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Last Updated : Jan 02, 2017 02:51 PM IST | Source: CNBC-TV18

Cash ban hit capex, nearly wiped off Kharif gains: CMIE

Prime Minister Narendra Modi's New Year eve indicates a no nonsense approach towards corruption says Mahesh Vyas, MD and CEO of CMIE.

Prime Minister Narendra Modi's New Year eve speech indicates a no-nonsense approach towards corruption, says Mahesh Vyas, MD and CEO of CMIE. In an interview to CNBC-TV18 Mahesh Vyas said Prime Minister's latest speech was more about give-aways to various segments of the population than stock taking of demonetisation.

The speech, he believes, was a disappointment as there was no information about 'black cash' impounded. He said there was certainly a recognition at the government's end that demonetisation endeavour was a lot more painful than anticipated.

On being asked about the situation Vyas said the on-ground situation is different for different parts of society. He said households are highly stressed because of demonetisation and they do see pain but they also have high hopes for the future, whereas the business segment is quieter, but they are the ones that are really stressed for the long term. He was of the opinion that businesses do not hope for a recovery in the short term and that the medium term play will be quite stressful for the industry and eventually for households.

Vyas said investments saw a substantial drop in the December quarter of 2016. He expects investments to remain subdued or even weaken further in 2017 which will impact the household sector and will lead to greater stress. He said the recovery period is going to be fairly long drawn instead of 2-3 quarters as thought previously. The growth rate has been reduced substantially for the long run and the long run trend rate of growth has been pulled down, he added.

Vyas was particularly critical of demonetisation as he opined that consumption has fallen as most companies saw a 25-40 percent fall in consumption expenditure. Investments too were affected. He referred to the hit as more cyclical since if investments are minimal then jobs will take a hit and that again affects consumption. Vyas stressed on the point that demonetisation impact is a lot more structural than merely a short-term phenomenon.

He further said demonetisation has completely demolished any pick-up in capital expenditure and that demonetisation was completely uncalled for. He said demonetisation completely wiped off all the benefits that Kharif crops saw with good rains this year after two years of drought. He added demonetisation dealt a severe shock to the economy which will reverberate for a fairly long time.

Below is the verbatim transcript of Mahesh Vyas’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.

Prashant: What is your impression when you heard Prime Minister Modi’s December 31 speech, what were the takeaways?

A: There were essentially a lot of giveaways to various segments of the population -- so senior citizens, housing, pregnant women. So, my takeaway essentially is that this wasn’t a stock taking of demonetisation as was expected. There weren’t numbers on how much of the black money or black cash was impounded, but it was more about giveaways. So, in a sense, it was disappointing because of an expectation that this would be a stock taking of the demonetisation exercise.

I think after hearing that, I would say that if this is going to be the trend of more giveaways to various parts of the society, we may soon see a substantial rise in socialist kind of action by the government compared to the righteous expectations that we have had.

Prashant: We have discussed the implications of specific measures with banks, NBFCs, etc all day and we will continue to get more reactions but you do believe then that there is a mark shift towards some amount of populism and if that is true, does that also raise expectations for more of that from the government say in Budget or even before that?

A: Let me first say that I don’t think that this is part of any policy towards more giveaways. I don’t think it is a well thought out Robin Hood style giving handouts to various sections of society. At least that is not what most of the speeches of the Prime Minister seem to indicate. The Prime Minister speeches in the recent past mostly indicated a tough, no nonsense approach towards corruption. So, one expected more on those lines as to what those actions could be or what the record of the 50 days of tough action was.

So, when the Prime Minister says that we will give some handouts to people who have probably been more inconvenienced, then I think this is more in the sense of a kind of an overcoming of the pain of certain sections of society because the pain was apparently more than anticipated. I don’t think the Prime Minister or the government has indicated anything as a shift towards the more socialist society. However, there certainly is a recognition that the demonetisation endeavour was a lot more painful than had been anticipated when the scheme was launched.

