India’s Economy Is Crashing After High-Denomination Cash Ban

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December 7, 2016 12:15pm BATS:INDA

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From Tyler Durden: Amid social unrest and loss of faith in the nation’s currency, India’s economy has ground to a halt with its Composite PMI crashing by a record in the last month as demonetization strikes.


However, even more problematic is that Indians have validated 82% of bank notes rendered worthless by PM Modi, dramatically undermining the government’s estimate of unaccounted wealth in the economy. As Bloomberg reports,

About 12.6 trillion rupees ($185 billion) had been deposited into bank accounts as of Dec. 3, the people said, asking not to be identified citing rules for speaking with the media. The government had estimated that about 5 trillion rupees of the 15.3 trillion rupees sucked out by Modi’s move would stay undeclared, implying that this was cash stashed away to evade taxes, known locally as black money.

Lack of a meaningful cancellation could be a double blow for Modi as the measure was being used as a political and economic gauge of the success of his Nov. 8 move. One of Modi’s biggest campaign pledges was to expose black money in Asia’s No. 3 economy, and economists were viewing the cash as a potential windfall for the government.

“Some of the windfall that the government was hoping for from the cancellation of notes will be dented,” said Anjali Verma, chief economist at PhillipCapital Ltd. “That means the fiscal stimulus that was being expected might also take some hit. That is not good news at a time when direct consumption, private investment is not expected to pick up.”

“Markets are not too worried at the moment,” said Chakri Lokapriya, Mumbai-based managing director at TCG Advisory Services, which manages about $3 billion. “But if 12-13 trillion rupees comes back into the system it defeats the whole theory of black money.”

In such a situation where the gains of demonetization aren’t apparent, individuals will more closely analyze the pain. A slump in demand due to the cash shortages will hurt company revenues and government tax collections, widening the budget deficit and ultimately weakening the rupee, Lokapriya said.

So was the whole effort merely, as Modi admitted, a move towards a cashless society after all? And not in any way related to corruption? Either way, it is too late now as faith in the fiat currency has collapsed.

Finally, while most shrug and say “how does that affect us?”, the tumult in India is weighing heavily on the rest of the world via the oil market. India has been the world’s fastest-growing crude market and that may weaken as the government’s cash crackdown slows the economy. As Bloomberg reports,

 Diesel and gasoline use, which account for more than half of India’s oil demand, will slow or contract this month and possibly early next year, according to Ivy Global Energy Pte., FGE and Centrum Broking Ltd.

“As the Indian economy largely depends on various cash-intensive sectors, the demonetization saga will no doubt slow down economic growth in the near term,” said Sri Paravaikkarasu, head of East of Suez oil at FGE in Singapore. “Moving into the first quarter, an expected slowdown in the economic growth should marginally drag down oil consumption, particularly that of transport fuels.”

Diesel consumption could fall as much as 12 percent and gasoline demand as much as 7 percent this month, according to Tushar Tarun Bansal, director at Ivy Global Energy.

“I expect to see a much smaller growth in diesel demand of about 2 percent in the first quarter,” Bansal said.

The possible slow down this month and into next year is a reversal of the demand spike seen in November as people rushed to fill their tanks to take advantage of a rule allowing fuel retailers to accept the banned 500 and 1,000 rupee ($15) bills until Dec. 2.

So an Indian PM ‘flaps his wings’ and the rest of the world may have a hiccup.

The iShares MSCI India ETF (BATS:INDA) rose $0.12 (+0.44%) to $27.11 per share in Wednesday afternoon trading. Year-to-date, the largest ETF tied to Indian equities has fallen 1.42%.

This article is brought to you courtesy of ZeroHedge.


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