Demonetisation effect: Small traders hit, pain to linger for three quarters

In past 50 days, 60% of the work force was let off in retail, agri, textile and other sectors

Traders, retailers and various trade bodies in India have been saying that 100% foreign direct investment (FDI) in multi-brand retail, if allowed, would wipe out industry. However, according to experts, demonetisation has turned out to be much bigger disruptor. 

The Narendra Modi-led government does not allow FDI in multi-brand retail owing to resistance from trader and retail lobbies who fear losing business and jobs. 

Demonetisation, according to analysts, has hit small and medium businesses hard and it would take at least three quarters before things are back to normal. In the past 50 days since demonetisation, according to industry body Assocham, as much as 60% of the work force was let off in retail, agriculture, textile and other sectors.

“Demonetisation has turned out to be a much bigger disruptor for small traders and businesses than FDI in multi-brand retail. The government’s move has affected lakhs of traders who have lost huge cash reserves and are unable to pay salaries. The Centre’s move of demonetisation leading to cash crunch has disrupted the normal functioning of several industries. Demonetisation has severely hit the unorganised and informal sectors, thereby significantly impacting jobs and livelihood of workers,” said D S Rawat, secretary-general, Assocham. 

According to the industry body, demonetisation might lead to deflation and slowdown in the economy in the near term and might also hurt GDP growth. “In some of the sectors like construction and real estate, handicrafts, textiles, leather, domestic tourism and agricultural labourers, the impact of job loss was felt to the extent of 60-65%,” Rawat added.

“FDI in retail is a very small thing compared to demonetisation. Cash retail has been immensely impacted. People are thinking twice before spending. I think the situation would change at least after two quarters,” said Girish Vanvari, partner and head of tax at KPMG in India. 

Micro, small and medium players have been hit the hardest. As demand went down and the inflow of ready cash reduced, many had to retrench workers and business has come to a near standstill. 

“The impact of FDI in retail is curtailed to a certain set of sectors, but demonetisation has affected every sector perceivable. The challenge in front of MSMEs today is when and how the demand would revive again, which has been hit the hardest. What would be the demand in the market? How would the re-monetisation happen? These are the questions which are in front of us today,” said Anil Bhardwaj, secretary-general of the Federation of Indian Micro and Small and Medium Enterprises. 

However, supporters of the move argue that FDI in retail is more of an immediate threat. “We all know the goods and services tax (GST) is on the cards. In GST regime, the whole process of payments is on the basis of digital money. Sooner or later, we’d all have to start making payments digitally. FDI in retail was an immediate threat to us. We still had some breathing time during demonetisation to change the way we were doing business. In retail FDI, the way they would do business we would not stand a chance,” said Praveen Khandelwal, secretary-general, Confederation of All India Traders).