Ekta: There are lots of cautious statements which have come in from the likes of Bajaj Auto. In fact this morning they said that the conversion of inquiry to sales ratio has not seen any sort of recovery. The management of Hero mentioned that large industry should at least take 12-18 months to recover and your own statistics are saying that there is an order drop of around 37 percent year-on-year (YoY). What is your sense in terms of what the on-ground situation is right now and how long do you think a recovery is going to take?

A: The on-ground situation is very different for different parts of society. So, on the one hand, you have households who are highly stressed because of the demonetisation. They do see a lot of pain but they have also very high hopes. At the same time, the business segment is quieter, doesn’t seem to say much excepting a few cases here and there but they are the ones that are really stressed for the long term. I don’t think they have a hope in the short term of a recovery from where they stand. So, I see the medium term play to be rather stressful for industry and therefore eventually for the households.

Investments dropped in the quarter of December 2016 substantially. I expect investments to remain very weak or weaken even further in 2017 because of demonetisation and as this happens, it will have an impact upon the household sector and it can lead to greater stress. I think the recovery period is going to be long and the impact of demonetisation is not one of two or three quarters and then we will see a hockey stick turnaround or anything slightly close to that, I think this is going to be a long drawn, a fairly long term hit to the economy where our growth rate has been reduced substantially for the long run.

Prashant: You are saying that the trend rate of growth has been pulled down, is that what you mean?

A: Yes.


Prashant: Why do you say that? You put out some estimates about 20 days into demonetisation announcement and at that point you put a number that is Rs 1.28 lakh crore was the hit to the economy till the December 30 but that was then.

A: That was an estimate of what is the cost, the transaction cost of demonetisation till December 30; so that is a different story. I am saying the growth rate has come down; the long run growth rate of India has come down because demonetisation in the short run has hit consumption expenditure and the hit on consumption expenditure is sharp. Most companies are talking about 25-30 percent and even 40 percent fall in consumption. I don’t see this consumption coming back to normal very easily and as this takes time to come back to normal, investments take a hit.

Investments have been very weak for a fairly long time now. So, if investments take a very long time to come back and, I don’t see them coming back easily for the next two to three years as well, then growth will take a hit. If investments are hit, then employment is hit and that hits consumption again. So, I think the hit is a lot more structural than merely a short term hit that most people seem to be talking about.

Prashant: I don’t think people were expecting private capex to pick up all the way into 2018-2019 as well right, so, this maybe accentuates that problem but it wasn’t as if things were looking like they were taking off but I don’t think private capex especially was expected to pickup, was it?

A: It wasn’t expected to pickup and if there was any expectation from any quarter of capex picking up, even that has been demolished; I think demolished is a hard term but I can’t find other term to describe this. This was completely uncalled for. The kharif crop had just benefitted from a good rainfall after two years of drought, we were just beginning to see at least some hope of a recovery and then comes demonetisation, a very severe shock to the economy which will reverberate for a fairly long time before households find employment to be good enough, wages to be good enough, have confidence to spend and until they don’t spend the capacity utilisation level of 70 percent or so that we see now, will not rise. If that does not rise, we don’t see any capex coming.

Ekta: When you are talking about trend growth, what are you anticipating in terms of gross domestic product (GDP) when it comes to say FY17 and FY18? People are still anticipating that FY18 would see a recovery; do you see maybe a sub 7 percent figure then?

A: CMIE’s GDP forecast will come out in the next three or four days and when that comes out I will let you know. Right now I am not giving a number.

Prashant: You said when you differentiate between the impact in households and corporates, you said household’s impact is high but expectations are also very high. Are you saying that expectations in terms of sops and lower tax rates for them are high and should we expect any of that in the Budget?

A: No, I don’t know whether these expectations are regarding more sops or just that a society which is cleansed of black income or black money or black wealth is going to be a happier society. So, what I am talking about is actually consumer sentiment.

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First Published on Jan 2, 2017 12:38 pm
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