There is a growing divergence between India's official and effective money supply. The latter referred to the amount that was available for carrying out daily financial transactions and affects the overall demand for goods and services.
Currently, the limit for over-the-counter exchange of old currency notes for new ones is at 2,000 rupees. Old currency above the withdrawal amount can still be deposited in banks until Dec. 30. However, Indian media reported that ATMs in the country were running out of new notes to dispense, while many bank branches were facing cash shortages due to lack of cash transporting vehicles, according to the Times of India.
Sectors that relied heavily on cash transactions, including real estate, construction, gold, gems and jewelry as well as the informal sectors are expected to suffer a near-term decline in consumption demand.
"Small and marginal farmers in the fruits and vegetable category typically require off-loading of their produce in the local mandi (wholesale market) in cash and could see an immediate impact," according to analysts from India Ratings and Research (Ind-Ra).
The services sector, which BAML's Mookim pegs at 61 percent of India's GDP, could also take a hit. "The current disruption is not a postponement of income, but is lost revenue," he explained, adding the impact on consumption will outlast the physical cash shortages.
Given India's companies have been more conservative with their investment plans given the slowdown in the economy as well as their bad debt problems, a drop in consumption would push growth lower unless compensated by gains in fiscal spending and trade gains.