India Market Watch: India’s High Currency Demonetization and Abu Dhabhi Global Market (ADGM) Woos Indian Investors
Repercussions of India’s Ongoing High Currency Demonetization
The Indian government made an aggressive move on November 8 to overnight demonetize its high-level currency notes – 500 and 1000 – in a bid to combat black money and dismantle the country’s flourishing parallel economy. The exchange of old notes will be accepted at banks only till December 31, 2016. While this decision is bold and directly attacks ill-acquired or unreported wealth in hard cash (thereby reducing the government’s liabilities and increasing tax scope), the policy is not without significant repercussions. The sudden demonetization unleashed a severe liquidity crunch, massively affecting the country’s back-end economy, from last mile retailers in the fast-moving consumer goods (FMCG) industry to cement, steel, logistics, transportation, and automobiles sectors. The demonetization move also impacts the agricultural sector as farmers face a disrupted cash flow right in the middle of the winter sowing season.
The reasons for the liquidity crisis is because of the banking system’s struggle to replenish the shortfall in cash supply (either through banks or ATMs and other Points-of-Sale) due to insufficient currency and non-availability of new currency. Moreover, the country’s central bank, the Reserve Bank of India (RBI) has put in place various immediate restrictions that limit cash in hand, having painful implications for such a largely cash based economy as India.
Upon an emergency Cabinet review in the late evening on November 13, the government agreed to increase the daily ATM withdrawal limit from Rs 2000 to Rs 2500 (US$ 29.51 to US$ 36.88) and extend the over-the-counter exchange limit to Rs 4,500 (US$ 66.39) from Rs 4,000 (US$ 59). Further, the weekly withdrawal limit from bank accounts is now Rs 24,000 (US$ 354.08) from Rs 20,000 (US$ 295.07) earlier, while the per day withdrawal limit of Rs 10,000 (US$ 147.54) from the bank is now scrapped. This may yet have a staggered impact on the long queues in banks and ATMs, unless the new ‘500’ notes become ubiquitous, and both the new ‘500’ and ‘2000’ currency notes become available at the ATMs. As of now, the new high currency note of ‘2000’ alone brings with it its own transactional limitations, although this will be temporary until the lower cash denominations in circulation stabilize. Finally, the government has temporarily extended the use of old ‘500’ and ‘1000’ currency notes for the purpose of public utility and fuel payment till November 24. The entire transition period is expected to last 50 days before normalizing with the experience differing from rural to semi-urban to urban areas.
Telengana State to Focus on Easing the Cost of Doing Business
India’s newest state, Telengana, took the top spot in the ease of doing business ranking by the World Bank and the central government this year. This was a huge leap from its ranking of 13th in the preceding year. Underlining this strong showing in the business rankings have been the state’s constant efforts that saw the issuance of 50 government orders, amendments to 26 laws, and 150 circulars towards implementation of reforms. Telengana’s government is now keen to ensure that the accelerating industrial growth and positive business environment extends beyond the joint capital of Hyderabad.
Further, to build on investor confidence, the state authorities aim to make efficient the cost of doing business in Telangana. Towards this, officials are looking at streamlining the state bureaucracy, establishing fast-track commercial courts, and securing a comprehensive dispute redresal mechanism. Moreover, a concerted push is being made towards attracting more players in the electronics manufacturing, aerospace, and defense sectors – thereby attempting to replicate the success of the region’s IT and ITeS sector.
RELATED: India Market Watch: State-wise Ranking for Ease of Doing Business in India and the Auto Components Market in Northeast India
UAE Woos Indian Businesses with Tax Holiday and Sops
The Abu Dhabi Global Market (ADGM), an independent jurisdiction in the Abu Dhabi emirate of the UAE that is governed under the English Common Law, is wooing Indian investors with unparalleled incentives, including a 50 year tax holiday and full ownership. Official representatives from ADGM are currently on a ten day visit to India and have scheduled interactions with businesses at Delhi, Mumbai, Hyderabad, Kochi, and Thiruvananthapuram. ADGM aims to become a major financial center in the Middle East and hopes to capitalize on the country’s close connections with the countries of the Gulf Cooperation Council (an alliance of six Middle Eastern countries, namely, Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman), India, and North Africa.
What makes ADGM an attractive investment destination is its offer of an efficient tax landscape (zero tax for 50 years) and a well-regulated international business platform. Anticipating the consequences of new Place of Effective Management (PoEM) rules along with the renegotiation of the Mauritius Double Tax Treaty, ADGM seeks to convince Indian investors of the benefits of diversifying their operations. The UAE, and Abu Dhabi in particular, will benefit from India’s growth and expertise in various key industries from manufacturing to IT to financial services.
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