin-tech and e-commerce could gain. The long-term outlook remains positive.

SECTORAL IMPACT

While sectors with linkages to the unorganised economy are likely to be affected, technology and financial services are expected to gain in the medium-to-long term. On a sectoral basis, the commodities and agricultural sector including the market for consumer durables and non-durables is expected to feel the heat. In the short to medium term, large denomination purchases will likely be made via electronic purchases rather than through brick and mortar outlets. This will impact the retail sector adversely. 

REAL ESTATE WORST HIT

The real estate sector is likely to see a significant negative impact in the medium-to-long term particularly in the repurchase market. There are expectations of a revaluation of current real estate transactions across the board representing possible losses to players in the sector. 

OTHER SECTORS

The luxury goods market is also likely to get affected as this move represents an erosion of real wealth to a large number of people. Areas of sub-sectoral impact will be felt in luxury cars, SUVs, gems, jewellery, gold and high-end branded products.

Positive for (Winners):

Payment gateways; Cards; Mobile wallets; Online retail; Net and payment banks; e-marketplace 

Negative for (Losers):

Agriculture; Luxury goods; Real Estate; Commodities; Traditional Retail - Consumer durables and consumer non-durables
 

IMPACT ON EXCHANGE RATES

Domestic currency could appreciate as notes in circulation will decrease. Though the RBI will be monitoring and taking remedial action, negative impact on international trade cannot be ruled out at this point. Counter moves by the government are expected to ease this impact.

IMPACT ON INFLATION

Inflationary pressures are likely to decline, as demand - along with household inflation - expectations are likely to go down. This would make RBI more comfortable on managing inflation in the future increasing the possibility of rate cuts in the future.

LONG-TERM BENEFIT

This essentially represents a change in regime for the real and financial economy. Domestically, there could be some turmoil as the effect will be disproportionately felt by the lower and upper income classes. Internationally, the government is likely to get a thumbs up for the move and more countries could potentially see this as a viable option to curb black money and stem illegal financial activity.