170119_demonetization in india
TRANSCRIPT
Page 1Date: May 1, 2023
Demonetization in India
Prepared by: Spire Research and ConsultingYAMADA Business Consulting
Date: 19 January 2017
Page 2Date: May 1, 2023
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Page 5Date: May 1, 2023
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Page 6Date: May 1, 20236
Yasuyuki (Luke) KitaGeneral ManagerSingapore
Luke joined Yamada Business Consulting Co., Ltd. in 2007 after his graduation and focused on supporting business recovery and growth strategy development for Japanese enterprises. He has covered a wide range of industries, including pharmaceutical, apparel, industrial, as well as food and beverage. He was then assigned to the Singapore branch office in 2011.
Having also lived in Canada as a student, he is well exposed to multicultural and English speaking environments, which has become a valuable asset to the company.
Luke graduated with Bachelor of Commerce in Finance from Kwansei Gakuin University. During his university years, he also joined an exchange program with Oxford University.
Luke is currently the General Manager of Yamada Business Singapore branch, and shuttles regularly between Japan and Singapore. As General Manager, he has been engaged in wide range of fields such as business expansion planning, M&A, and investment projects conducted with Japanese clients in Southeast Asian markets.
Yamada Business Consulting in Singapore
Languages Spoken:• Japanese• English
7
Topic
1 Brief Overview – Demonetization in India
2 Major Trends – Demonetization
I Growth in Cashless Transactions
II Retail Industry
III Banks and NBFC Sector
IV Real Estate
Agenda
Page 8Date: May 1, 2023
Brief Overview -Demonetization in India
Page 9Date: May 1, 2023
Demonetization in India – A Brief Overview
On 8th November 2016, Prime Minister of India announced demonetization of INR 1000 (SGD 20.97) and INR 500 (SGD 10.48) notes.
The total value of the currency demonetized was approximately INR 15.44 Trillion (SGD 324 billion).
This currency formed 86% of the total currency in circulation by value.
98% of all consumer payments in India use cashPeople in India were given time to deposit old notes in banks between 9th November 2016 to 30th December 2016.
Before this there has been two prior incidences when Government of India has demonetized currency in circulation:
In January 1954, banknotes of 100 (SGD 2.09) and 1,000 (SGD 20.97) rupees were withdrawn and new notes of 100 (SGD 2.09), 500 (SGD 10.48) and 1000 (SGD 20.97) rupees.
The Janata Party coalition government demonetised banknotes of 100 (SGD 2.09) , 500 (SGD 10.48) and 1000 (SGD 20.97) rupees in January 1978 as a means of curbing counterfeit money and black money.
Page 10Date: May 1, 2023
68% of all transactions are Cash based in 2015
57% of online transactions are “Cash on Delivery”
80% of population was employed in the cash economy
Dependence of Indian Economy on Cash
India China Mexico SA Turkey Russia Brazil0
40
80
120
160
10.5 16.731.9
45.3 52.8
106.4
142.3
2015 Cashless transactionsPer capita number of transac-
tions with payment instruments
India
Swed
en
Mexico HK
China
Singa
pore SA
Turk
eyJap
anBra
zil UK
Austra
lia US
Russia
Cana
da
Korea
050
100150200250300350
18 40 49 50 55 59 66 77127129130161173185222
291
2014: Reach of ATMsAutomated teller machines (ATMs) (per 100,000 adults)
Swed
en SABra
zil UK
Cana
da
Austra
lia
Turk
eyKor
ea
Mexico US
Singa
pore
Russia
ChinaInd
ia HKJap
an0%4%8%
12%16%20%
2%3%3%4%4%4%5%5%6%7%8%9%9%12%
15%19%
Cash DominanceNotes and coin in circulation outside banks as a % of GDP
Source: India Chart Book – Capital Economies Limited
Source: India Chart Book – Capital Economies Limited
Source: India Chart Book – Capital Economies Limited
Page 11Date: May 1, 2023
Reasons for Demonetization
Government had three main reasons to demonetize the currency
Shadow Economy
The government intends to integrate India’s shadow economy estimated to be 26% of GDP, into the formal economy, and hence address tax evasion
Counterfeit Currency
Government also aimed at reducing the flow of counterfeit currency from circulation.
92% of all the fake currency were found to be INR 500 and INR 1000 notes
It is believed the Counterfeit currency is also used by cross border organizations to support terror activities in the region
Cashless Economy
Another intention of the government is to increase cashless transaction to promote the transparency in the business dealings
This move is also expected to increase the number of people in the banking system, and boost organized economy further
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2
3
Page 12Date: May 1, 2023
Economic Impact
Increase in tax collectionIn December 2016, Indirect tax collection went up by 14.2% year-on-yearAggregate tax collection from 47 urban grew by 236% between Oct and Nov 16Push towards a formal economyMany small and medium business have moved to the cashless transactions bringing them in the formal economyOrganization of the real estate sectorIndian real estate sector will get organized due to decrease in the unaccounted cash from the market
Decrease of Government DebtIt is estimated that government will be able to decrease its debt due to difference in the currency circulation and currency deposited
Pros Cons
Short term slow down in GDPIndia Ratings, on 2nd December 2016, lowered its GDP forecast for 2016-17 to 6.8% from 7.8% earlier, stating that the demonetization drive will lead to an erosion of INR 1.5 trillion (SGD 25.9 Billion) this fiscal year.
Job losses in the unorganized sector
It is estimated that approximately 400,000 jobs will be lost due to lack of liquidity in the market
Negative impact on most industrial sectors
Since this move happened in the season of sowing, many farmers were not able to sow their fields on time which will lead to the loss of agricultural output
Page 13Date: May 1, 2023
Economic Impact
Page 14Date: May 1, 2023
Major Trends - Demonetization
Page 15Date: May 1, 2023
1. Growth in Cashless Transactions
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Growth in Cashless Transactions
59%23%
18%1%
Preferred Payment Method Used After Demonetization
E-walletsNet bankingDebit/ Credit CardsCash
Oct 2016 Dec 20160
2
4
6
8
1.7
6.3
Growth in E-Wallet Services
Num
ber
of D
aily
tra
ns-
acti
ons
(in
Rs.
mill
ions
)
Paytm Freecharge MobiKwik Oxigen Citrus Others0%
20%
40%
60%50%
35%
9%3% 2% 1%
Most Preferred e-Wallets
Source: Survey Results of CashKaro-India’s largest Cashback and Coupons siteSource: Ministry of Electronics and Information
Technology
Source: Survey Results of CashKaro-India’s largest Cashback and Coupons site
Page 17Date: May 1, 2023
Credit and Debit card transaction also expected to grow as merchants adopt POS technology.The panel of chief ministers have decided to import around a million Point of Sale (POS) machines in India between January and March 2017.State Bank of India (SBI), the largest government bank of India, has been installing around 5 times higher the number of POS machines every day after demonetization as compared to the number of POS machines installed per day prior to the cash crunch in the economy.In addition to this, SBI faced excess demand for POS machines of around 70,000 even after 50 days of demonetization for which the bank ordered 150 thousand new POS machines to be installed by March 2017.
Before Demonetization After Demonetization0
300
600
900
1200
200
1000
Installation of POS Machines by State Bank of India
Aver
age
Inst
alla
tion
s pe
r D
ay
Source: moneycontrol website
Growth in Cashless Transactions
Page 18Date: May 1, 2023
2. Retail Industry
Page 19Date: May 1, 2023
Retail Sector – (1/2)
Increasing bargaining power of modern trade
Pre demonetization, modern trade comprised of only 8% of retail sectorSmaller suppliers now prefer to supply to modern trade due to uncertainty about the credibility of general trade customers. larger and institutional FMCG companies also push their products through modern tradeCustomers also prefer modern trade as they can accept cashless payments
However, sales of hyper premium products fell down, as consumers focus shifted to necessities in stead of luxury goods.
Shift to Organized Sector/ Modern Trade
35%
25%
15%
7%
7%
6% 5% 1%
Preferred Channel to Shop for Groceries(After November 8, 2016)
Card Payments
Amazon
Bigbasket
Flipkart
Grofers
Cash
Snapdeal
Paytm
India China Indonesia USA0%
25%50%75%
100%
8%20% 30%
85%
Share of Modern Trade
Source: Survey Results of CashKaro
Source: India Fact book, Yes Bank, December 2016
Page 20Date: May 1, 2023
Retail Sector – (2/2)
Between October 2016 and November 2016, the paan and cigarette retail shop business witnessed a fall of 3.6 percent.
Pharmaceuticals and Cosmetics shops experienced a positive growth of 2.4 percent and 0.5 percent respectively.
Gems & Jewellery trade was among one of the worst hit sectors as 80% of jewellery sales are on cash and rest on cards. As per Mr. Bacchraj Bamalwa - Director & Ex-Chairman of All India Gems & Jewellery Trade Federation, around 40% of the gems and jewellery shops are not having any sales post demonetization.The grocery sector as a whole experienced a decline of 2.1%.
Within grocery, packaged grocery grew positively at a rate 2.4% whereas the sales of categories such as impulse foods, personal care and household cleaning fell by 2% - 5%.
According to the Federation of Automobile Dealers Associations, the retail sales of automobiles had declined by as much as 30% in November 2016. However, the second-hand market and service stations were even worse hit due to the cash crunch in the economy.
Impact of Demonetization on different segments of Retail Industry
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3. Banks and NBFC Sector
Page 22Date: May 1, 2023
Increase in the Deposits
Growth in bank depositsUp till 2015 Bank deposits had stagnated between 68-69% of GDP but increased to ~72.6%
Improved financial performance and lower interest rates
Writing off NPA’s: Banks were able to write off NPA’s worth INR 70 Billion (SGD 1.2 Billion)Decrease in the deposit rates as well as lending rates (RBI has cut interests rates to a 6 year low just before the announcement)
FY 13 FY 14 FY 15 FY 1650%
75%
67% 68% 69%73%
Bank Deposits
Source: India Chart book, Yes Bank, December 2016
Bank 2017 2016SBI 8% 8.9%Union Bank 8.65% 9.3%IDBI Bank 9.15% 9.3%SBT 9.2% 9.45%IOB 9.15% 9.5%PNB 8.45% 9.15%*MCLR: Interest rats for new borrowers Rates from Jan 2017
RBI Interest Rates
Page 23Date: May 1, 2023
Increase in the Deposits
Reach of financial institutions would grow-In anticipation of the current move, Government has been driving financial inclusion under the Jan Dhan Yojana programBut usage of bank accounts has been low and is expected to rise
2014, Financial Inclusion Indicators
Bank Account ownership
53%
Used account to receive wages
4%
Used account to transfer money
<4%
Saved money with a Financial Institution
9.9%
Borrowed money from a Financial institution
6.4%
2014, Bank Account Penetration
Page 24Date: May 1, 2023
4. Real Estate
Page 25Date: May 1, 2023
4 On going trends in the Real Estate sector
Sluggish growth in the residential sector
Demonetisation and liquidity crisis. 30% of all transactions are believed to be in Cash
NIFTY Reality index
Reduction in home loan rates- which would help demand in the long run
Oct-15 Nov-16 Jan-17
9.30%9.10%
8.25%Home Loan Rate
Introduction of “Real Estate Regulator Bill” in March 2016:
• Enforces transparency of information to buyers
• Ensures developers have 70% of the funds required
• Penalizes developers for project delays
• Enables aftersales service
Page 26Date: May 1, 2023
Impact of Demonetization on the Real estate sector
Dependence on Cash
Impact
New Re-Sale
ResidentialLow / Mid High
• Little impact on sales of new launches by institutional developers
• Lower home loan rates may boost some demand• Resale volumes and prices may fall drastically
CommercialLow High
• Resale transactions have a high cash component and will be impacted
• Rentals expected to be unaffected
RetailLow High
• Lower rental collections and demand as consumer spending falls
Land Sales / Green fields
High High• Slow down is expected as fund dry up• Prices expected to fall by 20-30%, which would trickle down to
new projects• Agricultural land, would be greatest hit
DevelopersHigh High
• Smaller players will face liquidity pressure, as alternative means for funding dry up.
• May be an opportunity for foreign investors and financial institutions
Investment Markets
• Projects expected to be delayed due to liquidity crunch• FDI, private equity and debt players may see opportunities as
transparency and demand increases
Page 27Date: May 1, 2023
In Conclusion
Page 28Date: May 1, 2023
Conclusion
Cash constraints to continue well into 2017
Consumer spending and SME’s that are cash dependant would be impacted most
Government’s financial position will improve and lead to opportunities in infrastructure projects
Retail sector would slow, but will shift towards modern trade and online
Opportunities for players who can help in digitization and shift towards an organized economy such as:
Institutional investors, Online Payment companies, ICT and infrastructure providers
Further regulatory changes are expected in FY 2017
Ease of dong business and transparency to increase, making India more FDI ready
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Page 30Date: May 1, 2023
Annexure
31
Ease of Doing Business
World Bank Ease of Doing Business
IndicatorsRanks 2017 Ranks 2017 Rank 2016 Change in
Rank
Overall 130 131 -1
Dealing with Construction Permits 185 184 1
Starting a Business 155 151 4
Registering Property 138 140 -2
Getting Credit 44 42 2
Paying Taxes 172 172 0
Trading Across Borders 143 144 -1
Resolving Insolvency 136 135 1
Enforcing Contracts 172 178 -6
Getting Electricity 26 51 -25
Protecting Minority Investors 13 10 3
GST (Goods and Services Tax): Indian Government will be implementing GST tax from 1st July 2017 (Tentative) across India. It will have following benefits
Simpler Tax Structure: This will be easy to manage tax for local and foreign companiesCancellation of Local and state taxes: This will be the only tax applicable removing all local and state taxes Reduction in Prices: the prices of end products will reduce
Key Reforms for 2017
Page 32Date: May 1, 2023
Real Estate Sector
Immediate Impacts of DemonetizationMost infrastructure stocks have corrected sharply (fell 5-15%) – on execution and traffic growth concerns.Labour unavailability: Labour supply for construction work was impacted sharply, immediately after the demonetization announcement, as most of the are paid daily and in Cash.Decrease in home loan rates: Home loan rates by SBI (India’s largest bank) have decreased home loan rates to 8.6% from 9.10%. Other banks are also decreasing the home loan rates
This will positively impact the new home market for new buyersDecrease in the re-sale market: Majority of the resale of housing market operated in cash, this will be impacted severely and will take minimum 6-9 months to recover
Period Number of new units Launched Decline
October 2013 – March 2014
224,628 -13%
April 2014 – September 2014
153,432 -32%
October 2014 – March 2015
152,776 0%
April 2015 – September 2015
87,368 -43%
October 2015 – March 2016
78,544 -10%Source: Economic Time report (Link), Yes Bank Report on Real Estate Sector
Page 33Date: May 1, 2023
Indian Real Estate Market Before Demonetization
Additionally, in March 2016, government passed the ‘Real Estate Regulator Bill’, to introduce the buyer friendly policies.
This combined with lower property prices and lower interest rates is expected to give real estate market a big push in second quarter of 2017
• In 2016, India recorded 41.6 million sq. ft. (3.9 million sq. metres) of gross office leasing transactions an increase of 3.5 % over 2015.Office leasing will continue to grow. In 2016, Bengaluru was leader in office leasing due to IT companies
31%
18%14%
13%
24%
Office Leasing in India
BengaluruDelhi/NCRMumbaiHyderbadOthers
Source: Collier’s International Report on Office Leasing in India (link), Colliers India Residential Report (Link)
Bengaluru Residential Prices 2010 - 2018F