Commentary

Demonetization And What It Means For Industrious Commodities

INR

World’s largest democracy,India, and it’s dynamic Prime Minister took a decision on November 8 to change the high value currency currently prevalent in the economy to render it redundant and instead change it into new currency notes.This was done to counter Black money, corruption , terrorism and weed out fake currency in circulation in the system.There was panic and unorganized sector came to a grinding halt as capital control measures resulted in lot of confusion and uncertainty going forward.
India as manufacturer of raw materials is minuscule as compared to it’s neighbor China who enjoys more than 50 % share of total industrious metals manufactured in the world.At 1.25 billion India has the second highest population in the world.Like many other emerging economy, India is witnessing rapid urbanization resulting in higher consumption of raw and finished products. If we look closely than most of the unorganized sector were trading in cash not necessarily avoiding taxes but a trading norm followed by predecessors for decades.The consumption pattern has definitely taken a hit with uncertainty looming in the air.This has resulted in fear and promptly consumers curbed their spending.India is a self sustaining economy with little dependence on exports.Now for large scale reforms and changes in tax law means the bill needs to be passed in both houses of parliament .The Government does not enjoys majority in Upper House and with the opposition parties not agreeing with the Government stance on Demonetization it is unlikely that these bills will be passed and made a law.This can further add to the confusion already prevalent in the country.An uncertain environment with unorganized sector being badly hit by the demonetization drive, consumers can likely go in a shell thus disrupting the consumption pattern of the country.
Indian economy is unique in nature with percentage of self employed one of the highest in the world having small business or trading platforms.This class of people have to bear the brunt of the Government initiative as their trade was mostly done in cash.If the current situation does not improve with Government backed measures than we can see reduced demand for all things.The biggest loser in world stage currently is Gold where the demand for yellow metal is 2nd highest in the world and despite positive sentiments currently prevailing in the commodity space gold has failed to rise as demand for the yellow metal has taken a hit.Similarly this pattern may have a bearing on future industrial metal space .With a huge population any changes in the pattern can dent demand for many products and result in pricing pressure for commodities going forward .On the other hand if things go as planned than commodity space can see big demand which looks unlikely given the size and population of the country.
Decisions like this happens once in a life time and the course it will take going down the line is difficult to assess.We can only analyze the situation and come up with our own assessments as these things generally have lot of unknown variables specially when the country has a federal structure in politics !

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