Demonetisation is great news for Indian economy (along with Republican victory)

The cleansing of the system will have a therapeutic and curative effect.

 |  2-minute read |   10-11-2016
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This is an epoch-making step and will fundamentally alter the long-term outlook about how business and polity are conducted in India. Whatever shorter-term adjustments and challenges on demand (for goods and services) this may create, in the longer-term, the effect will be salubrious. Why?

- Money under the mattress (earning 0 per cent return on capital employed, ROCE) will start making positive contribution to both velocity and productivity of capital. Whatever raises ROCE in the system will eventually raise the value of the system (and hence, the prices).

- The cleansing of the system will have a therapeutic and curative effect and this step, along with the Goods and Services Tax (GST), will go a long-way in giving a body blow to the parallel economy. '

- Over time, banks and formal financial systems will gain, the cost of capital will decline and formal monetisation will gain a major boost as popular but yield-poor assets like gold will lose relative importance in the system.

- Consumption may, in the short-term, get affected but will actually gain immensely over time (a person with excess capital doesn't indulge in matching excessive consumption!)

- Not just for now, but for the future as well, the process of parallel economy will get stymied.

- In sum, over time, the economy will get boosted materially and on a permanent basis.

trumpnew-embed_111016061031.jpg Republicans have a better record of managing the US economy than the Democrats. (Photo credit: AP)

US elections

While we, generally speaking, have no interest in commenting about macro-events like the US elections, the following may be relevant to note:

- Republican victory means that now, both houses will be under the control of Republicans and, therefore, decision-making which was forever getting stalled will move apace.

- Without getting into any debate about the merits of respective the candidates (it is academic now!), Republicans have a better record of managing the US economy than the Democrats.

- Purely from the point of view of India's national interests, Republicans have a better record (and India's national interest is what we should be concerned about).

- The Indian pharmaceutical industry's interests are likely to be better served under Republicans (though the Indian software industry may potentially have an additional challenge to deal with).

- US Fed rate hike may witness (one more!) deferral.

Also read: Banning Rs 500/1,000 notes won't help recover black money

Writer

Bharat Shah Bharat Shah

The writer is Executive Director, ASK Group.

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