India’s money crackdown hits corporate profits
mumbai — Prime Minister Narendra Modi’s crackdown on black money may have an unintended consequence: a slump in consumer spending that hits India’s corporate earnings recovery.
Investors are trying to gauge the impact on company profits after Modi’s surprise recall of high-value currency notes last week. At risk is a strengthening earnings picture that has seen three-quarters of gains, after operating profit fell in every quarter of 2015. Finance Minister Arun Jaitley said on November 9 the move will damp consumption in the short term, a belief that’s helped send an index of consumer discretionary goods to a four-month low.
“The earnings revival will get delayed as the liquidity crunch will hit consumer-facing industries,” said Nilesh Shah, chief executive officer
86% of money in circulation are ₹500 and ₹1,000 notes
of Mumbai-based Kotak Mahindra Asset Management, which has $9.5 billion in assets. The measure will “lead to a temporary squeeze in small-ticket consumption and discretionary spending,” he said.
Economic expansion of above seven per cent, the $13 billion salary boost for government staff and a good monsoon after two years of drought had led investors to bet on company profit growth accelerating. Goldman Sachs Group in October forecast corporate earnings growth in India to outpace its regional peers in the year to March. The sudden decline in money supply has muddied the picture. Modi’s decision to withdraw ₹500 and ₹1,000 notes, which accounted for 86 per cent of the money in circulation, has virtually stalled the economy. While no one is predicting the anti-graft measures to push Sensex earnings into negative territory just yet, the move will disrupt segments of the economy such as property and gold where cash transactions play a vital role, analysts say.
“This move has multiple longterm benefits but in the near term it will lead to material transitionrelated uncertainty and can potentially disrupt several economic activities that have traditionally relied on unaccounted cash transactions,” Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf wrote in a note.
There will be an “adverse” impact on shares of developers, cement producers and infrastructure companies, they said.
An index of real-estate companies tumbled to a seven-month low on Tuesday, while the S&P BSE Auto Index capped its biggest four-day loss since August 2009. The S&P BSE Consumer Discretionary Goods & Services tumbled the most in 14 months, extending last week’s 6.4 per cent retreat that was the steepest in five years. — Bloomberg