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Will the Demonetisation Disaster Mean that You Make Money, Or Lose it?

Dec 3, 2016

In this issue:
» The huge disparity between the rich and the poor
» Markets in the week gone by
» ...and more!
00:00
Rahul Shah, Co-Head of Research

A million questions riddled Indians when the Modi government suddenly announced the demonetisation move on 8 November. As the days are going by, some answers are slowly unraveling. And many of these answer don't paint a very encouraging picture.

Take this one for example. Citing RBI data, a report in Indiatoday.in points out that while the total high denomination currency circulating in the system on the day of demonetisation was Rs 15.44 trillion, until 27 November Rs 8.45 trillion had been deposited back in the banks.

Further, it estimates that the quantum of such notes lying with the RBI as cash reserve ratio deposits on 8 November was about Rs 4 trillion. And that with banks was about Rs 0.5 trillion.

Add all this up, and one gets a rough figure of Rs 13 trillion in banned currency notes that is no longer with the public.

Going by the rate at which money is being deposited in banks, it reckons that another Rs 2 trillion could easily get deposited in the 33 days left until 30 December.

This leaves one with an estimated grand total of Rs 15 trillion of such money back in the banking system, compared to the Rs 15.44 trillion that was in circulation before the move.

What does all this mean?

Well, to be sure, all this may not be very precise math. However, it does seem to be enough of an indicator that the black money being left out may not amount to that much. Which in turn means that most have already figured out ways and means to get their stash back in the system with little or no costs.

And the portion of 'black money' that will actually be destroyed may turn out to be so small, it raises serious questions about whether the whole exercise was even worth it to begin with!

Yes indeed. As the numbers come in, the perceived benefits of demonetisation are actually turning out to be way lower than expected. This, even as its costs mount higher and higher with each passing day.

The cash-crunch, confusion and uncertainty of demonetisation and its shoddy implementation has already brought in tremendous disruption for India's people, its businesses, and of course, it's investors. And it looks like things may get much worse in the months to come before they start to normalise at some point in the future.

It is imperative that investors brace themselves for the very real possibility of this turmoil in the short run. Affecting not just the business markets, but also the financial markets. The seas are bound to turn rougher in the days ahead. How one prepares for and navigates through this period will differentiate the investors that use this as a period of opportunity, from the ones that get struck by the lightening.


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02:45 Chart of the day

The attack on black money is primarily to put an end to the parallel economy. It is also supposed to weed out terror funding and corruption. But one of the indirect objectives of checking black money is to bridge the income disparity in the economy. It seems very unlikely that is going to be the case anytime soon.

As of November 2016, India is the second-most unequal country in the world. The richest 1% of Indians own 58.4% of wealth. The richest 10% of the Indians own 80.7% of the wealth. This trend is going in the upward direction every year, which means the rich are getting richer and the poor poorer.

The income patterns are ensuring that this disparity keeps getting wider instead of being bridged. As per latest NSSO data, published by Mint, India's richest 20% have 45% of aggregate household disposable income. The poorest 20% earn barely 7% of the aggregate income pie. In fact the monthly household disposable income of the poor (Rs 7,739) is about one fourth of the rich households (Rs 29,775).

The Huge Disparity Between the Rich and the Poor


The survey has also pointed towards lack of education and access to job opportunities being the key reasons for low income levels in rural areas. With neither the problem of education nor job creation getting addressed, gaping income inequality remains a huge social risk.

In fact, we recently came across a truly critical number that highlights this risk. A number that concerns every Indian, including you and me. And there is a possibility that the demonetisation drive is going to make this number worse.

Here's everything that you need to know about this number.

03:50

Global Markets took a cautious stance before Italy's referendum on constitutional reform on Sunday and the US payrolls data later on Friday, which may cement the case for a Federal Reserve rate increase. Strong economic data from the US, including upbeat manufacturing activity and construction spending, have bolstered the view that the Fed will tighten monetary policy faster than expected to keep inflationary pressures in check. The strong US data have boosted interest rate expectations, which have already been running high due to anticipated inflationary pressures from rising oil prices and President-elect Donald Trump's promises of fiscal stimulus. The DJI Index was up marginally by 0.1% for the week gone by.

Investors in Europe remain nervous ahead of a constitutional referendum in Italy and a presidential election in Austria this weekend. Stock markets in Germany and France were down by 1.9% and 0.5% for the week gone by.

China's economy was also in focus this week over the release of activity monitoring indices for the manufacturing and services sectors. China's manufacturing sector expanded more than expected in November, and at the fastest pace in more than two years, an official survey showed on Thursday. The PMI stood at 51.7 in November, compared with the previous month's 51.2. The Shanghai Composite Index was down marginally by 0.5% for the week gone by.

Japan's Nikkei, which jumped to an 11-month high on Thursday, closed down 0.5% on Friday, but still posted a weekly gain of 0.2%.

