A year after demonetization and four months after the rollout of the goods and services tax (GST), the economy is still coming into terms with the changes.
While the impact of the storm is still being debated, brokerage houses estimate that close to Rs 2-3 lakh crore of money that was lying idle has come into the mainstream economy.
Banks were flushed with liquidity and their cost of funds fell.
Rajnish Kumar, chairman of State Bank of India, told DNA Money, "Demonetization was able to mobilise low-cost funds for the banks and the CASA went up. We also saw digital transactions going up."
For SBI, CASA deposits have gone up 3%. "That is a huge gain from the banking sector point of view. The second thing where I see gains for the banking sector is this move away from ATM transactions which are really going down in percentage terms and the transactions on digital channels are going up," Kumar said.
The electronic infrastructure in the country underwent a transformation process as consumer behaviour changed. "Transactions on digital channels are now nearly 40%. which used to be the reverse, 30% or 32% on digital and 40%," Kumar said.
Digital payment companies flourished. Banks also enhanced their digital infrastructure. As per the recent data from NPCI, the number of point-of-sale (POS) terminals in the country has touched the three million mark. This is significant given that India had just 1.5 million PoS terminals as of November 8 last year," according to a HDFC Bank report on demonetization.
Banks' credit growth to small- and medium-sized businesses has been in negative or low single-digit growth in recent years. Some banks also saw many smaller stressed loans being paid off due to demonetisation.
Parthasarathi Mukherjee, MD & CEO, Lakshmi Vilas Bank, said, "It is now a year after the event and, on reflection, I feel that the impact for the banks has been largely positive. Besides, banks picked up deposits during the demonetisation drive and a lot of small loans got paid off, many of which were sticky. A spinoff from demonetisation has been the overall increased emphasis on digital transactions and that channel has seen manifold growth."
On November 8, 2016, currency notes of denominations of Rs 1,000 and Rs 500, valued at Rs 15.4 lakh crore and constituting 86.9% of the value of total notes in circulation, were demonetized.
Nitasha Shankar, senior vice-president and head of research at YES Securities said FMCG and many other sectors of the economy were impacted.
Post demonetization, rural India, which is majorly a cash-based economy, was affected the most due to liquidity crunch. This jolted sales of two-wheeler companies, which have sizable sales in rural parts of the country. "However, sales have picked up once the liquidity crisis eased," Shankar said.
The informal sector, which consists of many small businesses, bore the brunt as they do not have a capacity to tide over the cash crunch. Delayed payments from other players in the value chain crushed their revenues and their businesses became vulnerable.
"In an economy where 90% of employment and over 50% of GDP is derived from informal activities, this is bound to be a highly disruptive process. Without adequate social safety net provisions, the inevitable rise in the cost of operating in the formal economy (entailing registration, tax compliance, and regulatory obligations), will likely compel many informal businesses to either restructure or perish," DBS said in a report.
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