The Sectoral Impact Of Demonetisation - In A Nutshell
The long-term effects of the recent demonetisation move are bound to be far-reaching and consequential
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The long-term effects of the recent demonetisation move are bound to be far-reaching and consequential. Though an exact prediction of just how the chain reaction will play out is difficult to make, one can make a few calculated guesses on what sectors might be impacted and how. Here's how the move is expected to affect a few key sectors in the short and long run - in a nutshell.
Since the move was announced, over 5.44 Lakh crores have already flowed into the banking channel. In the short run, higher CASA balances will help reduce cost of funds, which is a big positive for the sector. In the long run, we'll see credit offtake picking up and interest rates coming down. Banks with a strong retail presence will benefit tremendously from the revival in loan growth. The short and long term impact on the banking sector are both positive.
NBFC's could face short term headwinds, as their collections are mainly cash based. In the long run, we might see a flight of business from local money lenders to microfinance companies, who stand to benefit thus. In a nutshell, it's not all good news for NBFC's; however, the move will lend a fillip to a sub-section of NBFC's that will benefit from the exodus of local lenders from the fray.
Undeniably, cement will take a hit in the short term. At present, rural housing contributes to nearly half of all the cement demand in India, and urban housing roughly 20%. The sector will face the brunt of collateral damage from the slowdown in both. In the long run, we'll see accelerated liquidity-driven government spending on infrastructure (currently estimated to be contributing 15-20% of the total demand for cement), which will boost the sector. Imbued with enhanced transparency as black money leaves the system, Real Estate is likely to pick up after a few years as well - contributing positively to the sector. So, it's short term pain followed by long term gains for cement.
The Auto sector could run into trouble in the short term, with an across the board dip expected in sales volumes. Two-wheeler sales are likely to take the biggest hit as they tend to be cash driven. The used car market will also face the heat for the same reasons. In the long run, reduced interest rates are likely to bring down financing costs and lead to an accelerated demand for cars within the middle-income group. Ambitions bolstered by the prospect of paying smaller EMI's, many two-wheeler users are likely to cross over into the small car segment. In the long run, the demonetization move will have a positive impact on the sector.
The secondary market will take a big hit because of the move as black money gets steadily siphoned out of the system. Volumes could drop further in the already beleaguered sector, as it's very cash intensive. Demand and prices will drop further, meaning that Real Estate is unlikely to emerge from its extended slump anytime soon. In the long run, the sector will sputter and choke back to life. The move will lead to sustainable growth and increased demand due to lower interest rates and resultantly, reduced home loan EMI's. Properties are likely to become more affordable as prices receive a long overdue dose of rationalization.
The RERA bill is likely to further condense the gap between primary and secondary market transactions. It's too early to predict exactly when a recovery in this sector will arise, but it's likely to start moving up sustainably after a hiatus of anything from 2 to 4 years more, depending upon the location in question.