Global benchmark Brent futures jumped to a 16-month high of US$ 54.53 a barrel on Thursday after the Organization of Petroleum Exporting Countries (OPEC) agreed its first output cuts since 2008. Russia also agreed to reduce production for the first time in 15 years. Crude Oil posted a weekly gain of 11.6% with crude oil closing at US$ 51.7.

Back home, negative global indices, along with caution ahead of US non-farm payrolls data and profit booking, suppressed the Indian equities markets during the week. Besides, the political logjam in Parliament over the government's demonetisation decision continued to erode investors' sentiments. The BSE-Sensex ended on a negative note and was down marginally by 0.3%.

Going ahead, the market will be influenced by the RBI action on market stabilisation scheme (MSS) as well as the rate decision in the ensuing policy meeting. The US Fed meet mid-month will also be keenly watched. While a rate hike is widely expected, the market will watch out for Fed comments accompanying the decision.

Performance During the Week Ended 2nd December, 2016

04:56 Investment mantra of the day

"Cash combined with courage in a time of crisis is priceless." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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6 Responses to "Will the Demonetisation Disaster Mean that You Make Money, Or Lose it?"

FK

Dec 6, 2016

Rahul,
Your note is similar to the views of some very prominent economists.
While Demonitisation is a reality we HAVE TO live with it. The economy will adjust and continue with what it has to do. The debate on how long it will last is, STILL A DEBATE.
However, i concur with your assessment of the situation. There are more negatives than positives. But we don't have a choice. We have to find ways to make it work and focus on 'demonitisation' rather than people's obsession with 'blackmoney' whether they had it or no.
I would request you to please continue with your analytical thought process.
I would hope you do not change your analytical thought process to cater to ignorance.
Regards
FK

Like 

hari Sharma

Dec 4, 2016

Dear Rahul ji,

As per you maths, about 15 trillion will come back into system, of which X trillion was black money. This was brought back into the system.
Assuming 20% as black money, about 3 trillion came into official circulation which was other wise stashed and of no use. Dont you think that it self is an achievement.

Like 

Surendranath

Dec 4, 2016

Dear Rahul Shah,

You have ignored one important point in your writeup ..

True, by the end o December there could be 15trillion currency deposited with the bank..

what does it mean... The money lying with those hoarders have reached the banks vaults..

THAT DOES NOT MEAN RBI WILL ISSUE EQUIAL AMOUNT OF CURRENCY AND INJECTS IN TO THE SYSTEM.. WHAT IF RBI ISSUES ONLY HALF OF THAT AMOUNT IN FRESH CURRENCY..

TRUE, THE DEPOSITED MONEY BELONGS TO THE PUBLIC, BUT ALREADY IT OFFICIALS HAVE STARTED THEIR EXERCISE OF IDENTIFYING LARGE DEPOSITS AND ALL THOSE HOARDERS WHO HAVE SURREPTITIOUSLY DEPOSITED THEIR STOCK OF NOTES IN BENAMI OR OTHERWISE HAVE TO WAIT FOR A LONGTIME TO COME CLEAN..

THINK IT OVER...

Like 

satish dabholkar

Dec 4, 2016

I do not understand the word used by you"Blackmoney Disaster"when there are innumber of advantages in bringing all transaction under banking channel.Are you supporter of Black Money? Pl explain

Like 

Shrinivas Moghe

Dec 3, 2016

9377019377
Demonetization has been effected and will not be roled back. In view of this fact, I think, we have no choice but to go along with it. And if so, then why not with a positive frame of mind? There are many good aspects of demonetization, which can be improved with a positive approach. I think with each passing day, deposition of cancelled OHD, will dwindle and a substantial number of notes would get physically eliminated. Your calculation of 0.44 trillion notes getting eliminated is erroneous. Moreover I am seeing more and more people turning to cashless transactions. We all should give our helping hand to people and small traders, in adopting the system. Such transactions through banks will also eliminate wrong practices in trades and manufacturing companies.
I think, experts like you, should support this courageous step of the government, with your valuable suggestions and help people with your positive advice.
The next fearsome problem is of unemployment. You can educate people on this impending grave issue, through your articles. I would love to read your article on this.

Like 

NEERAJ KUMAR MISHRA

Dec 3, 2016

Dear Rahul ji,

I have read your views om demonetisation. I am surprised to note that you have missed one vital point. Accordingly to you 15 Trillion was in circulation and almost entire amount is either deposited in bank or it is with RBI and Banks. Out of 15 Trillion, approx. 10 Trillion has been projected to be deposited with banks. Please note that entire 10 billion is to be investigated except petty amount and you may guess, how much revenue is to be generated by the Govt. in the shape of Income Tax , Interest and penalty.

I would be obliged if you will explain the impact considering above facts.

Thanks
NEERAJ KUMAR MISHRA

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