Category: Investment Management

Impact of Demonetisation and GST rollout on Indian economy

In November 2016, the government made a high-risk, high-stakes economic intervention in the world’s largest democracy, with an objective to reduce corruption. Overnight, 86% of cash in circulation was voided. In a country almost 90% cash reliant, chaos ensued.

With effect from 8th Nov. 2016,  our PM Shri Narendra Modi  banned currency notes of 500 and 1000. It is a strict decision of banning regular 500 and 1000 rupee notes from circulation which is a result of finding 1.25 lakh crore black money. Within 3 days of that striking decision: – 35000 Crore Rs. Deposited in banks and approximate 1500 Crore Rs Black Money were destroyed. According to the RBI‘s (Reserve Bank of India) Annual Report for April 2015 to March 2016, the value of the currency notes at the end of March 2016 was 16.42 trillion Indian rupees. The 500 rupee and 1,000 rupee currency notes formed 86.4% of the value.

In one stroke, the government removed 86.4% of the currency in circulation by value. In terms of volume, the currency notes of these two denominations formed 24.4% of a total 90.27 billion pieces. Also, RBI data showed that as of March 2016, 632,926 currency notes were counterfeit—known as an FICN (Fake Indian Currency Note). As a proportion of NIC (Notes in Circulation), the 1,000 rupee and 500 rupee notes were the highest. Nullifying these FICNs was also part of the demonetization move.

Impact on different segments of the economy:

Agriculture:        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.

Because of cash shortage daily supply transport system has also suffered which was result in 25 to 50 % reduction in sales.

Manufacture: Automobile :          Clampdown on cash transactions and temporary cash crunch 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.

Real Estate :       Demonetization smashed the real estate market and it will result in 50% drop down and it will remain for further 5 to 6 months. While the short-term impact is negative, Experts hoping that rate cuts in the coming months would boost home sales.

FMCG Products :              Consumer expenditures also affected by that decision now only those products are purchased which was necessary for daily consumption and mostly the small traders like ‗kirana stores’  etc. they all have done their daily transactions only in cash and because consumer has less cash in his pockets the daily sells of these traders drop down by 20 to 30 %. It is also a short term impact in future things get normal.

Service sector: Service sector is hit hard by Demonetization , the worst slump in nearly three year is noted. The Nikkei India Services Purchasing Managers’ Index (PMI), which tracks services sector companies on a monthly basis, stood at 46.7 in November, down from 54.5 in October. The Index slipped into contraction territory for the first time since June 2015 and pointed to the sharpest reduction in output for almost three years. On other hand if we talk about Banking Sector this is the only sector which was benefited by that decision in many aspects, this move will pull a large chunk of first time users to banks, who will have to use the system at least once to exchange their old notes for new ones. According to a study conducted by Moody’s, people tend to continue using banking services once they have crossed the ‘first-time user’ mark. This development will increase bank deposits by 1 to 2 percent compared to what they were before the demonetization scheme.

Benefits :

  • One of the biggest benefits of this move is that it is going to drastically affect the corrupt practices.
  • Enemies of the country which are involved in counterfeit currency and terrorism will not be able to continue it further for quite some time at least.
  • The smuggling of arms and dealing with the terrorist will not sustain further as all of the money will be on record now
  • Banking system will improve as it will slowly head towards a cashless society.
  • The existing white money of people will be known to the government and it will remain with banks so that it can be put on loan, and interest can be generated from it (though interest rates would fall) with a corresponding fall in Inflation.
  • It will also reduce tax avoidance. Whatever money will be deposited or exchanged, authorities will keep a track of it
  • Importantly, in the longer run, tax and interest rates on loans are expected to come down as higher income tax collections arising from better compliance would offer scope to reduce rates over the long term.

GST Rollout

India rolled out the Goods and Services Tax (GST) on July 1 2017, replacing a thicket of indirect central and state levies that critics argue have blunted economic competitiveness and hobbled efforts to lift more out of poverty.  Observers have described the reform as the most meaningful change to India’s tax regime since the country became independent in 1947.

