Demonetisation though had brought a standstill across the economy, will surely bring back ‘Achchhe Din’. However, it’s important to mention that the critical aspect about eradicating black money is not attacking its flow by demonetising, but nipping its creation to cease fresh generation.
November 9 will be etched in Indian history as a landmark day because on this day, India’s cash economy has been brought to a halt or better say thrown into turmoil since Mr. Prime Minister announced that 500 and 1,000 rupee notes would cease to become legal tender. This unexpected move to demonetise both the currencies of highest denomination left everyone bewildered as this could suck highest quantum (around 86%) of hard cash leaving only a meager, about on one-seventh of the total currency in circulation. However, it’s around two weeks now and things have started getting on to normal.
While many economists say the move will be beneficial in the long-run as it is targeted at weeding out tax evasion and corruption, the short-term impact has come in the form of the biggest crackdown on money laundering in India’s history putting everything almost on a cessation. It is a different matter that no industrialist, banker or opposition party has got into voicing a contrary view, but the one visible certain impact is that the move has created mass-level chaos. The queues at ATMs as well as at the withdrawal counters in banks are yet to become normal leaving the markets empty to count heads as for the cash for meeting even day-to-day expense is not easily available.
If the banking system and overall economic activity take weeks to recover from the disruption, then there will be some costs to bear for the country as a whole. The greater one will be the deflationary impact on the economy as demand suffers from a partial demobilisation of income and loss of wealth. I G Patel, Reserve Bank of India governor when demonetisation took place in 1978, recalled in his memoirs that he tried to dissuade the Janata Party government from demonetisation, pushed for by politicians who wanted to ‘punish their corrupt predecessors’ as ‘such an exercise seldom produces striking results.’
Traders/Retailers call it a bane!
In absolute business term, economic life has been shaken at all levels except for the corporate. There are major consequences to this agenda as this has adversely affected the trading community, hardly known for its love for paying taxes. Smaller businesses, right up to retail, have been disorientated and are witnessing a fall in sales.
“The lack of cash flow in the markets is equally affecting traders and the transport sector as well, since both these businesses function mostly on cash. There is a lack of money flow in the markets, and on the back of this demonetisation our businesses have seen an overall drop of 75%,” Praveen Khandelwal, Secretary General of the Confederation of All India Traders (CAIT) has been quoted as saying.
According to CAIT, demonetisation has taken around 60% of freight off the road because the fortune of truckers is also linked to that of the trading business, which is facing its own set of woes. With bulk purchases in mandis almost drying up, delivery of products also becomes redundant. While a share of this dwindled demand could be attributed to distractions caused by the move, many opine that this is a result of a trust deficit in the market. Money has become dearer, leading to cautious spending and minimal transactions.
Logistics – Off the Road
With the government’s curbs on monetary movement, the motor transport business is suffering badly because 80% of the business is cash-based. The All India Motor Transport Congress (AIMTC) – a representative body for 9.3 million truckers, and more than five million bus operators, tourist taxis and maxi cabs – says 70% of the vehicles of their members are already off the roads. The association warns that if the situation is allowed to persist not only the supplies of essential commodities like milk, fruits, vegetables and medicines will get increasingly affected but it will also cripple the lives of 20 crore people directly or indirectly dependent on this industry.
What the truckers association has sought to drive home is that this industry contributed 4.8% to the country’s GDP in 2015-16, which amounted to Rs. 5,44,800 crore. This is a little over Rs. 1,492 crore daily. With 80% of the transactions in cash, Rs 1,194 crore is what the industry needs daily to sustain operations – the bulk of which is just not available today. “Under the Finance Act, I’m allowed Rs. 35,000 per truck per trip in cash for expenses on diesel, Octroi, etc.,” Kultaran Singh Atwal, Chairman of AIMTC has been quoted as saying. “How can I survive when there is an overall withdrawal limit of just Rs 50,000? This is very little against what is required and hence, is badly affecting our operations,” he said insisting that the government must hike the withdrawal limit or allow cheque-based transactions in our sector.
Going forward with AIMTC’s side of the presentation, what is happening in the process is the supply chain has been hit. Movement of products is slowing down. Supplies of essential commodities like food, pulses or any export consignment are either getting slow or even coming to a halt in some places. For now, the ones plying are the short-haul vehicles, which are either running on diesel bought with leftover old currency and because there is an exemption on tolls. There is also a sharp drop in long-haul movement because, apart from diesel and tolls, all the other expenses, like the daily expenses of drivers, local taxes are also paid in cash.
Logistics – The Flip Side
Contrary to these claims, Sundeep Reddy, founder of Boxoffice Logistics – an online trucking solution in the B2B segment and Zeromile Warehousing in Hyderabad had brought some interesting facts forward while he spoke to a few in his own logistics’ community there. “Yes, there are people impacted, but news of 70% of total trucks going off roads in all is false. Ground situation is far removed from such a number.”
