All ground-breaking policies have consequences. Tracing the paths of those consequences is seldom straightforward, particularly when the impact is felt across a complex economy as India. We will mark the first anniversary of demonetisation in India on 8 November 2017, considered as one of the most radical fiscal decisions taken in Indian economic history. The primary idea behind the move was to negate the parallel economy built on unaccounted cash accumulation and lend a boost to digital payments. The government has also taken several steps to build the digital ecosystem. As we look back today, we find that it had several consequences, some intended and some unintended.

The adoption rate of online payments surged during demonetisation but plateaued as soon as cash became available in the system. A positive is that it has not fallen down to pre-demonetisation levels. According to the Press Information Bureau, digital payments have risen by 56% till May 2017 and the number of credit card users has increased by 24% since last year. However, a large part of our economy especially in rural areas depends on cash, which was under severe stress with unintended loss of business.

Secondly, 3.3 million new taxpayers have been added post note ban, resulting in higher government revenues, which could lead to a fall in tax rates in the future, spurring economic spending. It will also help to increase the size of the formal economy.

Now, looking at the cons, the manufacturing sector saw a steep fall as the liquidity crunch disrupted the production supply chains and SMEs which typically pay workers in cash were most hit. Average year-on-year growth for the sector fell to 1.7% for the nine months post-demonetisation compared to 5.8% for the nine months pre-demonetisation. Firms dependent on the wholesale channel suffered the most as the channel works primarily on cash.

Impact on consumption

The disruption caused by the above events definitely triggered a change in consumer psychology and made them act judiciously and postpone discretionary purchases. The Reserve Bank of India’s latest Consumer Confidence Survey results for September 2017 confirms this observation as the consumer confidence index based on the current perception of the economy is at the lowest point (95.5) in the last three years.

The twin impact of note ban and GST has cut the liquidity flow to the markets and consumers were seen in no mood to splurge even in the festive season. Loans for consumer durables have fallen by 9% to 17,800 crore this year. An online survey of 39,000 Indians conducted by Ipsos found that 40% were likely to reduce their spending this Diwali from a year ago.

But we’re seeing a slight improvement in consumer sentiment; it will only get better in the coming quarter.

Signals of demand revival

Finally, as we approach the middle of the third quarter we see the ripples created by demonetisation and GST settling down. We should now get to see the positive implications of these unprecedented decisions in the form of restored real demand, lower inflation and a sound economic system. Consumer demand is showing resilience. Some early signs of recovery are already visible in the second quarter results of the leading fast moving consumer goods firms.

Though the revival is being led by growth in urban markets, the rural demand, which was the worst hit, is also starting to pick up due to a good monsoon, albeit at a slow rate. Increased government spending, improved rural demand, besides wholesale channel stabilization will aid in the pickup in demand by year end.

We see a rising trend of micro-transactions conducted via mobile phones. While cash is still used, it is encouraging to see the growing use of digital transactions across tier I, II and III markets. The trust factor in digital transactions has also boosted. It will definitely influence many more shoppers to start using plastic money in the long-term. In the past six months, we have seen the trend of increased usage of credit/debit cards and eWallets especially when e-commerce players, banks and fintech start-ups offer cashbacks or discounts. This trend will only rise over a period of time as digital payments become more mainstream. We are amid a true paradigm shift and India is poised to become a global leader in new types of payments.

In summary, demonetisation increased the level of the digital economy significantly and brought in more taxpayers, while impacting the GDP negatively at the same time.

Pinakiranjan Mishra is partner and national leader, retail and consumer products, EY India.

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