The big-bang year

Cash was king as government chased tax evaders and promoters tapped profit-makers to sustain capital-guzzlers in the group

By Mohan Sule

If the assassination of a president was a seminal moment for Americans (Where were you when Kennedy was shot?), it arrived with a thud for Indians at 8 pm on 8 November. Like addicts displaying withdrawal symptoms, the forfeiture of high denomination notes sent everyone scurrying to take stock of their cash chest. There was shock and awe even on the other side of the Atlantic at the election of a maverick as president, perhaps demonstrating that the oldest and the largest democracies in the world share more in common than thought of: the off-streaming of the mainstream media. There was anger, denial and finally acceptance of the ostensible drive to unearth black money and choke corruption. The acrimony turned from the lack of preparation, despite repeated explanations by the finance minister on the need to maintain secrecy, to the positives and pitfalls of a digital India. The meltdown was not restricted to an anti-corruption crusader and a fiery leader of an impoverished state coming out of many years of Communist rule. The most pathetic lot was the economists, clueless on the outcome of the mind-boggling exercise just as they were split wide open on the continuation of the previous central bank governor. The tinge of skepticism if it is ever possible for India to become cashless was derived from the four-storied GST structure and the wrestling between the Centre and the states on the degree of control over revenues.

Control was at the heart of other dramas unfolding elsewhere. At Bombay House, allegations of coup were aired by the retired honcho who refused to fade out gracefully and countered by accusations of fraud by his successor who did want to exit quietly as the shareholders saw their wealth evaporate and corporate governance was condensed to a tussle between izzat and downsizing. Turf wars were not always internecine. The aggressive business model of a new telecom services provider erupted in a battle for survival, with user’s interconnectivity becoming the dead point as existing players retaliated. The exhaustion led to tepid response to spectrum auction, disrupting government calculation that had already gone haywire due to failure to stick to the PSU divestment timeline. Cartelization was not restricted to the air waves. Cement producers in India and drug exporters to the US were pulled up by monitors for ganging up to fix prices, raising concern over the sustainability of their valuations. The worry extended to tech stocks facing cut in spends by the financial sector in the US, Brexit and the EU. Even as emerging markets’ currencies played snakes and ladders with the dollar, boosting and pulling down ferrous and non-ferrous metals in turns, another deadly game was being played at the LoC, with surgical strikes countering terror attacks on army bases.

Meanwhile, promoters resorted to complex restructuring exercises in the name of synergy but in reality to suck out cash from profit-making companies to help capital-intensive businesses. Uncertainty arising from uneven global growth and an increasingly imminent second hike in US interest rates since the credit crunch of September 2008 kept domestic equities range-bound but propelled the Dow to new heights. Will they fly out or stay put was the dilemma of local investors second-guessing the behavior of foreign portfolio investors despite them turning net sellers for most part of the year. The renewed rural buying after a normal south-west monsoon following two years of deficiency bolstered earnings of a host of sectors ranging from two-wheelers to cement and consumer durables. The accord on cutting production to stabilize the declining trend in crude prices in the waning days of 2016 was a solace for project exporters depending on orders from the Gulf region and to commodities depressed by a strong dollar. It was not only gold whose luster was fading due to spurt in prices riding on a weak rupee and government crackdown on jewelry sales in cash and on imposition of cap on holdings. Liquor, too, became scarce as Kerala and Bihar banned sales. For banks groaning under bad loans, the surge in deposits post demonetization was a blessing as bond yields dived on easy liquidity, boosting treasury income. Stocks, meanwhile, continued to trade volatile, unable to make up their mind if the cash crunch will be a bigger threat to growth or the outflow of foreign funds to the US due to belief of increased spending on infrastructure. In a nutshell, the paradox of growth coming at the expense of trade barriers in one corner while increasing transparency and ease of doing business trying to be the selling points in another perfectly captured the essence of the year that was.

Audacity of hope

The 50-day transition towards digital transactions will be a unique feat for an economy sustained by cash dealings

By Mohan Sule

There might be two views on the short-, medium- and long-term impact on the economy of the sudden withdrawal of old high denomination notes from 9 November. Projections of the dent in the GDP growth rate for the current fiscal have ranged from 0.1% (according to some brokers) to 2% (according to economist-turned-politician Manmohan Singh). The confusion stems from the fact that there is no track record to rely on, no esoteric research papers to latch on to. India has become the first growing economy to undertake the exercise. So far, only a handful of autocratic, poor and financially-devastated nations have resorted to such a drastic step. Demonetization carried out in India in January 1978 was before liberalization, Internet, mobile telephony and Jan Dhan accounts. Hence, there is neither a road map nor any serious studies to draw conclusions of the salutary or adverse impact of demonetization. As such all the estimates have to be taken with a big dose of skepticism. The market has not been of much help either. As the announcement coincided with the results of the US presidential election and indication by the US Federal Reserve about a second hike in interest rate since the credit crunch of September 2008, there is uncertainty about the weight to assign for the causes of the flight of foreign portfolio investors. The diving of the Indian rupee has to be seen in tandem with the weakening of other emerging market currencies against a soaring dollar. The move, at hindsight, could not have been timed better. The kharif season was over and so also festive buying courtesy some of the disbursements recommended by the Seventh Pay Commission. Most rabi-crop growers had bought fertilizers and seeds to begin sowing. Some state elections are due early next year.

Almost all the downward revisions in targets for the equity market are based on two assumptions. First, the informal sector is dependent on the cash economy and drying up of the flow will lead to diminished purchasing power. Second, discretionary spend is largely financed by unaccounted wealth. What is ignored is the fact that cash is merely a medium and plugging of this mode does not mean legitimate stakeholders will be denied their dues. The disruption will lead many to utilize their Jan Dhan accounts, so far the receptacles of subsidies. The telecom revolution is not merely fueled by urban areas. Even rural areas have embraced the communication technology. The question that should be posed is if a 50-day window adequate to effect mass-scale switch-over from physical to digital payments. The concern that consumption sectors will take a hit has to be viewed in the context that the new buyers that urbanization will create and the shepherding of the informal segment into tax-paying players will boost volumes of mid- and low-level products and services to balancing out the decline in demand for high-end output. There will be correction in prices of some of the supplies that banked on scarcity rather than any innovative appeal. Investors might prefer players catering to a larger market at sensible and realistic margins. As their earnings will depend on number of units sold, the demand for manpower and inputs, too, will increase.

In the transition to a cashless society, Prime Minister Narendra Modi will be demolishing many myths. First, only an economist can understand the economy. This is a generic assertion. Rather the differentiation should be made between a mediocre and an out-of-box thinker. A leader is not afraid to take a stand that might cause pain in the short term but packages it so attractively that followers are willing to make the small sacrifices called of them. On this criterion, the prime minister has passed with distinction, modifying the implementation as per feedback without losing sight of the objective of sucking out the excessive cash from the system. Second, firmness is a disadvantage. Instead, it can turn out be a virtue when the going gets tough. There is already optimism that the next big move to stimulate the economy will come early next year or in the budget for the next fiscal to be presented on 1 February. Third, a government-mandated changeover to a new environment cannot be achieved in a limited time frame. Sudden disruption can lead to chaos but there are times when beginnings have to be abrupt so that the old system is discarded fully. Though the switch to de-mat trading was achieved in phases by the stock exchanges presiding over a universe of one of the largest listed equity markets in the world, there was a timeline to adhere. If the current turmoil results in India achieving a state where only about 8% of the transactions in value are in cash as in many developed economies as against more than 65% in value in India, the daring experiment will be emulated and examined by historians in the years to come.