According to Reddy’s finding, except for a couple of days, thing has got back to normal. Yeah, there are some issues with transporters who used to work on COD (cash on delivery) basis, but most of the logistics players are trying to issue them cheques or holding their credit till liquidity is back. Quite a few transporters have now started operating in cheques or small payments are taken in E-wallets. For fuel, most truckers have started to use fuel cards and debit cards and carry small change for toll charges (while no toll charges are being collected on national highways, some state highways still charge) for upcountry needs.
Reddy further mentioned that Eashwar Rao, General Secretary of Andhra Pradesh Lorry Owners Association based out of Vijayawada, one of the biggest transport hubs in the country said that there has been no impact on the organised transporters, but about 30% of unorganised transporters who operate on cash on delivery basis have suffered. “Most affected are the reverse trips businesses, where cash is paid normally and that the association is educating all the transporters about going cashless and training drivers to operate debit cards and fuel cards.”
Lighting Industry – Feeling Joyous
There is a co-relation among the industry, the logistics and the trade fraternity. No wonder if the lighting industry does feel a halt of this demonetisation, of course for some time, because of its traditional basis of transactions, which obviously was cash. However, when contacted by LED World, a feeling of satisfaction for future operations was pretty visible amidst the stakeholders. The common perception is a quite positive outlook is in the waiting as this step of the government would somehow eradicate the unorganised sector that would put a cap on duplicacy/counterfeiting, besides encouraging professional way of doing business.
Indian business and industry will have very positive growth impact. In fact, LED lighting business will set the trend for truthful and accurate costing and payment of realistic taxes, which will ultimately benefit the nation. This is aptly clear with what the Elcoma (Electric Lamp & Components Manufacturers Association) – the apex body of Lighting Manufacturers in India which liaisons with govt agencies & supports the country’s lighting industry, insists on. “I would like to say that to my knowledge, demonetisation that has recently ceased the high value notes i.e. Rs. 500 and Rs. 1000 to be treated as legal tender, has not made any difference to the country’s lighting industry,” says Shyam Sujan, Association’s Secretary General.
“Demonetisation is a welcome move by the government. For manufacturing sector, there is hardly any negative impact. Only those companies, which have consumer facing businesses, could face temporary slowdown due to cash crunch. But for those in the organized sector, this is almost a masterstroke as it would bring level-playing field. With likelihood of less cash transactions in the future, the unorganised sector is expected to come into the legal framework. This will give a big boost to the Indian economy,” says Arun Gupta, MD, NTL Group.
B S Praveen, MD, BAG electronics (India) Pvt. Ltd., feels that it’s a bold step for the overall healthy growth the Indian economy in the long term, although with some short term pains. “It will have significant impact on black money and reduce the cash economy significantly. This will get more money into the banking system, which could reduce Interest rates and push up growth. Govt would have more money to spend on things like infrastructure etc, which in turn would help the LED lighting industry for sure, while reigning in the inflation to certain point,” he shares anticipating a boost in the business with the growth in the economy. There’s hardly any direct impact felt in the organisational setup. “We have not had any major disruption in our operations, except for a minor pain to go to bank and exchange our small cash balance in the Company,” he quips.
Echoing similar sentiments, Rakesh Zutshi, MD, Halonix Technologies, opines that demonetisation will bring out the black money, which is mostly unproductive, back into the economy; besides taking the country away from the cash economy, the generator of black money. “We need some follow-up actions like putting a cap on cash transactions, make it mandatory to have PAN card beyond the cash cap that is decided,” he states indicating that the instant impact would be more visible on small traders who deal mostly in cash across industries.
“However, it will have a short-term dislocation on the cash flows of the traders and in turn on the organised sector too. We may see a drop in consumption for a couple of months, but that would be temporary. Also, once we shift to the GST regime, it will be a huge step forward to getting the trade and industry on a growth path and a disincentive for illegitimate cash generation,” asserts Zutshi who feels that corporate India by and large have already moved onto cashless transactions. “We should focus on the product availability and quality and look beyond the short term disruption that we envisage,” he says.
Going in a little detail, VP Mahendru, CMD, Eon Electric suggests that the demonetisation would surely bring ‘Achchhe Din’ (Good Days) for our industry, especially when it comes to quality and pricing besides improving trade practices. “The business of LED lights has been expanding and because of the wide variety of raw materials and components that go into the manufacturing of LED-based lighting products, the unstable and short term policies of pricing that is extremely popular in the retail (of electrical/lighting) market were not only harming the growth of the industry but also damaging the faith and reliance of the customers, clients and manufacturers in good and stable pricing and quality of LED components.”
He further explains as how things would be beneficial for the industry in the after-effects. “Obviously, all the industries would be at advantage. But when it comes to LED lighting businesses, these benefits would be unique. The cost of LED lights and its consequent selling price will become more stable, uniform for wider markets and would help building confidence of the clients in brands and their pricing. The price competition will be based on a steady and genuine cost and quality of the products. Full genuine sales tax/GST will be realised, which will benefit the actual consumers along with the government. Costing, worked out on genuine cost of production, will benefit the manufacturers and the consumers in better planning, and will ensure well authenticated projections and pricing,” outlines Mahendru.
