The Modi government in India took a major decision of banning 500 and 1000 rupees notes in a cash intensive economy of India on 8th November, 2016. The article analyses the effects that it had on the various manufacturing sectors of the country’s economy like pharma, basic metals, construction goods etc. and compares the actual results with the predictions.
Predicted: Demand is not going to be impacted in a big way but may have negative impact in short run.
Actual: Growth rate is lesser than in previous year but it seems that there is no major impact on the sectors.
Verdict: Both prediction and actual numbers match. This coincides with the fact that growth in pharma sector is largely based out of necessity for basic healthcare in the country. Hence demonetisation may affect business in very short term but can’t be much affected in the long run.
Basic metals and metal products
Predicted: Steel, aluminium, copper and zinc are hit since they are used in building construction.
Actual: Fabricated metal products manufacturing saw a bad year compared to previous year as the growth rate is negative for most months. For basic metals, the growth is not good immediately before and after the months of demonetisation but the growth has been good in recent months
Verdict: Prediction and actual numbers are in line with each other. But it is not entirely clear whether the adverse impact on industry can be directly attributed to demonetisation. Steel industry in India was affected due to cheaper imports and real estate industry was already not very strong before demonetisation.
Predicted: Not much effect since export volume is one third but domestic market will be affected.
Actual: For most of the year after demonetisation, the growth in the textile and wearing apparel industry has been negative whereas the same was positive in the previous year. This shows that textile industry was significantly hit by demonetisation.
Verdict: The actual production has decreased as opposed to what was predicted. According to industry estimates, eighty percent of the Indian textile and clothing industry is in the decentralized sector. Since most of the transactions in these sectors take place in cash and the wages are also paid in cash, this sector has been severely affected by the demonetisation. Also there is liquidity crunch because end consumer is delaying the purchases of clothes to save for more necessary items.
Beverages and food products
Predicted: Will be majorly affected as Indian economy is mostly cash based and transactions at all levels like distributors to retailers to final customers are usually cash based.
Actual: The growth in the beverage industry has been negative for most part of the year after demonetisation compared to a good previous year. For food products, the growth has been negative in the months immediately after demonetisation but similar trend was observed in year ago period as well.
Verdict: The actual trend is not quite similar to what was predicted. The manufacturing in the beverage industry decreased but the reasons for this can also be ban on liquor vends along highways which has also affected the restaurant business adversely. For food products, the trend of decrease after demonetisation is similar to last year which means that the reduction in output can’t be attributed to demonetisation and is because of other external factors like weather etc. Demonetisation should not have affected production of food products since it is a basic necessity and its consumption can’t be avoided.
Construction goods and furniture
Predicted: Demand likely to get impacted since real estate demand decreases and also real estate accounted for large amounts of unaccounted money.
Actual: Growth for non-metallic minerals like cement and glass etc. has been negative after demonetisation whereas it was positive in the year ago period. Even growth rate of furniture has not been good.
Verdict: Both prediction and actual numbers match each other. Since real estate industry constitutes of large amounts of black money and since workers are also paid in cash, the construction goods industry is expected to be severely affected as most real estate projects are delayed.
Predicted: Demand likely to dip for couple of months but passenger vehicles and tractors will not be impacted since purchase made via financing
Actual: Manufacturing of automobiles were affected for just one month after demonetisation but after that the manufacturing index growth has been positive.
Verdict: Both prediction and actual numbers have similar trend. Since most passenger vehicles are bought by middle class salaried people who receive salaries in their accounts, the sales are likely to be less affected as people usually buy these vehicles on loans.
Consumer Non Durables
Predicted: Since it is among the most cash intensive industries, it would face adverse impact.
Actual: The growth has been positive for most year after demonetisation though it decreased in the months just after the announcement.
Verdict: According to the prediction, it should have been impacted but in actual it did not get affected much since consumer non durables are mostly basic necessity items and its consumption can be less for some time but not in the long run.
Predicted: Sales will decrease as lot of sales of consumer durables and appliances are still done in cash.
Actual: The growth in this sector has decreased after demonetisation and is even negative for most year after demonetisation.
Verdict: Both the prediction and actual numbers match. Since these are not basic necessities and some of the products are considered luxuries, consumers have delayed their purchases. Sales have decreased in tier 2 cities where there is larger involvement of cash to make such purchases.
The predictions made for sectors: Pharma, basic metals and metal products, construction goods, furniture, automobiles and consumer durables match the actual numbers whereas for other sectors predictions and actual numbers show opposite trend. The article has analyzed the actual reasons for a particular trend for that sector.
Source of Predictions: