‘Demonetisation to trigger recession, lower revenues’

‘Demonetisation to trigger recession, lower revenues’
A number of states, including West Bengal, Uttar Pradesh and Tamil Nadu, on Sunday raised the issue of demonetisation of 500 and 1000 rupee notes and its impact on state treasuries with Union Finance Minister Arun Jaitley. Before the start of informal meeting that was called to end the deadlock over jurisdiction over assessees under the GST regime, sources said, West Bengal Finance Minister Amit Mitra said the ban on old currency notes would trigger recession as industrial activity would be hurt and tax collection would recede.

Tamil Nadu too joined the chorus saying that industrial activity is hurt and while Uttar Pradesh said factories in Kanpur and Moradabad have closed operations. Kerala Finance Minister Thomas Isaac said many states have “reported informally” that they have seen a “significant decline in revenues”.

“If 86 per cent of your money disappears, there is a problem for the people. There is a collateral impact on investments sentiments,” Isaac told reporters here. In a major assault on black money and terror financing, Prime Minister Narendra Modi on November 8 announced demonetisation of 500 and 1,000 rupee notes and asked holders of such notes to deposit them in bank accounts.

As much as Rs 14 lakh crore or 86 per cent of India’s currency has been withdrawn and is getting replaced with new Rs 500 and Rs 2,000 rupee notes. Sources said that all states were in agreement that their revenues will get impacted and employment will be hit, but nobody demanded a roll back.

While West Bengal Chief Minister Mamata Banerjee and Delhi Chief Minister Arvind Kejriwal, have been demanding a roll back of demonetisation exercise, Samajwadi Party supremo Mulayam Singh Yadav demanded a short-term roll-back of demonetisation move saying that people should be given at least a week’s time before the ban on old currency notes.

Meanwhile, Andhra Pradesh Chief Minister N Chandrababu Naidu said in Amaravati on Sunday that he was “pained” to see that the crisis caused by demonetisation persisted even after 12 days even as he commended the patience of the people for putting up with the difficulty. He announced that the RBI has released Rs 2,000 crore worth currency in smaller denominations for Andhra Pradesh that should provide some relief to people from Monday.

“In my long political life, this is the first time I am seeing a crisis that remained unresolved for such a long period. It’s painful that the crisis caused by demonetisation persisted even after 12 days. I am feeling impatient but it’s commendable that the people are so patient,” Naidu said.

People, the rich and the poor alike, are facing problem in exchanging currency and the impact was felt across the regions, he added. The Chief Minister said that of the total currency released for the state by the RBI yesterday, Rs 100 notes alone amounted to Rs 400 crore that should provide some relief.

Naidu conducted a teleconference with district collectors, officials of finance department and bankers today and reviewed the situation. Bankers and finance department officials should respond immediately and ensure relief for the people, he said. “Set up call centres in each bank and provide information to people constantly. Make use of all available resources and infrastructure. Estimate the currency requirements in each district and ensure money is dispatched promptly to those places.

“Banks that have currency chests should share their cash with banks that do not have the facility, particularly in rural areas,” he said, adding that mutual cooperation, coordination and effective action were the need of the hour.

On Friday, the Chief Minister had written a letter to the Centre requesting it to release currency notes worth Rs 10,000 crore in smaller denominations in view of the problems being faced by people. State Finance Secretary M Ravi Chandra was specially sent to Mumbai to meet RBI officials and secure money release.

The RBI officials, however, were said to have told the state government that they could not make any specific commitment on the release of the amount sought since it involved logistics and security issues. 

Cash shortage likely to shave 15-20% off cement demand

Post currency demonetisation, the cement sector is likely to witness 15-20 per cent demand drop until December 2016 and subdued 3 per cent growth in the fourth quarter of this fiscal, a report said. “We now factor a 15-20 per cent demand drop in the near term until December 2016 and then subdued 3 per cent growth in 4QFY17. Investors believe that the drop in near-term demand is likely to be severe,” Deutsche Bank Markets Research said in its report here.

“The demand may see subdued 3 per cent growth in Q4FY17 and upturn is expected only in FY20 as compared to FY19 earlier,” added the report. “We see some infra sector demand offsetting weakness in demand from the housing segment. We may also see a gradual reduction in mortgage rates, which could bring back some genuine demand,” Research Analyst Chockalingam Narayanan said.

“Looking at the demand-supply model, we expect the regional balance to first shift in favour in Northern and Central India. Eastern India is likely to see the largest reduction in utilisation over the next 12-18 months,” Narayanan said. The cement sector is hopeful that infrastructure projects to offset weakness in realty sector.

With the government’s balance sheet likely to be in a much better fiscal position, the industry expect a sharp pick-up in infra demand — in line with the government’s vision to push public spending. Currently only road and railway sector spending is primarily driven by central government agencies.

State government finances, on the other hand, may come under some pressure, as a good 5-10 per cent of their revenue receipts come from the property sector. To that extent, their infrastructure sector spend — on rural roads, urban development projects (metro/mono-rail), affordable housing, irrigation, etc may be impacted.

“This is likely to be mitigated if the central government passes on a higher proportion of its improved finances to the states,” the report said. The sector was expecting 55-65 per cent of demand from housing (35-40 per cent rural and 20-25 per cent urban); 17-20 per cent from infra and 25 per cent from institutions and commercial realty.

In urban housing, the already subdued levels over the last 3-4 years may be prolonged but may not necessarily deteriorate, the report said. Commenting on cement prices, Narayanan said, following demand volatility, we anticipate a correction in cement prices in the near term. Looking at our cost curve analysis, however, we don’t expect a very sharp deterioration in cement prices on a sustained basis.

Currently, a good 30 per cent of players are not breaking even on a cash cost basis. If this were to take into account the recent spike in fuel costs of both pet coke and imported coal, at current prices over 43 per cent of the industry would not be at break even.

To that extent the room for prices to correct on a sustained basis looks low, he said. 


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