At a time when demonetisation was still fresh in the air, PIC organised a unique talk on this theme by Mr. Saurabh Mukherjea, CEO of Ambit Capital Ltd. The programme was chaired by Prof. Rajas Parchure, Professor of Finance at the Reserve Bank of India (RBI) & Officiating Director of Gokhale Institute of Politics and Economics (GIPE).

Mr. Mukherjea began his talk by describing the chain of events that took place before the announcement of demonetisation on 8th November 2016. The attack on black money had been initiated by the Government as early as May 2015 through acts such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Benami Transactions Act and the Foreign Account Tax Compliance Act (FATCA) -India’s Tax Information Agreement with the US.

Ambit Capital had earlier observed that such legal moves would have led to a natural reduction in the purchase of gold and land. Given that half of our savings in India are in the physical form, these reductions in purchase would force money into financial savings, hence bringing down the cost of capital.

In a country with a GDP of 18 trillion Rupees, the Government had demonetized 15 trillion, leaving out 3 trillion Rupees. In India, 85% transactions of value occur in cash. Traveling from 18 trillion to 3 trillion would translate into economic mayhem, until we remonetised. The first instinct was that since India is a low income economy, with low internet penetration and 30% illiteracy, there would be rapid remonetisation.

A survey conducted by Ambit Capital with 82 SMEs revealed that more than the immediate cash crunch that was affecting them in their daily transactions, their concern was more long-term and existential in nature. Being pushed to go white would mean having to comply with all kinds of regulatory obligations such as minimum wages, PF, environmental laws, etc., all of which would eventually turn them into a loss-making proposition.

Forecasting the consequences for SMEs, Mr. Mukherjea said that large listed entities would backward-integrate and buy out the supplier because the supplier would be a regulatory arbitrage. Manufacturing companies would get eaten out and mergers and acquisitions would take place under duress. Also, when a large capital-intensive listed entity, which is labour light, acquires a smaller entity which is labour intensive but capital light, the consequences for unemployment are evident. This would lead to consumption consequences and investment would take a knock as the business model of SMEs will have collapsed.

Mr. Mukherjea also spoke of the electronic trail that was being laid in the process of cash deposits made by the public. He drew attention to the relevance of big data and the likely ways in which the Government would track down the black money. He also mentioned that it would be unlikely for the Stock market to be adversely affected by demonetisation, as it includes only listed entities and as these entities consolidate the market, their pricing power would improve. Cost of capital and land would also drop.

Looking ahead, Mr. Mukherjea estimated that with cheaper land and capital, over a 2-3 year period we might develop into a manufacturing country. A disruption would be likely for the SME sector and they would have to reinvent themselves into an efficient white model and try to find success in export markets. The domestic economy will consolidate around larger companies with adverse near-time consequences for employment, consumption and investment. However, job creation is also on the horizon and we may see a very different India over a period of time.