Thursday, January 12, 2017

Digged for Gold but got Copper

We came to know that Modi can take bold and tough decisions. But political mastery does not necessarily equate with mastery over economics. So the benefits of demonetization were overestimated and the inconveniences were underestimated by his close aides. And they had to learn hard way that poor execution can spoil a good strategy. Newly printed Rs.2,000 notes became an exchange for black money and created a large scale corruption. It proved that the majority of Indians are not ready to pay taxes they owe to the system.

Let us look at the negative effects first. Take a glance at credit growth rates, it shows that it has gone to 50 years low. Bad times for banks. Vehicle sales have plummeted. Construction industry is seeing a set back. What India badly needs is job creation but the jobs are being lost as the mass employing sector like construction is seeing a set-back. You think it is a temporary phenomenon, well, it is difficult to estimate when the turnaround will come. Forget growth, going back to past levels of valuation will take couple of years for the real estate industry, so there is not much motivation for investors.

There are many positives too. Interest rates are down, inflation is under check. Money in banking system has gone up. Cash to GDP ratio is reduced. Tax collections will see an upside. Indians learnt to use Paytm. Debit cards are not limited to withdraw cash at ATM’s and consumers as well as retailers are demanding for use of POS machines. All these will help offset the negative impacts over few years period. Unless monetary system is tampered again, India would absorb this shock and post higher growth rates.

Collectively, over a period of years, benefits may over weigh the injuries done by the demonetization. But the expectations were set very high that India would be clean in 50 days, which was quite unrealistic.They digged for Gold but what they found was Copper. It too has some value.