Sugar, mutual funds, and telecom: The bright spots amid Narendra Modi’s demonetisation gloom

Not all hardship.
Not all hardship.
Image: AP Photo/Ajit Solanki
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At first glance, Narendra Modi’s demonetisation carpet bomb may seem to have wreaked havoc on all areas of the Indian economy, at least in the short-to-medium term. However, a closer look reveals that some sectors may have hit the jackpot in the Indian prime minister’s gamble.

At the ground level, Indians have been left stranded without cash and the economy is expected to be hit hard, though no one really knows how hard. Various agencies have now pegged GDP growth for financial year 2017 at anywhere between 3.5% and 7%, much below the pre-demonetisation estimates.

Sectors reeling under the currency ban include manufacturing and those tied to consumer demand. The liquidity crunch has forced manufacturers to halt operations as new orders turn into a trickle. Consumers have been cautious in spending, hurting consumer goods firms.

Yet, demonetisation augurs well for a few industries, albeit in the long-term for some. Here’s taking a look at the lucky ones.


Demonetisation has been to Indian banking what the Fairy Godmother was to Cinderella.

The rush to save unaccounted wealth by depositing the hitherto hoarded Rs500 and Rs1,000 notes in bank accounts has led to a surge in fund inflows for the lenders.

A higher deposit base gives banks enough elbow room to manage daily treasury operations efficiently and, in turn, operate at higher margins. Banks could gain as much as Rs38,200 crore due to increased liquidity, according to India Ratings and Research, a credit-rating agency and a unit of Fitch Ratings.

“The development comes at a time when the banking sector is facing challenging conditions. The profitability levels of Indian banks remain weak owing to continued pressure on asset quality and weak loan expansion. It would be imperative for banks starved for capital to strengthen their capital adequacy ratios,” a December note from India Ratings said.

However, experts are concerned about the sustainability of these gains. “The question is how many banks will be able to retain these substantial deposits, since we don’t have the final deposit numbers yet,” explained Abhishek Bhattacharya, associate director and co-head, banking and finance, India Ratings. The quantum of currency under circulation will soon inch up, which means the huge deposit base will shrink correspondingly, he said.

There already has been a drop in bank deposits compared to the levels immediately after demonetisation. Additionally, Bhattacharya explained that these deposits can only mask the larger problems plaguing the banking industry, like toxic assets, in the short-term. In the long-term, the problems at the crux still need a solution.

Mutual funds

Millions of Indians are now expected to park their funds in various investment vehicles. Many households will look to invest the cash lying with them to avoid future investigations. And mutual funds (MF) are said to be a favourite.

“We believe people will no longer be investing in real estate and gold, and rather put their money in capital markets, including mutual funds. However, it will happen over a period of time,” Aashish P Sommaiyaa, MD and CEO of Motilal Oswal Asset Management Company told the Economic Times in November. Investors are not favouring gold as an asset class because of fears that income tax authorities could crack a whip on investments in the yellow metal soon.

“It is expected that deposits of over Rs10 trillion will come to the banking system due to the demonetisation move and we do hope that 10% of this amount will move to the industry,” G Pradeep Kumar, MD of Union KBC Mutual Fund, said in November. The MF industry currently manages Rs17 lakh crore worth of assets. Demonetisation will only take it higher.

Some, like UTI Mutual Fund managing director Leo Puri, also expect new consumer classes such as  housewives, who’ve traditionally kept savings in cash, to now turn to mutual funds.


Demonetisation, combined with the good monsoon in 2016, has brought relief to the sugar industry which was staring at competition from imported stocks.

Prices had remained firmed up over the past few years due to the poor monsoon. With demand remaining high, especially from bulk buyers such as beverage makers and the pharmaceutical sector, various lobbies had sought a cut in the import duty on sugar.

However, now, demonetisation is expected to bring down demand. Moreover, 2016 saw a good monsoon. “We have a situation where domestic consumption is declining and a bumper crop is expected next year,” Tarun Sawhney, vice-chairman at Triveni Engineering & Industries, which owns seven sugar mills in Uttar Pradesh, told Business Standard newspaper.

In such a scenario, any demand for imports will hardly carry much weight.

Meanwhile, stocks of sugar companies have been inching upwards, despite the low demand as prices haven’t been impacted much yet.


India’s power sector, faced with serious capacity constraints for years, could certainly receive a much-needed boost.

Much of that is because a large number of consumers suddenly began paying up dues in the demonetised currency, something the Modi government had allowed until Dec. 31. “DISCOMs are expecting a substantial influx of payments prior to the Dec. 31 deadline after which these currency notes will become invalid,” energy consulting firm Mercom said last month. “For cash-strapped DISCOMs this is unexpected good news.”

Then, there is also the belief that the influx of money into banks could bring down key interest rates, allowing more lending in the sector.

Mercom also quoted an official at the Maharashtra State Electricity Distribution Company (MSEDCL) as saying that state power distribution companies had seen payments of old bills worth Rs100 crore ($14.74 million) within a week of demonetisation.

Digital payments

The biggest boost the Modi government’s gamble gave was to digital payments.

E-wallets have seen business swell. For instance. Paytm, the largest startup in the sector, has seen daily transactions triple to 7.5 million since demonetisation while Mobikwik, another such platform, saw a 400% growth in transactions. The government’s own digital payment application, BHIM (Bharat Interface for Money), launched on Dec. 30, has seen five million downloads and 700,000 transactions so far. BHIM even topped the Google Play Store in India on Jan. 04.

India’s digital payment industry is estimated to reach $2.4 billion (pdf) by 2020, up from $1.2 billion in 2016, according to Nasscom. Asia’s third-largest economy has one of the world’s highest cash-to-GDP ratios and just last year, 78% of all consumer payments were made by cash, while it was between 20% and 25% in developed nations.

Some $500 billion worth of transactions are expected to take place digitally by 2020 in India—nearly 10 times the existing rate, according to a report by Google India and The Boston Consulting Group.


As more and more Indians switch to e-payments and use mobile phones, it’s happy days ahead for IT and telecom firms—hardware as well as software. Although demonetisation may hit revenues and profitability right now, in the long run, a cashless economy will only benefit telecom firms, experts said.

“We will see a huge demand for handsets and in ensuring technology,” Madan Sabnavis, chief economist at CARE Ratings, said. “IT companies and telecom sector will certainly see a boost as a result of digital payments. Also, handset makers will likely benefit, as the government pushes for more mobile banking.”