Real cash shortages impeded transactions Prices could fall

Real estate Prices declined, as wealth fell while cash shortages impeded transactions Prices could fall further as investing undeclared income in real estate becomes more difficult; but tax component could rise, especially if GST imposed on real estate Broader economy Job losses, decline in farm incomes, social disruption, especially in cash-intensive sectors Should gradually stabilize as the economy is remonetized GDP Growth slowed, as demonetisation reduced demand (cash, private wealth), supply (reduced liquidity and working capital, and disrupted supply chains), and increased uncertainty Could be beneficial in the long run if formalization increases and corruption falls   Cash-intensive sectors (agriculture, real estate, jewellery) were affected more Recorded GDP will understate impact on informal sector because informal manufacturing is estimated using formal sector indicators (Index of Industrial Production). But over time as the economy becomes more formalized the underestimation will decline.

Recorded GDP will also be overstated because banking sector value added is based (inter alia) on deposits which have surged temporarily Informal output could decline but recorded GDP would increase as the economy becomes more formalized Tax collection Income taxes rose because of increased disclosure Payments to local bodies and discoms increased because demonetised notes remained legal tender for tax payments/ clearances of arrears Indirect and corporate taxes could decline, to the extent growth slows Over long run, taxes should increase as formalization expands and compliance improves Uncertainty/ Credibility Uncertainty increased, as firms and households were unsure of the economic impact and implications for future policy Investment decisions and durable goods purchases postponed Credibility will be strengthened if demonetisation is accompanied by complementary measures. Early and full remonetisation essential. Tax arbitrariness and harassment could attenuate credibility  AGRICULTURAL SECTOR:Demonetization of high-valued currency was implemented at thetime of sowing of rabi crops and post-harvest operations of the Kharif crop. Ahuge amount of cash is required by the farming community to conduct both theseactivities.

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As a result of this, the time of execution rendered the farmingfraternity worst hit as compared to the previous instances of demonetization inIndia which happened when vital agricultural operations have ceased in the monthof January. There were difficulties in receipts too against the sale of Kharifproduce.Due to issues in labour hiring, delay in input procurement,provision of currency for household purposes, unavailability of informal andformal credit in cash and general distress in the economy, there was a delay inthe sowing of the Rabi crops by one or two weeks.

Amongmajor Rabi crops growing states, the overall shortfall in sown area is about 20per cent in Tamil Nadu and Karnataka and 8 per cent in Gujarat and AndhraPradesh. Similarly, J&K and Himachal Pradesh also show a major deficit inRabi sowing. Largest shortfall is seen in Kerala. All other major statesindicate small to a large increase in crop sown area this year over the normalarea.Althoughthe usage of the high denomination demonetized currency was allowed for farmersto procure agricultural inputs, not all farmers were aware of the provision.Even out of those who were aware, many couldn’t use it due to uneven anddistant location of  governmentagro-input agencies. According to Fertilizer Monitoring System (FMS) in Departmentof Fertilizers under Ministry of Chemicals, Petrochemicals and Fertilizer,fertilizer sale during the current Rabi season was lower than the fertilizersale in the corresponding period during 2014-15 and 2015-16 by 7.

47 per centand 7.0 per cent. It was also found that the unavailability of new denominationcurrencies in rural areas, non-acceptance of old high denomination currency byprivate input dealers, distant location of government agro-input agencies weresome of the hindrances which farmers have faced in the procurement of inputs. However,use of own seeds and stock of fertilizers, borrowing from the fellow farmers,purchasing on credit from the private traders, purchase of inputs on creditfrom cooperatives, & credit from the traders for purchase of inputs weresome of the commonly followed strategies that helped farmers to manage farmingactivities in the cash crunch situation. Inability of farmers to use cellphones as a medium of connecting in to the market was one of the majorimpediment to facilitate farmers.

Thearrival and price of perishables like vegetables and fruits dropped postdemonetization. The small and marginal farmers were most affected again as faras the sale of agricultural produce is concerned and the large farmers wereleast affected. The farmers faced problems like delayed payment for produce,payment in parts, absence of aggregators in the village for a while, theabsence of transportation, bumper harvest and unavailability of adequatestorage infrastructure.BANKINGSECTOR:Therewas a substantial increase in the deposits in banks after demonetization whichcan be invested to improve profitability and liquidity.

Threats likemisappropriation, theft and dacoits have been reduced due to improvement indigital tools and equipment to avoid cash loss in transactions. Since peoplehave kept their surplus money in banks, the cash has become an asset for themto earn income from. Demonetization also increased the customer base of bankswhile increasing deposit corpus.Despitethese positive impacts, there are major negative influences too. 100% CRR onincremental deposits meant that banks did not earn any interest on Rs.

3 Lakhcrore of deposits for nearly a fortnight. ATM charges were waived off duringbanned note exchange and banks incurred a loss of Rs. 20 in every transaction.Banks incurred loss of 1% discount charges from merchants on using of everycard transaction. Banks were focused on exchanging currency notes and they werenot able to sell any loan products.

This made banks to curb their lendingactivities. During demonetization, some SME businesses had seen their salesdrop by 50-80 percent and could default in their installments to banks. Thisled the banks to consider it as NPA and affected its level in banks.

BankEmployees were put under pressure and overtime work environment. It depressedthem and kept imbalanced life style. Few cases were found where the employeescommitted suicide due to work pressure.MANUFACTURINGSECTOR:Demonetizationhas undoubtedly resulted in industrial recession. February2017 had an index of industrial production that was 1.

2 percent below that ofFebruary 2016; and for manufacturing the index was a full 2 percent below ayear ago. February 2016 itself had witnessed a 0.6 percent growth compared tothe preceding February, so that the decline in growth rate is2.6 percent. If we calculate the growth in the index of industrial productionfor consumer non-durables for the months December-February 2016-17 (over thecorresponding months of 2015-16), ie, leave out November itself when the effectof demonetization on output could not have been felt in viewof the time-lags, we obtain a growth rate of -5.3 percent.

While the growthrate was -1.85 percent for the period April-November 2016-17, it fell to -5.3percent for the next three months, which shows a decisive break in the trend.This trend was negative for the year as a whole, but it became even morenegative for the three months December-February 2016-17 when the effect ofdemonetization got further superimposed on the already negative trend.


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