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Demonetisation to Destroy 400,000 Jobs... Can Stocks Withstand the Pain?

Dec 9, 2016

In this issue:
» The mystery of 3 lakh crore black money
» Jan Dhan account balances swell a month after demonetisation
» Cash crunch puts brake on auto sales
» And more...
00:00
Tanushree Banerjee, Co-Head of Research

L&T's recent layoff of 14,000 employees came as a shock to many. But we called it the tip of the iceberg. We already know that companies will shed excess employees. Better productivity and automation will render non-specialised jobs dispensable. And apart from startups, even the biggest and most profitable corporate groups will want to seek lean manpower. So loss of jobs is a given.

It's not the number of jobs lost that should surprise you. But the context of unemployment scenario we are currently in. This could hit the economy really hard and have far-reaching repercussions. Yet no one wants to talk about it. And most don't fully understand its impact yet.

The fact is that we have 1,000,000 new job seekers every month! That makes it 12,000,000 a year.

And as per estimates, demonetisation will render another 400,000 jobless in a few months. Hindustan Times arrived at this number based on estimates by top headhunting companies in India. Ecommerce, real estate, and infrastructure are expected to shave the most jobs. But mind you, this number is just from the organised sector. It does not include the lakhs of jobs already being lost in the unorganised textile, gems, and jewellery sectors.

The government will likely be busy making currencies available and offering digital payment sops for months. Schemes like National Skill Development, which were supposed to create millions of jobs, are now on the backburner.

So the pain of demonetisation will not be felt on consumption growth until the 30th of December 2016. Consumption demand is bound to stay paralysed for much longer. It is not only the cash crush and the suppressed demand that will weigh heavily on consumption. The loss of jobs and underemployment will also hurt.

Several companies are optimistic of a quick V-shaped recovery. They expect demand to surge as soon as new currencies find their way into banks. An FMCG company we met recently called Quarter 3 (October to December 2016) a 'wash out' in terms of financials but said they expect a recovery soon.

The fact that sufficient currency will not mitigate the impact of the loss of jobs seems to be lost on them.

No doubt the pain of demonetisation will be temporary. But several factors, especially the loss of jobs, could make it worse. Stock markets are yet to price in this reality. That's why we're urging cautious investors to test if the stocks in their portfolios are strong enough to tide over this pain.

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02:45

Exactly a month back, a war was declared on black money. The ban on Rs 500 and Rs 1,000 notes stumped the nation. And as the process began public outcry, government's new proposals and sops have unfolded in a month's time. But the entire month's events beg one question: Were the entire exercise and the accompanying hardships worth it?

The one assumption that many analysts and economists made was around 20%, black money was held in cash.

But Vivek Kaul contradicts this. He has recently done an analysis which gives quite a shocking result.

According to Vivek, the amount of black money that was really held in the form of cash, is much less than 20%. In fact he went on to unravel the mystery of 3 lakh crore of 'assumed' black money in his Diary. Here is an abstract...

  • If we look at data for the period of six years of close to 24,000 seizure and search operations, cash formed around 5 per cent of the undisclosed wealth. Also, the proportion varied from 3.7 per cent to 7.4 per cent over the years.

This leaves us wondering whether demonetisation was about black money in the first place.

03:25 Chart of the day

As people are resorting to innovative ways to convert their black money into white, the Jan Dhan accounts have seen a surge in balances. In the last one month of demonetisation, the average balance under the Pradhan Mantri Jan Dhan Yojana has increased by 61.2%. There are currently around 257.8 m accounts having an average cash balance of Rs 2,883 per account. This is much higher than the average balance of Rs 1,778 during 11th November, immediately after demonetisation was announced.

Sharp Surge in Average Balance of Jan Dhan accounts


The government has been able to taper down black money conversion in these accounts by freezing some accounts and putting limit on deposits. But as we approach the last day of depositing the old currencies, it would be interesting to see how much of the black money finds its way to the banking system.

04:05

As events unfold post currency ban, here is some news from the auto sector. After a gap of around 44-months, the total automotive domestic sales declined by 5% in November. Now these are wholesale numbers. For many companies the situation in retail is far worse.

As an article on Economic Times reports, Maruti Suzuki, Hyundai Motor, Honda Motor, Mahindra & Mahindra, Ford Motor and Renault-Nissan have scheduled shutdowns stretching from a week to as much as 15 days over this month and the next. Couple of companies have mentioned that the shutdown of plants was earlier planned. Others have attributed it to of demonetisation. The likes of Honda Cars India and M&M are suspending production in order to correct inventory levels on the back of slow demand.

