Money! That’s what I want!
The Potential Impact of Demonetisation on India
The Indian Government’s bold plan to stamp out black money and supposedly terrorist sources of finance is by the standards of the normally slow bureaucracy an absolutely radical step. In many other countries, it might have only a modest impact. But, in India’s cash economy where everything is done in cash, both legally and illegally, it has hit the populace like a lightning bolt.
The immediate impact has been paralysing queues at banks and ATMs and desperate anxiety among those who have been storing illicit money under the bed. In the longer term the hope is that India’s economy will be legalised.
- More citizens have bank accounts
- More trade is declared with increased tax income
- Political parties have to declare their income and are no longer in hock to illicit donations by powerful figures
- More trade happens online or through bank payments
- The property market values are declared and property prices stabilise.
- Inflation falls
- Political parties have to broaden their funding base with citizens.
- The economy falters as huge amounts of money (previously stored as black money) is unavailable for trade
- It impacts poor people a great deal more than anticipated.
- The impact on property and construction effects the wider economy more than anticipated.
- The wider economy interprets the step as incoherent and leads to lower investment over the longer term. Ie investors worry that the government will use sudden radical steps more often.
- Opposition parties, supposedly flush with cash, are unable to fund themselves to the detriment of wider democracy – especially the main opposition Congress Party.
Immediate Impact on Travel Trade:
There has been an immediate impact on domestic travel as leisure travellers cancel or postpone their plans. Our team in Goa has told us that travel booking has ground to a sudden halt as travellers assess where they stand financially. Anecdotally, we understand that lots of domestic travellers save up over the year and store their holiday money in cash. They will need to exchange that and also declare it which many may not have done. If they are sitting on substantial undeclared cash then they are suddenly 20-40% poorer than they thought!
see http://traveltriangle.com/blog/inr-500-1000-notes-scrapped/ and http://www.ibtimes.co.in/tourists-caught-demonetisation-mess-703776 for further thoughts on travel impact and anecdotal evidence of problems.
Impact on wider economy
JR Financial summarises the likely impact on the economy in the short term. They assess that a squeeze on the money supply will impact all sectors to some extent
Meantime, the property market might undergo a 20-30% correction in prices as clack money in flushed out of the system – http://www.indiainfoline.com/article/article-latest/impact-of-demonetization-on-residential-real-estate-116111500206_1.html and also http://www.businessworld.in/article/Demonetization-Fallout-20-30-Correction-In-Property-Prices-Expected/09-11-2016-107938/