Strategy: Demonetization is neither the start, nor the end - Kotak

Demonetization is neither the start, nor the end. The government's recent action against 'shell' companies shows its unequivocal commitment to (1) greater transparency in business and commerce and (2) higher probity in public service. It has implemented several measures to reduce corruption and eradicate unaccounted income and wealth. We do see some fallout of the government's actions on economic growth but some of them may be necessary to contain the malice of 'black' money and corruption.

Demonetization shows that the government's job is far from over

The critics of demonetization miss an important point about the obdurate mindset of a section of India's society. The fact that 99% of the currency has been deposited with banks shows that either (1) there was/is very little unaccounted money in India (at least in the form of cash), a laughable proposition or (2) a section of the population has a very 'fearless' attitude towards the law. We would assume the government would deal with the latter situation in a firm manner, especially as the banking system has records of all cash deposits.

Demonetization story may not be over as yet

We note that the data on cash deposits in bank accounts during the demonetization period should provide the government sufficient ammunition to deal with unaccounted deposits. As per government data, 11 mn bank accounts saw cash deposits of Rs0.2-8 mn with average deposit of Rs0.5 mn totaling Rs5.5 tn and 0.15 mn bank accounts saw cash deposits of over Rs8 mn with average cash deposit of Rs33 mn totaling Rs5 tn.

Crusade against corruption is definitely not over

We highlight that the government has implemented several measures against unaccounted income and wealth over the past three years. In its latest offensive, it has frozen the bank accounts of 0.2 mn dormant companies out of 1.68 mn registered with the Indian Registrar of Companies (RoC). Exhibit 3 gives the status of companies registered with the RoC. The government has also announced stiff penalties including imprisonment for the directors of the 'frozen' companies for any illegal activity during the 'suspension' period.

Harsh measures warranted given the economic lawlessness

To our minds, the establishment of the 'rule of law' and the restoration of faith in democratic institutions are paramount for sustainable economic growth. We would like the government to succeed in its efforts to establish a cleaner system for business, commerce and public service. The vast majority of India's law-abiding citizens have suffered silently while a section of the society has benefited from loopholes in the system. We do see some collateral damage of the government's 'clean-up' measures but we would highlight that a 'corrupt' system was a not a sustainable model for economic growth anyway.

Source : Equity Bulls

Keywords