Is Demonetization Good for Economy ?
The demonetization-driven cash crunch that is playing out in India will create short-term economic pain in the form of the transactional hit created by a hard cash deficit and the structural hit to non-tax paying businesses that would become unviable.
As we move further away from this event, government’s larger crackdown on black money and its resolve to check tax evasion will yield two distinct sets of benefits:
- A lower cost of capital due to huge inflows
- higher in-flows into the financial services sector which will benefit equities in long term
Also, as the informal sector shrinks on the back of a crackdown in the black economy and on the back of the GST implementation, the formal organized sector is likely to gain market share as a ‘formalization effect’ comes into play from the next year onwards.
Trying to describes in greater detail these complex set of effects that demonetization will trigger in the short to long run all are personal view based on various reading and understanding and these level of recall was not done in history so all these could go wrong, I reserve all rights to be wrong
The informal sector accounts for more than 40 percent of India’s GDP and provides employment to close to 80 percent of the labour force. While it is difficult to capture details regarding the profit margins of businesses in the informal sector, it is safe to assume that from the third quarter FY17 to fourth quarter FY19, the share of the informal economy in India could as low as 20%. This shrinkage of the informal sector is likely to result in a short-term adverse effect as the informal sector is no longer able to employ the numbers that it did. However, as the informal sector shrinks, the formal organized sector is likely to gain market share will benefit listed companies. The formal sector accounts for 60 percent of India’s GDP today. Ambit Capital assumes that from FY17 to fourth quarter FY19, the share of the formal economy in India could expand from 60 percent to 80 percent.
Black money will prevent people from parking their savings in physical assets such as gold and real estate. This should boost the flow of savings into the financial system to a significant extent. This in turn should spell a higher influx of flows for financial services providers such as banks, non-banking financial companies (NBFCs)
The most hit will be real estate, land and gold prices in long term, here are some stocks that can benefit in long run, most of them are part of our portfolio already.
| Stock | Current Price | Why it will gain |
| DHFL | 230 | Lot of money will flow it small and mid-segment housing and cost of fund will go down, short term pain |
| NBCC | 225 | This will be the biggest beneficiary, as Govt will build lot of house for poor on Govt land and only PSU in this psace will see lot of orders and can grow order book at 25% CAGR for next 3 years |
| Sun Pharma | 695 | Sun Pharma is trading at very low and it has acquired one more company is Russia and this will help in growth in business |
| ICICI Bank | 255 | It will be biggest beneficiary of Demonetization, low cost of funds and reeducation in Repo Rate on Dec 7 policy |
| Kotak Bank | 750 | Same as Above |
| PFC | 125 | Lot of money was paif by big Defaulters so it will see very good days ahead |
| IL&FS transportation | 90 | This can benefit as Govt will invest into infrastructure and IL&FS will be biggest beneficiary |
| Tata Motor DVR | 290 | It has fallen for multiple reasons like Mistry issue and Demonetization , but in long term there will be very less impact on Land rover and Jaguar sales |