Repercussions from the shock scrapping of high denomination currency notes by New Delhi have roiled Indian equity markets for a second week, and with the authorities conceding that it would take more than a month to ease the severe cash shortage hobbling daily life there would be more pain for everyone.

Serpentine queues of ordinary people — from office goers, industry workers, small traders, daily wage earners to housewives and senior citizens — throng banks across the country all day to either exchange or deposit Rs500 and Rs1,000 notes that ceased to be legal tender on November 8, but the system is unable to provide sufficient cash.

As the banned high-valve notes account for 86 per cent of the total currency in circulation, the effect has been felt far and wide, disrupting normal life and businesses. Farmers, stuck with perishable goods, are unable to trade their produce because no one has the cash to pay for them. Economists agree that the government’s currency decision is positive for the economy in the longer run, but there will be a price to pay in the near term.

“This move has multiple long-term benefits but in the near term it will lead to material transition-related 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 to their clients.

There will be an “adverse” impact on shares of developers, cement producers and infrastructure companies, they said.

The cash crunch could shave off a half-point from India’s growth in October-December, which could imperil its position as the world’s fastest-growing major market, the bank said.

Pranjul Bhandari, chief India economist at HSBC, expects the disruption could cause 0.7-1.0 percentage point reduction in GDP growth over a year, “with the maximum impact in the immediate two quarters, which will see a large contraction in ‘effective’ money supply”.

Spending falls

India’s $2 trillion economy was expected to expand by around 7.8 per cent in 2016-17 ending March, with a $13 billion salary and pension boost to government staff and good monsoon rains combining to fire up domestic spending. Manufacturing activity had picked up in September and October and the outlook appeared bright.

The abrupt shortage of money supply has severely dented the feel-good factor. Sullen faces abound among traders, farmers, businesses and every form of economic activity. Although the intention of the government to root out corruption and tackle unaccounted money was right, the authorities miscalculated the logistical issues needed to keep the wheels of the economy moving.

Consumer spending has taken a big hit. Cash transactions are routine for most purchases of consumer goods, including vehicles, in India. Under current rules, a depositor can withdraw a maximum of Rs10,000 a day and up to Rs20,000 in a week. Unable to cope with the rush, some banks restrict the withdrawals to as low as Rs3,000 a day per person.

Compounding the problem, the government has launched Rs2,000 notes, which are useless because no one has change. Suffice to say the situation is grim. Footfalls in shopping malls, cinema halls and restaurants have dropped, with the worst hit being small traders. Trading volumes at wholesale markets have halved, and many factories are curtailing operations.

A majority of cash machines across the country either run out of cash within an hour or don’t work at all. This has piled pressure on the banks, where people stand in queues for several hours to withdraw their own small savings.

Newspaper reports say many businesses, including factories, have shut some shifts and are making their staff to crowd bank counters to exchange defunct high-value notes.

The BSE index for Consumer Discretionary Goods & Services has tumbled 11.3 per cent since November 8.

Foreign sell-off

The problems triggered by the demonetisation drive has coincided with the emerging market equity sell-off after Donald Trump won an unexpected victory in US presidential election, setting off speculation that his business-friendly priorities would quicken inflation and higher interest rates. The Federal Reserve is widely expected to raise its main discount rate by a quarter point in December, and there could be more increases in 2018.

For global fund managers the prospect of higher yields and relatively lesser risky bets offered by the US is a tempting option they can hardly refuse. Foreign funds have dumped Indian shares worth over $1.2 billion this month, more than half of that happening after Prime Minister Narendra Modi went on national TV on November 8 to announce the scrapping of high-value currency notes.

Since that announcement the top-30 Sensex has fallen 5.2 per cent to 26,150.24, and the snowballing crisis of acute cash shortage should trigger more losses for equities. Still, it must be noted that the cash outflows from other emerging markets have been much higher, meaning the foreign portfolio moves are driven by higher returns expected from the US rather than the specific troubles in India.

There is a consensus among market analysts that a pickup in corporate earnings would be delayed, but there could be benefits down the road.

“It is a setback for a quarter or two but then there is a big medium-term positive that is coming along with the policy initiative that has been taken which perhaps will mean that growth will bounce back more than we expected in 2017-18,” Bharat Iyer, head of India research at JP Morgan, told ET Now television channel.

“I do not know if today is the bottom or we are going to bottom out in December or in January, but I definitely think the next two or three months is a good time to be buying the markets.”

“There is a fair bit to look forward to on the policy front. You could get interest rate cuts. You have the budget. So you have a lot of things to look out for on the valuations front.”

The writer is a journalist based in India.