NEW DELHI: The much-hyped demonetisation of Rs 500 and Rs 1,000 notes has indeed forced people to tighten their purse strings. This reflected in the consumer inflation numbers for November, released on Tuesday. According to the data, retail inflation rose by an annual 3.63 per cent - the slowest since November 2014.
An analysis of data released by the Ministry of Statistics and Program Implementation shows that demonetisation led to a drop in consumer demand as people had less cash to spend. This, in turn, caused a sharp drop in prices, especially of food items. Vegetable prices deflated further from (-) 5.74 per cent in October to (-) 10.29 in November. Inflation in prices of eggs, meat and fish also grew less compared to the previous month. However, inflation in prices of cereals and fruits inched higher.
The demand destruction unleashed by the note ban doesn’t end there. Data published by the RBI shows that bank credit - that is loans given to consumers and industries - shrunk by a whopping Rs 61,000 crore between November 8 and 25. This has been attributed to reduced demand in the market due to uncertainty and the fact that banks shut other operations barring deposit and exchange of old notes during that period.
Yet another indicator of the drop in demand is the pricing strategy being followed by automobile majors. Five of the top manufacturers - Tata Motors, Toyota Kirloskar, Renault, Nissan and Hyundai - have decided to hike car prices substantially from January. This could either be a strategy to fuel demand in December or an attempt to preserve profit margins amid falling sales or even both, say experts.
While slower inflation is usually good news for consumers, this time it’s not the same, as it’s the result of weakening demand fuelled by currency crunch. If the transition to a cashless economy does not happen within the government-planned timeframe, demand could remain low, prolonging the distress caused to farmers and traders.
Weakening demand, based on all these indicators, could also have an adverse impact on the overall growth. While the central bank has already lowered the GDP forecast to 7.1 percent, the Asian Development Bank on Tuesday cut India’s growth estimate to 7 percent.
The government, meanwhile, continued to announce measures to tackle the after-effects of demonetisation. The RBI has asked all bank branches to preserve CCTV recordings since the day of demonetisation and keep a record of new bank notes to check laundering and hoarding of cash. Finance Minister Arun Jaitley also indicated, yet again, that direct and indirect taxes could be lowered in future as a result of demonetisation.