The demonetization of Rs. 500 and Rs. 1000 notes announced on 8th November 2016 by the Hon'ble Prime Minister Narendra Modi has been a discussion area from large business houses to a small household consumer. The Government had laid down a detailed step-down program wherein time has been given to either exchange these notes for valid notes with a valid ID at any bank or post office or deposit in their bank accounts.
Due to the quantum of money to be exchanged or deposited and also the withdrawal requirements of people for self-use, this step has created a struggle for people to have a hard cash to spend. Hence, this has created an anxiety in almost everyone, which is believed to be short term. The Indian consumer segment is expected to benefit by this move. The Hon'ble Finance Minister Mr. Arun Jaitley had recently said that - demonetization will not only bring back the unaccounted wealth into the economic system, it will also pave way for tax relief to honest tax payers by bringing the rates down.
Indian consumer segment is broadly segregated into urban and rural markets, and is attracting marketers from across the world. The sector has a spread of middle class, affluent class and economically disadvantaged class. Amongst these, the middle class comprises of majority of the salaried class who contribute considerable part of the income tax on salary. They are also largely dependent on their savings to decide if any expenditure on luxury items is appropriate.
With demonetization bringing a huge amount of money back into the circulation, it is expected that Budget for 2017-18 may have higher thresholds for levy of income tax for individual tax payers. It is also expected that income tax rates applicable to individuals will be reduced. As a result, all the middle class consumers are expected to have higher disposable income and hence higher purchasing power. On the other hand, Rs. 500 and Rs. 1000 notes amount to around 86% of all the cash in the system. Once these funds are deposited, the banks will have huge cash reserves which will help curb the home loan interest rates. Due to increased liquidity with the banks, interest on savings (primarily fixed deposits) are likely to go down making savings less attractive. This would facilitate middle class consumers to spend more on the consumer products which otherwise would have been only a dream for many.
The common man is hopeful on the steps taken by the government to eradicate terrorist funding, black money and extracting right share of taxes from large part of the population by making India a "less-cash" economy if not cash-less economy. Though the time will tell on whether the move by the government is successful or not, the common man is definitely hopeful on taking home a little more of his earnings than he takes currently and being able to spend more on various consumer products. Given the vast population and the consumer masses, this announcement is expected to bring about positivity to the sector.
Mr. Pushkar Khire is Senior Manager; and Mr. Jatan Shah is Manager with Deloitte Haskins & Sells LLP