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30 Nov 2016

Madhusduan Kela of Reliance Capital Addresses Inspiration Series Meet on Demonetisation

Madhusudan Kela

The latest event under the banner of The Inspiration Series, a talk by Madhusudan Kela, Chief Investment Strategist at Reliance Capital Ltd on ‘Demonetisation and its Impact’, understandably attracted a huge audience to the MCA Club auditorium where it was held on November 29.

The session commenced with a brief introduction of the topic and the speaker by Rajiv P. Mehta who believed that the demonetisation move was not sudden, but appears to be a continuation of various systematic steps taken earlier by the government. He pointed out that there would be some pain from the ‘withdrawal’ symptoms, but said it was a bold political step.

Madhusudan Kela, the Guest Speaker, a veteran in the field of finance and investment, and one of the team that plays an active role at the overall strategy level of the Anil Dhirubhai Ambani Group (ADAG) of companies, made a panoramic presentation on the short, medium and longer term impact that the government’s decision to withdraw all notes of Rs 1,000 and Rs 500 would have on different business sectors and the economy.

Eminent Panellists

Kela described the decision as the biggest reform India has seen, and said that it doesn’t get bigger than this. It will hit hard at illegitimate businesses such as drugs and betting, and will impact industries where cash transactions were higher. Though there were some negatives in the short run, he averred that the decision was extremely good for the economy in the long term.

Explaining that India has one the highest levels of currencies in circulation at 13% of GDP (vs. Emerging Markets average of 4%), Kela said that this indicates the existence of a large informal economy, which reduces economic productivity as well as encourages generation of black money.

All businesses have been impacted in the near term due to the immediate cash crunch, though in the medium term the impact would vary across segments. Citing reports by analysts and market observers, Kela said that there would be serious impact for the gems and jewellery industry in the shorter run. While the export sector stood to benefit from the move, the jewellery industry may experience some structural changes with possible shifts in consumer preferences and spending over the longer term and further increase in the share of the organised sector over time.

Deeply engrossed in the discussions

For the economy as a whole, Kela said that it was likely that discretionary spending would come down to an extent. However, the increased formalization of the economy would lead to many positives such as higher tax collections, lower tax burden and encouraging a shift from the unorganized to the organized segment.

Pointing out that the costs of the move are upfront, while the benefits are more back-ended, Kela said that the “biggest structural positive from Demonetisation would be structurally lower interest rates & changing contours of household savings.” Predicting a greater shift by investors from physical to financial assets, and analysing various opportunities that exist, Kela said that “amongst all avenues of medium-term investment, equities as an asset class clearly stands out”.

Summing up some of key issues for businesses and investors, Kela said that it was extremely important to ensure that one’s capital was in the right place. He said that in India, about 60% of family wealth was estmated to be in real estate, while in the US, all large business houses hedge their bets by spreading investments over the business as well as family trusts etc. Emphasising that life will go on once the dust has settled, he advised all present that this is the time to be smart rather than over smart (“Zamana hai shaana banne ka; ded shaana banne ka nahin”)

At the panel discussion that followed the presentation, Arunbhai Mehta called on the diamantaires to persist with their business investments but ensure a change in approach. He suggested that all transactions should be through banks/books, and that those who were not registered with the IT should do so immediately, offering help where needed.

Vasantbhai Parikh, the other panellist, said that the pains of demonetisation were short to medium term, while the cashless economy would lead to better controls and better accounting. He added that structured capital creation of personal wealth was advisable, and ended by quoting the words of the Prime Minister “Reform, Perform, Transform”.

A wide gamut of issues was raised during the Q&A session that followed ranging from immediate practical questions to queries related to the longer term structural impact. A broad consensus emerged that the industry has to start transforming itself immediately, though the process would possible take about six months to complete.