International Journal of Scientific Research in Engineering (IJSRE) Vol.

1 (2), February, 2017

Impact of Demonetization on Major Sectors of Indian Economy

Dr. D. K. Parmar1, Dr. S. K. Dave2
1
Lecturer in Applied Mechanics Department, B. and B. Institute of Technology, Gujarat, India.
2
Head in Civil Engineering Department (GIA&S/F) B. and B. Institute of Technology, Gujarat, India.

Corresponding Author Address:

Dr. D K Parmar
Lecturer, Applied Mechanics Department,
B & B Institute of Technology,
Vallabh Vidyanagar, Gujarat, India.

ABSTRACT

In a historic move, by the Modi government decided to cancel the legal tender of Rs 500 and Rs 1000
notes in a bid to curb and eliminate black money and counterfeiting, which is also likely to impact
various sectors of the economy. There are short-term implications for cash-intensive sectors such as
real estate, construction, and consumption. However, in the medium term, benefits through higher
government spending, better transmission, greater financial inclusion and movement of household
savings from physical to financial would be beneficial for boosting potential growth, says a recent
research report by YES Securities.

INTRODUCTION
Demonetization of Rs. 500 and Rs. 1,000 notes by the Government of India is a very bold act
and welcoming one. The hoarding of money by unscrupulous people led to double pronged
impact on the economy. First the prices of commodities have gone up quite steeply due to
free flowing of high value currencies by a handful of few and second the purchasing power of
money in real terms has slid badly to common people who are the majority and in whose
possession the savings is very reasonable. To say succinctly, the high value currencies were
stored only in the form of Black Money. Pumping of this was used for activities which are
antisocial and on things which would shoot up prices of essential commodities. Right from
vegetables to gold, prices went sky high.[2]

What Is Demonetization?
Demonetisation is a process by which a series of currency will not be legal tender. The series
of currency will not acceptable as valid currency. The same thing happened with the Rs. 500
and Rs. 1000 note demonetization.

What are the causes of Demonetization?

There can be many causes of Demonetisation in any economy some of them are: Introduction
of New Currency ,Black Marketing, Currency Storage, Corruption and others. There will be
excess fake currency in the economy is main reason of demonetisation.

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International Journal of Scientific Research in Engineering (IJSRE) Vol. 1 (2), February, 2017

IMPACT OF DEMONETIZATION ON SIX MAJOR SECTORS

OF INDIAN ECONOMY [1, 3, 4, 5, 6]

AGRICULTURE AND RELATED SECTORS:

The sector typically sees high cash transactions and therefore near-term impact could be seen
till liquidity is infused in the rural areas. As farmers face a temporary shortage of cash in
hand, it could lead to a delay in payment which in turn would hurt the related companies in
the short term. As liquidity eases and cashless transactions gain acceptance, the fundamentals
would be driven by the longer term drivers of normal monsoons and positive traction in
acreage.

AUTOS & AUTO ANCILLARIES:

These demonetization measures are expected to impact cash transactions in the automobile
industry in India, particularly for two-wheelers, used vehicles and other secondary
automobile and auto ancillary industries. These measures may indirectly affect OEMs as well
as potential automobile customers may find sale of older vehicles more challenging as a
result of the reduced liquidity. In particular, these measures are expected to significantly
affect rural and semi-urban regions, as well as tier 2 and tier 3 cities and towns that cater
largely to the two-wheeler and used vehicle markets primarily driven by cash transactions.

Two Wheelers: Clampdown on cash transactions and temporary cash crunch could hurt
purchases particularly in the economy segment of the two wheeler space where the
percentage of cash transactions have been high. However, as companies learn to work around
it, demand may pick up by overall growth in consumption on the rural as well as the urban
side.
Passenger Vehicles: The seasonal slowdown seen during November and December months
could get more pronounced as consumers delay purchases due to temporary liquidity crunch
and expectations of rate cuts. However, as most passenger vehicles are financed through
loans, the blip would be temporary and demand may recover on the back of growth in
demand in rural and urban areas as well as trickle down benefit of the 7th Pay Commission
Payouts.
Commercial Vehicles: Slackness in the economy on account of demonetization could have a
negative impact on the commercial vehicle volumes which have been under pressure in
recent times. However, this slowdown may be short lived and demand may pick up, led by
pre-buying in response to the changes in emission norms as well as a pickup in overall
economic activity.

