The shock of a sudden withdrawal of 86 per cent of liquidity on 8 November 2016 has had an immediate and lasting impact on consumption expenditure. The impact was immediate because the old currency notes lost their legal-tender status almost as soon as the announcement was made. This immediately reduced consumption demand. The impact was lasting because the government failed to replace the de-commissioned currency notes with new ones well beyond the promised period of 50 days.

Besides the direct impact that this demand squeeze caused on consumer spending, it had a simultaneous impact on household earnings as a significant chunk of labour had to forego wages to exchange currency notes at cash-starved banks.

48 per cent of the work-force has lost incomes. Daily wage labourers, who form the largest chunk of this section, account for 25 per cent of the workforce. Self-employed entrepreneurs, small traders and hawkers that also are a part of this section, form a smaller 8 per cent of the work force. But, this smaller 8 per cent suffered a bigger hit as both, their wages and businesses were severely hit by demonetisation. Similarly, businessmen and organised farmers who account for the remaining 15 per cent of the workforce suffered a substantial loss of business because of demonetisation.

It is this substantial 48 per cent of the workforce that has taken the most severe beating in terms of lost wages and lost businesses because of demonetisation. The rest suffered, but lesser.

Salaried classes account for only about 25 per cent of the total work force and these could have suffered the least. We also assume that small farmers and agricultural labourers (30 per cent of the work force) did not suffer much because of their ability to isolate themselves from the formal economy. This is a sad commentary that the standard of living of these is so poor that they do not get severely impacted by demonetisation.

This impact of lost wages, broken supply chains and lost businesses will be lasting. The relatively vulnerable sections will have dug into savings or incurred debts to meet at least their necessary expenses during the initial days of extreme shortage of liquidity. Jobs lost along the supply chain will take time to be repaired and again savings will have been drawn down.

The available data for November almost indicates that there were no disruptions. Electricity generation was up 8.9 per cent, petroleum production consumption was up 12.1 per cent, domestic passenger air traffic was up 22 per cent, railway freight traffic was up 5.5 per cent.

This robust performance in November indicates two different phenomena. First, it is apparent that the economy was not doing too badly till November and secondly, the stellar performances partly reflects the increased business seen by utilities who were allowed to accept the demonetised currency notes during the month.

But, the fall seen in automobile sales shows that a reasonably-performing economy was stalled by demonetisation. Domestic automobile sales recorded their steepest fall in last 16 years (18.7 per cent) in December.

The impact of the disruption in consumption caused by demonetisation is best seen in the public statements from FMCG and consumer durable companies.

Varun Berry, MD, Britannia Industries - retailers are reporting sales of 30-70 per cent of what they were doing earlier; production has been reduced by 15-20 per cent. B Krishna Rao, Deputy Marketing Manager, Parle Products - production has been cut and inventories have piled up. Sales in November were 10-12 per cent lower than in November last year. Sunil Duggal, CEO, Dabur - sales are down 20 per cent over earlier week, supply chain is down-stocking and production is being calibrated. Harsh V Agarwal, Director, Emami - production will be cut across categories since consumers are postponing purchases. Manish Aggarwal, Director, Bikano - production reduced by 10-15 per cent Pradeep Bakshi, Voltas - impact of demonetisation higher in December; demand in Tier-III and Tier-IV towns down 50 per cent; in bigger towns demand is down 25-30 per cent. Manish Sharma, CEO, Panasonic - business down 40 per cent in November and December. Kamal Nandi, Business Head, Godrej Appliances - business down 40 per cent in November, lost two months but some recovery signs in top towns. Production cut 15 per cent.

After such a sharp fall, consumption is unlikely to bounce back easily. This is because most of the cuts are in discretionary spending items and not in staple diets. As the liquidity constraint drags over several months, consumption of these discretionary items is likely to settle to a lower level. The cuts in consumption have been accepted without much ado. This looks more like a welcome cut in consumption than a painful cut in consumption. Therefore, it would take several quarters of good liquidity, restored supply chains, restored incomes and most importantly restored aspirations and consumer confidence to bring them back to earlier levels. This will take time.

Growth in real private final consumption expenditure will fall to 3.5 per cent in the December 2016 quarter compared to our earlier estimate of 8.2 per cent. Growth will improve a little thereafter but will remain lower than in the recent past. Estimates for PFCE growth in 2016-17 is scaled down from 7.8 per cent to 5.5 per cent. And the 8+ growth in the following four years is scaled down to 6-7 per cent.