A keen tracker of macros, Ritesh Jain, the Chief Investment Officer of Tata Mutual Fund, talks of the demonetisation effect on GDP, inflation, banks and rates. Excerpts:
Some brokerage reports out now predict that demonetisation can reduce India’s GDP growth by 2-3 percentage points and others predict the impact will only be 0.25-0.50 per cent. Which, according to you, is more realistic?
While it is true demonetisation will have an impact on growth, in our view, it’s too early to gauge its extent. To hazard a guess, I think, nominal GDP could be hit between 1-2 percentage points, evenly split between real GDP and inflation. I believe there would be a wealth effect shock of around 20 per cent, too.
Anything more than that would be the result of disruptions in the new note supply.
Also, if the growth impact becomes sizeable, our own sense is that the government will step in with measures to boost both consumption and capex.
Longer-term gains are likely to be in the form of wider tax collections and hopefully, our tax to GDP ratio can start to inch up. It will increase compliance from small businesses in the informal sector. It could make implementation of GST more meaningful.
It appears as if the informal sector will be harder hit by the disruption than the formal one. So, will the listed companies prove resilient to the move?
Prima facie, it looks so. I would say that it is the organised sector (whether listed or unlisted) that would become more competitive.
That said, smaller companies or companies that were so long operating in the informal sector, may also use this opportunity to quickly ramp up their systems and join the organised fraternity.
Some of them may still turn out to be winners in the market place against old organised structures.
Still demonetisation, in my view, will make India more oligopolistic in nature, where big and established businesses with reasonable cash flows will use this opportunity to strengthen their market share by doing M&A activity. Or they will simply add market share through aggressive pricing or advertising.
Which sectors do you expect to be impacted positively and negatively?
I think, due to demonetisation, the immediate hit will be on the consumption and real estate sectors. Interest rates will come down, but that will only help good quality borrowers.
Over the medium term, the biggest beneficiary will be PSUs and consumer staples as the government will have to kick-start capex.
The private sector, owing to less than 70 per cent capacity utilisation, will not invest immediately. So, in the coming Budget, I expect MGNREGA wages and MSPs to be increased substantially to offset the impact of demonetisation on rural India.
I expect the government to ramp up its spends on infrastructure, roads and railways directly. It may also leverage the balance sheets of well-run PSUs for this purpose.
This move creates a temporary liquidity windfall for banks. How will this help them or impact their asset quality?
Logic says that the liquidity is temporary, but let’s see whether this move can change the mindset of small businesses which really like to use cash as a means to do business.
Even if a portion of these businesses start to use the banking channel it would be a long-term positive.
Already some banks are indicating that small loan recoveries have picked up. We are looking at the slippage numbers of large corporate banks in the September quarter, we are not that confident on asset quality.
How does this move impact inflation? Yes, in the short term it is bound to dip. But what happens when all the currency is replaced and back in circulation?
The near-term slowdown in growth, accompanied by a pull-back in discretionary spending, is likely to push inflation lower in the near term. Likewise, the fiscal headroom would allow the government to maintain fiscal discipline. This, in turn, would help the medium-term inflation target.
Market interest rates have fallen quite steeply in the last few months. How does this change the rate outlook? Is there further downside?
Bond yields have come off steeply following the demonetisation move, on increased SLR demand from banks and expectation of a more accommodative central bank, given the short-term shocks to growth.
Further, the move towards non-cash economy may lead to structural improvement in tax compliance and tax/GDP ratio, implying a stronger fiscal position.
This should keep bond yields low. I think the bond market will remain supported until the Budget, by when all the positives of low inflation will be in the price. I expect the 10-year Indian government bond to bottom out at around 6 per cent, by when it will have priced in a 50-basis point rate cut.