The auto industry is no longer hopeful of the double-digit sales growth that it was expecting this fiscal. But with demonetisation, the customer footfalls are at multi year low.

Will that impact the long term view on auto stocks?

Here is what our in house auto sector analyst Kunal Thanvi has to say...

  • It is a deferral not destruction. Demonetisation or any other macro event cannot destruct the auto demand in India. All it can do is defer it.

    Yes, we agree in the short run there will be pressure on the demand. Some bad number will come. Some expectations will not be met. But we are fine with this. We anyway never look at one or two quarters.

    Given, the backdrop of long term investing, we believe any slowdown for some period will throw various opportunities in the sector.

    Mind you, Indian auto industry have phenomenal long term prospects.
04:45

In the meanwhile, the Indian indices have continued to trade flat with positive bias during the noon trading session tracking mixed cues from global peers. Sectoral indices are trading on a mixed note with realty, banking and FMCG stocks leading the pack of gainers. Whereas, auto and metal stocks heading the losers.

The BSE Sensex is trading higher by 64 points while the NSE Nifty is trading higher by 4 points. The BSE Mid Cap index is trading flat while BSE Small Cap index is trading up by 0.6%.

04:55 Investment Mantra of the day

"Time is the friend of the wonderful company, the enemy of the mediocre." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

Today's Premium Edition.

'Avashyakta Nahi Hai' - India's Demographic Disaster: The Demonetisation Update

How will the government answer to the people who have lost their jobs in the informal sector?
Read On...Get Access

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5 Responses to "Demonetisation to Destroy 400,000 Jobs... Can Stocks Withstand the Pain?"

Sanjiv Gupta

Dec 14, 2016

I fully agree with your views on shift to formal sector and hit to informal sector which is cash based. The issue of massive Job loss is extremely worrisome for nay economy. It is sad that we do not have any reliable employment index in our country.

While intentions to reduce Black money and Corruption cannot be disputed the implementation could have been far far better. Anyway, it has been done. Planning has never been strong point of Indian governments. Execution is still worse.

The pain may last well over 2-3 years. Let us hope that this budget provides some relief and government may push the infrastructure sector seriously to create jobs and push GDP growth.

I do not understand one thing. How will this reduce corruption in our system.

Political Funding should have been tackled first.

I feel that ITES and Export oriented sector may be safer in these times. Companies engaged in Digital Infrastructure may also stand to gain in a big way.

Like 

K Bala

Dec 12, 2016

Yes, those jobs which were fictitious to begin with. Those,where the employers were just showing head count to increase costs and show losses, thus pocketing the fictitious salaries and not pay taxes on the profits...

Like 

parimal shah

Dec 9, 2016

People who are saying the black money was not there or all of it is laundered forget one thing.
The fake currency that was so difficult to detect.
Like black money there is no true estimate of fake currency.
It is possible that a lot of fake currency is deposited and this has possibly upset the math of all experts.

Only the RBI can really detect the quantum of fake currency through thorough scrutiny of the notes (fake or genuine) that it has received and gauge how much black money has been burnt or washed away in the Ganges.

Like 

chaitanya kirtane

Dec 9, 2016

demonetization cannot destroy a single job this is my challenge. an employer wanted some excuse to reduce his workforce and he is taking advantage of this. if your business is running well, if your product is salable why you should close your factory? you can tell employees that i will pay you now on monthly basis in place of dally basis so that you will not lose job neither i will suffer loss of business. because i am not able to withdraw money now i will pay you whenever i will be allowed to withdraw money from my bank. there is no need to open employees account either.

Like (1)

sundaravaradan S.

Dec 9, 2016

Avashaktya Nahi Hai:

It is very painful to note:
1. Is the Author supporting Tax evasion & Black Money?
(of course Black Money generated for decades by SME sectors)Is the Author supporting these Tax evaders ? (Of course, these may generate huge Unemployment !) Is the Author Still supporting such Tax evaders? (who knowingly, felt that Govt. can not catch SMEs)!

2. All write-ups of the Author, is to Oppose the Govt..? (And support tax evaders...?).

3. I expect more maturity of the Authors of Equity Master.
4. If the Future of India, is SO Beak....Short-Term & Long-Term...(Author seems to be SURE of the Collapse of Indian economy, Author never wrote any thing other than Boom & Doom), then why recommend investment in Indian stocks????????
5. Is there ANY, any country where one can Invest...?????

6.Please be clear, not all readers can THINK....most of the readers (Not all) are influenced by, what is told to them by HIGHLY EDUCATED Analysts...!
Is it not....???? !!!!!!!!!!!!

Like (1)
  
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