As the LED industry further grows, it will help the manufacturers to get the benefits from lower cost-based on higher volumes of production. “Till date, many of the processes are done manually, when it comes to costing. Assembly or production of LED Lights will become automated as the production volumes and sales increase. Our company is taking wide ranging steps to positively intensify higher productivity and consequent profitability. We will introduce effective automation in various processes which can be further enhanced in other segments. Increased production and sale will provide more opportunities of expansion of business, job creation and consequent higher prosperity to all particularly to employees in the lower income group,” Mahendru reinstates.
Real Estate – Soon to Phase out the Gloom
One of the major effects of demonetisation is that housing prices in 42 major cities across India could drop by up to 30% over 6-12 months, wiping out over Rs. 8 lakh crore worth market value of residential properties sold and unsold by developers since 2008. The slowdown has been more severe in NCR particularly Gurgaon, Mumbai Metropolitan Region (MMR) and certain Tier II markets such as Surat and Vadodara. Minimal impact of demonetisation has been felt in markets such as Bangalore, Pune and Chennai, which are primarily end-user driven and rely on bank funding.
Liquidity has been severely impacted and this would result in a deflation with limited sales over the next three months. In short, the move has taken the real estate sector by a storm, and it would take time for all stakeholders in the sector – brokers, buyers, owners and developers – to assess its repercussions on their businesses and decisions. There would be intermittent delays in the execution of ongoing residential and commercial projects primarily owing to the massive cash crunch and minimal trading in the economy.
According to Getamber Anand, President – CREDAI National, the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. “Moreover, the organised part of the industry has always been compliant and it is only the unorganised fly by night players who will be affected. This move will help industry to fight more effectively for removal of section 43CA of the IT act as now there is no reason to charge tax on so called deemed income to both the buyer and seller post this move.”
Anand denies of any price correction intended in the properties out of this demonetisation. “As an industry body representing organised real estate, we again reiterate that the industry has always been catering to the primary market which comprises of end users who aggressively avail home loans. Moreover, with this step of demonetisation, banks are again going to be flushed with liquidity of approx. 15 lakh crores and will be compelled to lend aggressively .To do that ,they will have to lower interest rates. This could be made possible in as soon as the next six to twelve months. Housing industry will start to grow at a rapid pace while concurrently being in compliance with transparency and fair practices like RERA,” he adds.
Echoing the same sentiments, Boman R Irani, CMD, Rustomjee welcomes this demonetisation of Rs. 500 and Rs. 1,000 currency notes, as he feels that it will help to increase transparency in the real estate sector and curb unaccounted cash transactions. “Being a professionally run organisation, Rustomjee has carved a niche for itself in the ever-growing real estate sector over 20 years. The organisation has always believed in transparent transactions, which are for the benefit of the buyer and society alike. With this move we await a softening of the home loan rates as there will be excess liquidity which can be a benefit to the home buyer. We foresee enhanced confidence of global investors looking to invest in the real estate sector,” adds Irani who also happens to be the Secretary – CREDAI National.
At the same time, Rahul Shah, CEO, Sumer Group despite the belief that it would reduce corruption and bring transparency in time to come, looks cautious when he says the ban of old currency notes will also create a downbeat impact on the resale market, since most of the transactions in the secondary market have a cash component involved. “The primary real estate market will not feel the heat since most of houses are sold on bank finance. This transparency in real estate sector will give more credibility and make it more attractive to the NRI market.”
Going a step forward, Abhishek Lodha, Managing Director, Lodha Group, underscores that this will radically transform our economy and will prove that India is, in fact, a much larger and stronger economy than what is normally understood by GDP figures. “Reduction of cash will place India in the same league as the more developed countries and make our economy more efficient in the long run. The professional, well organised companies in the real estate sector will significantly benefit from this move and the scourge of black money will eventually vanish from the sector and the overall economy. This is likely to improve liquidity and lowering of interest rates, all of which will help boost the economic growth,” says Lodha.
“In the context of Bangalore market, it has always been a customer driven market. The majority of the home buyers are from the IT and Corporate sectors who pay their taxes and have their home purchases financed through bank loans. There might be a slight disruption till this process is streamlined, after which we expect it to be business as usual,” avers Bijay Agarwal, MD, Salarpuria Sattva Group.
Mudhit Gupta, CMD, EMGEE Group takes it in favour of the commoners with this belief that the initial effect of demonetization is going to be a knee-jerk reaction of a wait and watch policy, where the metropolitan cities will suffer the least. “However, the biggest beneficiary to this demonetisation will be the affordable and mid-income housing, since we expect the interest rates to come down substantially, while the luxury segment which has been suffering for the last couple of years will still take time to recover,” he says.
Even as the sale of pre-owned houses and developer-built small properties have come to a standstill, the realty industry hopes the quantum of home loans will pick up after stability returns and eventually lift its fortunes. Experts are of the opinion that this abrupt move is expected to give a sales push in time to come as banks will be willing to lend more at attractive rates to those keen to buy flats and properties because demonetisation, on the back of excessive deposits, would give them more maneuverability in giving loans. It will also provide a chance to the realty industry to offload its inventory. So, no worries for the lighting industry as quite a big market is in wait.