Corporate: Ripples Of That Shock
It’s easy to say the word demonetisation, but you are talking about eight million retail outlets in my sector, where ordinary customers buy their daily staples for small cash and my small distributors make their little daily collection in cash. But, how do you manage it when their wallet becomes empty all of a sudden?” was the grievance of a top manager of a consumer staples company. Almost 40 per cent of the sales of the company got knocked off in the October-December quarter after that 8 November decision by the government shook India’s informal economy to the core in 2016.
A year on, the magnitude of this grievance grows deep and wide. The corporate sector does not seem to have recovered fully from the shock of demonetisation. It still haunts many, even those for whom the revenue impact has been offset over the last eleven months.Demonetisation proved a bitter pill to swallow for many companies, especially in the consumer goods sector. Zero cash flow from the market, panic calls from dealers and distributors, sudden and heavy drop in sales, accumulated inventory at the godowns — the sequence of agony was as thick and long as the queues before banks used to be a year ago.
Companies in the consumer goods sector were the worst hit and their sales were the lowest in three years. The manufacturing and services segments, including makers of domestic appliances, consumer electronics, passenger vehicles (two-wheelers and three-wheelers) and food products, faced a devastating market situation because of the severe cash crunch that followed demonetisation. “There was at least a 35 per cent drop in our revenue till February,” says Nikhil Sen, Managing Director, Unibic Foods India– a top cookie maker in India.
Centre for Monitoring Indian Economy (CMIE) data shows that the stockpile in the manufacturing sector, excluding petroleum products, was the highest since March 2012. There was a substantial rise in inventory in the automobile, metals, housing construction and wholesale trading sectors. As another report in this segment points out, the automobile industry’s travails were only temporary, however, and sales have picked up since April this year.
The impact of demonetisation was severe on the services sector too, hitting business consultancy and entertainment companies. Most analysts believe that its impact will linger in the coming quarter. “While opinion is divided on whether these sectors will now see a recovery with an equally strong upturn or a more sedate one will depend on one’s assessment of the demand destruction in the informal sector,” says a leading economic analyst in a global consultancy firm.
He confirmed that demonetisation had hit sales of consumer goods, particularly domestic appliances and consumer electronics. It slowed growth in sales of passenger vehicles, two-wheelers and three-wheelers and hit sales of luxury automobiles hard. The liquidity crisis also hit hard sales of food products, high-end brands and consumer durables and non-durables.Demonetisation apparently shaved off at least Rs 8,000 crore in revenues in the automobiles and tractor industry till March, 2017. “The effect was deeper than we had expected in the two-wheeler and tractor segments but I feel the recovery was also quicker,” Pawan Goenka, Managing Director, Mahindra and Mahindra, told BW Businessworld recently.
Many services were impacted, including business consultancy and recreational services. Restaurants and entertainment avenues saw sales plummet. The real estate sector was the worst affected and the ripple effect reflected in cement, paint, construction accessories and even housing finance companies. While banks were flush with money from fresh deposits, repayment and disbursement in microfinance were largely on hold because of the cash shortage.
Analysts point out that many businesses also saw an uptick in sales. Sales grew in sectors like metals, mining and machinery in the December quarter. Corporate entities and commercial organisations used the opportunity to invest in commercial properties in the initial phase of currency conversion. Industrial construction, information technology (IT) and chemicals apparently performed well in the October-December quarter of 2016, because of the low base of the previous quarter.
Ironically, the inventories pile-up in the December quarter actually buttressed the profits of some companies. When demand picked up, a wide swathe of corporate India was able to push sales from the inventory of finished goods, despite having cut back on production. Sadly, the magic did not work for many other companies that found demand choked by the Goods and Services Tax (GST).
From the government’s standpoint, both demonetisation and GST are expected to translate into long-term good. The short-term cumulative loss of Rs 3,30,000 crore in the manufacturing and services industries, however, are yet to be recouped.