CONSUMPTION-RELATED SECTORS LIKE CONSUMER DURABLES, FMCG,

ETC.
The outlook is near-term negative as cash sales account for a significant chunk of sales for
companies in these sectors. As customers and companies migrate to the cashless platforms,

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International Journal of Scientific Research in Engineering (IJSRE) Vol. 1 (2), February, 2017

demand should come back making demonetization near term neutral. In the long term,
demand may shift from the unorganized players to the organized players.

REAL ESTATE:
The demonetization has caused a huge shock in the realty sector as it is eminently a cash
involved one. Not only in secondary sector, but also in the Primary sector, most of the buyers
and sellers prefer to have a major chunk in cash, restricting to only a lesser amount on
transparent payments by way of cheques and DDs. As such, this is the sector where hoarded
money finds its place. Black money takes the colour of white in realty sector.
In our country, presently, except organized big institutions, most of the small companies
encourage only cash transactions. This only gives rise room for investment of black money.
The peculiar truth is that most of the small constructions are handled only by small
companies where money only has a say in the matter. The demonetization has just shaken the
real estate sector totally. It is absolutely true. Prices are coming down to as much as 25 30%
to tide over the crisis. In the long run, this will definitely help the real estate sector fully. Not
only large institutions, even small companies will be forced to undertake only open
transparent financing. Black money investment will be ridden of it, in the near future.

BUILDING MATERIALS, METALS, CEMENT, ETC.

These sectors could see a slowdown in near-term demand due to their high dependence on
real estate. Slowdown would be more pronounced for unorganized players wherein cash
transactions are higher.
Over time as demand for real estate improves, we would see growth come back for these
sectors as well. Organized players would also see an expansion in market share on the back
of the shift in demand from the unorganized to organized.

BFSI:
Banks: A rise in deposit base will allow banks to lower the blended cost of funds as higher
CASA deposits help to replace the high cost of borrowing and lower overall cost of funds.
The new regime of MCLR will immediately take into account the lower cost and will thereby
lead to a decline in lending rates and improved transmission.
Digital wallet providers and payment banks would benefit from increased focus on cash less
transactions both in terms of volumes as well as in terms of value.
NBFCs: In the short term there would be a negative impact on NBFCs that make
disbursements in cash and/or do most of their collections in cash. These include gold
financing companies, microfinance institutions, etc. However, as these companies migrate to
the cashless business models, the pain would ease off.
NBFC lending against property (LAP): This is the segment that could face severe pressure in
the near to medium term as fall in property prices combined with longer time for liquidating
property could put add pressure on the financers in this segment.

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International Journal of Scientific Research in Engineering (IJSRE) Vol. 1 (2), February, 2017

CONCLUSION

Although the comprehensive long term impact of these demonetization measures cannot be
fully ascertained at this stage, the overall economy is expected to benefit from a decrease in
unaccounted cash transactions and an elimination of counterfeit currency notes, leading to
more effective tax collection and increased transparency in ascertaining transaction costs. An
increase in transparency is also likely to improve attractiveness for foreign investors, while
higher bank deposits and formalizing large hitherto unaccounted for income streams is
expected to improve the fiscal deficit of India.

REFERENCES

1. Impact of Demonetization on various sectors and the economy JR Financial dated

10/11/2016
2. Demonetisation: Impact on the Economy, National Institute of Public Finance and Policy
New Delhi
3. www.financial express.com/India News/demonetization effect massive layoffs in
construction sector in tamilnadu/450324 9
4. The Shadow Economy in Europe, 2013, Friedrich Schneider, (A. T. Kearney, Korea)
5. The Shadow Economy Friedrich Schneider & Colin C. Williams, Institute of Economic
Affairs, 2013
6. Black Money in Real Estate Sector, A Study, NIPFP, January 1995
7. http://www.geojit.com/Admin/
8. http://www.indianeconomy.net/
9. http://economictimes.indiatimes.com/

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