CIRCUIT BREAKER. The note ban: Who won, who lost

For two months after November 8, journalists, columnists and economists devoted a lot of ink and bandwidth to commenting on what was transpiring in the economy in the immediate aftermath of the note ban. But much of this was shooting in the dark. With everyone relying heavily on anecdotes, most of the accounts were prone to bias.

However, in the last one month, with the release of the latest GDP estimates and December quarter results from listed companies, data on the big picture is now available. This allows a more fact-based assessment of the impact of demonetisation. The data shows that while the economy, in aggregate, did not suffer a debilitating blow from demonetisation, this was because the sharp setback to some sectors was made up by others.

With reports of rural folk trekking miles to access ATMs and agricultural mandis grinding to a halt, there was worry about whether demonetisation would stifle the farm sector revival expected this year. Well, latest data on crop prospects suggests that it didn’t. According to the second advance estimates, foodgrain production for FY17 is likely to set a new record at 271.9 million tonnes, 5.7 per cent higher than the ‘normal’ output. Pulses had a bumper year too, with output 25 per cent over the five-year average. Sugarcane, jute and horticultural crops had an indifferent year; but that was more due to the drought in the peninsula than note-bandi . Crops such as wheat, jowar and gram, grown mainly in the rabi months (bang in the middle of note-bandi ) saw sowing increases.

Apart from the bountiful south-west monsoon, front-ended purchases and credit support from agri-input firms and financing firms seems to have helped farmers tide over the worst of the cash crunch. Tractor sales, for instance, rose 44 per cent in October, followed by a 13 per cent decline in November, getting back to 7 per cent growth in December.

The jump in farm output powered the rebound in the agriculture leg of GDP to a 6 per cent growth in the December quarter of 2016, from a shrinkage of 2.2 per cent last year. While sowing activity may have escaped relatively unscathed from the cash crunch, farm incomes depend not just on output, but also on realisations. Both agri price trends and the south-west monsoon will matter a lot in deciding prospects for rural India.

The consumer-driven sectors of the economy transmitted a jumble of confusing signals during the note ban months. December quarter results from corporate India reinforce the contradictions.

For instance, listed FMCG companies reported a sales growth of less than 1 per cent for the quarter, while white goods makers registered a reasonable 7 per cent sales growth. Carmaker Maruti Suzuki registered a 12 per cent sales increase while commuter bike-maker Hero Motocorp saw a 12 per cent decline.

Hindustan Unilever reported a 4 per cent dip in sales volumes this quarter and talked of consumers reducing their purchases of FMCGs and making more frequent store visits to conserve cash. But companies focussed on discretionary spends fared surprisingly well. Jewellery and watch-maker Titan Company managed a robust 15 per cent topline growth, appliances major Havells reported 13 per cent growth, and multiplex operator PVR saw a 13 per cent revenue increase.

The commentary from companies suggests four insights on consumer behaviour. One, with strong Diwali buying, October proved to be a bumper month for most consumer companies — carmakers, jewellers or white goods firms. These sales numbers helped make up for a weak November and a so-so December. Two, while the note ban did deliver an immediate jolt to sentiment, urban consumers were quicker to recover compared to rural ones, as they could quickly switch to electronic payments.

Three, with the pay commission payouts fattening their wallets, the note ban didn’t dampen the spirits of government employees. Maruti, which derives a fifth of its sales from this segment, mentions this as a key reason for good car sales. GDP numbers reiterate this mini-stimulus by noting a 12 per cent jump in “public administration, defence and services”.

Finally, with the cash crunch throwing non-tax compliant businesses into disarray, in many cases, consumers switched their custom to larger, branded players. Titan cited the confusion arising from demonetisation and GST as one of the key drivers for its market share gains from unorganised jewellers this quarter. Analysts also say that some large companies bailed out their distributors and retailers who deal mainly in cash, by absorbing the demonetised notes and pumping them with inventory instead.

Going forward, urban spending may continue to hold up, while we may have to wait for a recovery in rural consumer sentiment. The kicker to corporate toplines from jugaad moves such as channel filling may wane in the March quarter.

Two sectors that have always been heavily reliant on cash transactions are real estate and gold. So it isn’t a surprise that these two sectors should take it on the chin after the note ban. Real estate consultants estimate that property sales registered a 30 per cent dip in the December quarter, while new launches fell by 40 per cent. Market reports suggest that secondary sales of homes, which have a higher cash component, almost ground to a halt, while first-time home buyers were active.

On gold, data from the World Gold Council shows that despite unusually good October sales, jewellers closed the December quarter with a mere 3 per cent sales growth. These are definite pointers to the fact that, worried about the crackdown on cash and black money, Indian savers turned from physical assets to more liquid and transparent financial assets.

Apart from banks, which benefited from the compulsory deposits, mutual funds and insurers were key beneficiaries. Net inflows into equity mutual funds saw a 75 per cent year-on-year jump in the demonetisation quarter. Insurance companies clocked a 23 per cent jump in new business premiums in the last four months of 2016. This shift, if it lasts, can re-allocate capital into the productive sectors of the economy. But we need to see if the fascination for physical assets, especially gold, returns in full force once cash supplies normalise.

Overall, the smog is clearing up, but it will be some months before the sun shines brightly.

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