Sectors take note as demonetisation ends

Partial recovery for some but full normalcy for all still some time away

Monday is when the Reserve Bank of India (RBI) lifts all the currency withdrawal restrictions it had imposed since November 8, the day Prime Minister Narendra Modi announced his demonetisation drive. The exercise put 86 per cent of cash by value out of circulation with immediate effect, by making Rs 500 and Rs 1,000 notes invalid. It dominated national conversation over the next two months, not helped by a botched execution, with almost daily rule changes and turmoil in banks across the country. As an economic decision, the government justified the decision through the October-December gross domestic product growth numbers, and as a political move, it certainly did seem to pay off.

A recent research paper by the staff at RBI says the impact of demonetisation on the real economy has been transient, “given the information available so far”. “The analysis in this paper suggests that demonetisation impacted various sectors of the economy. However, the adverse impact, in general, was short-lived as it was felt mainly in November and December 2016. The impact moderated significantly in January and dissipated by and large by mid-February 2017, reflecting an accelerated pace of remonetisation,” the paper said. In the conclusion of the paper, the authors warned, was not necessarily the official view of the central bank.

However, anecdotal evidence did point to a negative economic impact. Businesses, especially the smaller enterprises, were hurt badly as orders were cancelled, workers laid off and entire units shut down temporarily. All sectors were impacted as consumption, production and spending habits changed overnight. Business Standard takes a look at some sectors and the road ahead.

Agriculture
 

When Modi announced the note ban, a big worry was its impact on rabi sowing, whose peak phase is November and December. Amid widespread cash shortage and low liquidity, sowing of the main rabi crops (wheat, mustard and chickpea) continued, as farmers made alternative arrangements for seeds and relied on the credit backbone in rural areas to finance their fertiliser and other input requirements. 
 

 

 

Sowing slackened for a few weeks after demonetisation but gathered steam to end at an all-time high of 64.5 million hectares in the rabi season. This has resulted in estimated output of 135 million tonnes (mt), which included an all-time high wheat harvest of 96.6 mt. The biggest dent is on vegetable production, the impact of which will be felt once summer sets in across India and supplies dry up. If prices of vegetables start shooting from April onwards, which many anticipate, it would mean that demonetisation had an impact on sowing. On the input side, most pesticide and fertiliser companies said recoveries were hit for an initial set of days, improving as the days progressed. 

Real estate

Just as the realty sector was gearing up to meet the deadlines set for implementation of the Real Estate Regulation & Development Act (Rera) and the goods and services tax (GST), demonetisation hit hard. The note ban created a real dent in the housing segment, affecting the October-December quarter’s sales substantially. These are still at all-time lows.
 

Experts say implementation of Rera and GST, a lower home loan interest rate regime and fiscal benefits for taxpayers in the Union Budget might in the coming days infuse some feel-good factor. However, for the first half of 2017, they do expect the residential sector to be largely muted, with pressure on prices. 

“With consumers in a wait and watch mode, demand could be subdued, due to a mindset that property prices could undergo reduction, along with a substantial lowering of home loan interest rates,” said Shishir Baijal, chairman, Knight Frank India. “Since buying a house is a discretionary need, that can be postponed, it is anybody’s guess whether the sector will be the slowest to recover from the impact of demonetisation.”

Automobiles

Strong growth across most segments of the domestic automobile industry met speed brakes with demonetisation. The impact has been sharper for two-wheelers, three-wheelers and commercial vehicles. These are primarily used by the rural population and could be purchased through cash more often when compared to cars. 

While growth continues, the rate has softened considerably except in the case of three-wheelers, where there is now a cumulative decline in sales. Three-wheeler sales had grown almost 12 per cent between April and October, the first seven months of the financial year, but there is now a cumulative decline of one per cent in the April-January period. Growth in two-wheelers has halved to eight per cent in the first 10 months, compared to a 16 per cent surge between April and October.

Ashok Bhasin, head of sales & marketing at Hero MotoCorp, the country’s largest two-wheeler maker, said March volume growth could be flat and improvement is likely from April on. Companies are pinning hope on the rabi crop harvest that begins in the next few weeks. The rural market is a key driver for two-wheelers, light commercial vehicles and even cars to some extent. “We have seen the situation easing out, cash coming back to rural India and semi-urban markets from mid-February, resulting in higher footfall. We are expecting full normalcy to return by the first quarter (April-June) of FY18,” said Pravin Shah, president and chief executive (automotive) at M&M.

Consumer goods

Demonetisation paralysed the consumer goods sector in the weeks after the PM’s announcement. As the marketplace is primarily cash-driven, especially in smaller towns and villages, business at the retail level for most fast moving consumer goods (FMCG, including packaged foods) and consumer durables nearly came to a halt within two days. This impacted FMCG entities, large and small. Revenue at the major ones fell nearly five per cent during October-December, robbing the sector of investor confidence. From November 8 to end-December, market capitalisation of listed FMCG companies shrank by Rs 1.2 lakh crore. 

Sales of consumer durables (electronics and home appliances) and fast moving items such as smartphones declined 70 per cent year-on-year during November. The impact was more severe in the rural market compared to urban centres, due to unavailability of alternate modes of transactions. Restaurant chains also saw a slump.

With the turn of the year, the situation has started to improve, with increasing availability of cash and government and companies’ joint push for cashless transaction modes at the retail level. However, excess inventory of smartphone and durables companies continue to keep manufacturing and ordering of such products lower. FMCG entities are still trying to address the woes of their trade partners, which lost significant sales during the recent months. Sector executives expect to reach the normal level of business by mid-2017.

Reporting by Arnab Dutta, Karan Choudhury, Ajay Modi, Sanjeeb Mukherjee and Arup Roychoudhury