A full 12 months after it was announced, the government’s demonetisation exercise that scrapped over 85 per cent of the currency in circulation continues to have a lingering impact on the economy. While two-wheeler sales, tractor sales and car sales witnessed a rebound after falling in the initial months of the currency ban; indicators such as credit deployment, real estate transactions and stressed loan assets continue to strain the economy. The currency withdrawal, combined with roll-out of the goods and services tax (GST) in July, has been especially disruptive for the small and medium enterprises and cash-dependent trading business across the country. Latest data from the Reserve Bank of India shows that credit to micro and small industry contracted at 3.4 per cent in the financial year so for while for medium sector industry the credit contraction was at the rate of 5.7 per cent. Overall slide in economic growth, which began in July-September quarter last year, was accentuated by demonetisation in the following quarter and challenges posed by implementation of the GST six months later. Growth in gross domestic product (GDP) has fallen to 5.7 per cent in April-June 2017, from 7.9 per cent in April-June 2016, after falling consistently during each quarter in the intervening period. The informal sector is expected to be severely hit by the twin moves. Analysts note that demonetisation and GST are expected to increase the size of the formal sectors, enhance the tax base in the medium term, while squeezing the small and medium enterprises in the informal economy. “In an economy where 90 per cent of employment and over 50 per cent of GDP is derived from informal activities, this is bound to be a highly disruptive process. Without adequate social safety net provisions, the inevitable rise in the cost of operating in the formal economy (entailing registration, tax compliance, and regulatory obligations), will likely compel many informal businesses to either restructure or perish,” Taimur Baig, chief economist at DBS Bank said in a note analysing the impact of demonetisation. “While the economy was trying to pull itself out from demonetisation, confusion over implementation of the Real Estate Regulation Act (RERA) and the GST caused further widespread disruption in the short term again. To put things in perspective, in the last one year we have lost almost six months owing to the disruptions caused by implementation of policies within a short span of each other,” said Surendra Hiranandani, CMD, House of Hiranandani. Analysts expect the growth rate to pick up in the July-September quarter as the negative effect of currency ban wanes and the GST regime stabilises. A key positive of the demonetisation has been the influx of deposits with the commercial banks, which resulted in a reduction in lending rates and enabled the government to announce Rs 2.11 lakh crore of capital infusion plan for the public sector banks. With enough liquidity in the banking system amid lackadaisical credit growth, the government is confident that the banks will buy Rs 1.35 lakh crore worth of the recapitalisation bonds that it plans to issue, the proceeds from which will be used to inject capital in PSU banks.
