Three weeks after India invalidated its largest bank notes overnight, cash shortages are choking the world’s fastest-growing large economy. While it is too soon for much of the pain to be read from broad economic indicators—in India, even monthly ones, such as industrial output, are released with considerable lag—early signs are coming in. Some of them imply the disruption might not be as deep, or as long-lasting, as the long lines at banks and ATMs suggest.
1. Industrial activity has taken a hit
The Nikkei India Manufacturing Purchasing Managers’ Index for November, released Thursday, is our first high-level glimpse at activity since the cash withdrawal. Factory conditions still showed improvement for the month, but at a slower pace than in October. Companies surveyed for the index said the cash crunch is likely to cause further disruption.
The size of the hit to the broader economy is still difficult to pin down, but most economists are bracing for some sort of impact in this quarter and the next, and many have marked down their growth forecasts for the financial year accordingly.
2. Paper money is only trickling back into circulation
Before they were suddenly canceled, 500- and 1,000-rupee notes ($7.30 and $14.50) were worth more than $200 billion in total, making up roughly 85% of India’s cash supply. That is a big hole to fill. Roughly $37 billion in fresh cash had been disbursed by banks and ATMs as of Nov. 27. But much of that was in the form of new 2,000-rupee bills—too large for most everyday use.
3. Consumers are still finding ways to spend—on small cars, at least
Maruti Suzuki, India’s largest automaker, said on Thursday that domestic car sales rose 14% in November compared with a year earlier. October sales had grown 2%. Indians usually take loans to buy small cars, which means many people who were in the market for a new ride could still take the plunge even if they were cut off from cash.
But Mahindra & Mahindra, another auto giant, saw a 33% year-over-year drop in passenger-car sales last month, it reported Thursday. The company’s sport-utility vehicles are popular in rural India, where cash constraints have been widespread. Mahindra also said it sold 21% fewer tractors in November than it did a year earlier.
4. Once the dust has settled, banks could have more money to lend
Lenders have received a torrent of old cash in the past few weeks. Not surprising, as there isn’t much Indians can legally do with invalidated notes other than put them into bank accounts. Deposits were made totaling 8.1 trillion rupees ($118 billion) between Nov. 10 and Nov. 27. Indian banks had a total of $1.5 trillion in deposits as of Nov. 11, according to central-bank data.
“The fact that banks are now flush with liquidity should help to drive down lending rates,” said Shilan Shah at Capital Economics. “Even if it’s very marginal, we might see some pickup in lending growth.”
Yet financial authorities also don’t want too much liquidity splashing around. Last week, banks were ordered to park excess deposits with the central bank, effectively yanking $50 billion out of the system.
5. The government could also have extra money to spend
Prime Minister Narendra Modi’s government is hoping that forcing Indians to redeem their cash at banks will dredge up income on which taxes hadn’t previously been paid—and thus deliver a much-needed jolt of revenue to federal coffers.
The lower house of Parliament this week approved changes to income-tax laws to encourage Indians to come clean on undisclosed earnings. Under the new stipulations, Indians who offer themselves up would need to deposit a quarter of their hidden money with a government program, where it wouldn’t accrue interest and couldn’t be withdrawn for four years. Those who aren’t able to explain the source of their income, and those whose income is only unearthed after an official search, would face harsher penalties.
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