Demonetization: long-run benfits

Demonetization, which was announced on November 8, 2016, will see significant benefits in the longer run but it is hurting growth for the short-term, says #Nomura in its global market research report.

“In our view, the resultant cash shortage will hurt short-term (economic0 growth, but we do not see any lasting negative effects; on the contrary, in the longer run we see significant benefits,” it said of India’s experiment with replacing Rs500 and Rs1,000 currency notes and tackle black money.

#Demonetization is not a panacea for the system problem of having a large shadow economy, estimated 20 per cent to 25 per cent of the Indian gross domestic product, Nomura pointed out in the report.

It does force existing illegal hoarded cash into circulation, but cash accounts for less than 10 per cent of the total black money, with majority parked in land, real estate, gold & jewellery or outside the country, noted Nomura.

“More steps targeting these hoarding vehicles can tackle the real stock of black money,” it believes.

“Moreover, policy reforms that deter generation of new black money – simplifying tax systems and regulations and stricter enforcement of law and order – also need to be enacted,” suggested Nomura,

“Policy should target the cause of black money, not just its effect,” added the Japanese origin bank.

“Once the cash shortage is addressed, which we expect by the second quarter of 2017, there will be benefits,” it said.

Separately, #Mixo Das, Nomura’s Southeast Asia Strategist, believes the Indian equity market will recover from the demonetization shock.

“We think the effects of this demonetization process will be transitory.

“Our economists are seeing growth returning to its previous path within three quarters. In that case, the market will look through this because equity price earnings are over a long-term period.

“And if the longer-term market outlook is getting better, which we think it is, then equities should be overlooking this transitory slow down,” he said.

“With this sharp shock, market valuation has come down quite a bit, that gives us an entry point into the market,” added Das.

Touching on the 25-40 per cent drop in property prices in major metros, he said there will be some sectors adversely affected. fii-news.com