The government introduced GST for a variety of goods and services along four main rate bands: 5-, 12-, 18- and 28 percent irrespective of the location of purchase. Certain goods such as fresh meat, eggs, milk, among others, will not be taxed.

Though experts agree on the long-term benefits, including the ease of doing business in India and bringing swathes of the country’s informal economy inside the tax net, they say in the near term there could be significant disruptions.

Since many SME s are not even reporting their sales and revenue figures. While some of them will be coming back into the tax net, some may stay out . The biggest challenge (of implementation) is that of delayed outreach. The training and the outreach / inclusion should have been done for a scale of this project.

The biggest hurdle will be to change the mindset and business practices for many of the smaller organizations.

While large companies in the organized sectors are fully behind the rollout, it’s the smaller ones that do not regularly pay taxes that have to adjust.

The ones who have never reported their taxation are the ones who are going to suffer. They will have to come in this era of transparency which is the government is pushing for. They will obviously have to learn to live with the new system.


  • The logistics industry is also set to benefit because transportation costs are expected to come down drastically . To produce in one place, transport across so you get cheaper logistics, you get lower taxes across the states, and you also get the kind of efficiency system that would make ‘Make In India’ a compelling proposition, alluding to Modi’s aim of making India a manufacturing hub.
  • No tax(0%) – Goods – No tax will be imposed on items like Jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi. Sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, Bones and horn cores, bone grist, bone meal, etc.; hoof meal, horn meal, Cereal grains hulled, Palmyra jaggery, Salt – all types, Kajal, Children’s’ picture, drawing or colouring books, human hair .

Impact on personal finance products & services

Impact on loans and credit cards:

Before evaluating the likely impact of GST on personal financial services, it is very important for us to understand the components which will be impacted due to increased GST rates. For example, in case of loans, the main cost of taking a loan whether a home loan or a vehicle loan or a personal loan, is interest which you pay for using the money. This cost is not going to be impacted due to increased tax rates, as no service tax is levied presently on it and the same is not taxable under GST. Likewise, for credit cards also the interest charged for delayed payments is outside the scope of the levy of GST. However, in case the banks charge you any penal charges to compensate them for the delay or default, the same is subject to levy of GST.

Though the interest charged on your loans or credit cards is not subject to levy of GST, there are various other charges levied in connection with loans and credit cards. First and foremost is the processing fee paid by you, on which service tax being levied is 15 percent but tax liability will go up by 3 percent to 18 percent under GST. This will be a onetime cost and the average impact of the same for your whole home loan tenure will be very insignificant, but the same may be higher in case of a personal loan or a loan on your credit card. The banks may also recover other charges like advocate’s fee, valuation charges etc. in connection with home loans which will go up proportionately. However, any stamp duty charged in connection with documentation of your loan will not change with GST implementation as stamp duty is not subsumed with GST. All the banks charges like NEFT, RTGS, ATM withdrawal etc will go up due to increased 18 percent GST rate.

Impact on the financial planning services and tax consultancy charges:

The increased rate of GST at 18 percent will be levied by your Financial Planner as well as the Chartered Accountant for fee charged in respect of services rendered to you in case the service provider is registered under the GST.

Impact on insurance products:

The increase of tax applicable for insurance will vary depending on the particular insurance product. For term plans, ULIPS, health insurance, personal insurance, vehicle insurance and critical insurance the cost will go up due to impact of increase of tax from 15 percent to 18 percent. However, for other products like for Annuity the GST applicable would be lower.(it would be 1.8 percent instead of 1.5 percent earlier).. For endowment insurance plans, the GST for the first year premium would be increased from 3.75 percent to 4.5 percent and for subsequent years it would be halved of the first year rate.

Sneha Ramamurthy

Content Strategist – Dilzer Consultants Pvt Ltd


25 August 2017