Demonetisation one month: Agriculture, real estate, consumer products worst affected

New Delhi: It has been a month since the Prime Minister announced the decision to render Rs 500 and Rs 1,000 currency notes worthless. Some have called this the PM’s 8/8 strike, since it was delivered on 8 November at eight pm, thereby insinuating that the move is some sort of a surgical strike on black money. This sudden demonetisation, which sucked out over 80 percent of the currency in circulation, has hurt the Indian economy with the RBI itself downgrading the growth forecast for this fiscal to 7.1 percent from 7.6 percent earlier. It has also led to a severe cash crunch, translating into untold woes for the aam aadmi even as its goal of extinguishing black money remains hazy. [caption id=“attachment_3120978” align=“alignleft” width=“380”] Representational image. PTI[/caption] Demonetisation has invalidated approximately Rs 14,180 billion worth of high value currency, which is almost 86 percent of the total currency in circulation ( total currency in circulation Rs 16,454 billion as on 31 March 2016). The unexpected and sudden demonetisation has had a ‘knee jerk’ reaction on the level of economic activity. All the cash dependent consumption-led sectors such as retail, wholesale, jewellery, hospitals, healthcare, diagnostics, trading, restaurants, transport, logistics are severely affected. Real estate/construction transactions, which are partly dealt with in cash, have been affected jeopardising millions of jobs in construction. A large proportion of the country’s labour force is employed in these sectors collectively. Therefore, the biggest concern from the demonetisation exercise is its far-reaching impact on India’s cash economy. Here’s an assessment of how this single significant move has impacted some major sectors: Real estate: A Crisil analysis says demonetization is highly negative for this sector. Cities/ micro markets such as Delhi-NCR with high investor demand has been severely impacted and residential real estate demand has declined more severely in micro markets with high share of unorganised developers (where practice of cash transactions was prevalent). Developers will face serious fund crunch in the short to medium term, which will further delay ongoing projects, it said. Land prices are expected to fall. The combined impact of this announcement, Real Estate Regulatory Bill and continuous monitoring of circle rates/ ready reckoner rates by states will reduce the gap in prices in the primary and secondary market transactions. Cement: Crisil has again dubbed the impact of demonetisation on the cement sector as negative. Its analysts have pointed out that 60-65 percent or two-thirds of consumption of cement is by the real estate sector, so near-term demand will be affected. There will be pressure on already low prices. Steel: This will be marginally negative since 30-35 percent of consumption or just a third emanates from the real estate sector. Near-term demand will be affected. There could be marginal pressure on long steel prices. Agriculture: One sector of the economy which has been bearing the brunt of demonetisation is agriculture. This piece in Mint says cash is the primary mode of transaction in agriculture sector with formal financing in many parts, especially Punjab, Uttar Pradesh, Odisha, Maharashtra, Gujarat and Kerala coming significantly from cooperative banks. These have been barred from exchange-deposit of demonetised currency. Agriculture is impacted through the input-output channels as well as price and output feedback effects. Sale, transport, marketing and distribution of ready produce to wholesale centres or _mandi_s, is dominantly cash-dependent. Disruptions, breaks in the supply chains feedback to farmers as sales fall, increased wastage of perishables, lower revenues that show up as trade dues instead of cash in hand and when credited into bank accounts with limited access affect the sector. Telecom: According to analysts at CLSA, demonetisation has impacted the mobile industry with a slump in prepaid recharges, smartphone sales and data adoption. But the cash crunch for prepaid recharges has been partly mitigated by a move to allow the use of old Rs 500 notes. Meanwhile, with demonetisation and a slump in smartphone sales, Reliance Jio has extended promotions beyond December. Consequently, the analysts have lowered the FY17-19 forecast revenue and Ebitda for incumbents by 1-8 percent. This means Bharti Aitel, Vodafone and Idea Cellular – the big three telcos – will get impacted the most. While the impact on voice revenues is likely to be short-lived, data revenues – which are more discretionary – are likely to see a larger impact. Demonetisation has already lead to a 50-70 percent fall in over-the-counter smartphone sales, as per channel checks by CLSA. Automobiles: Analysts at Kotak Institutional Equities say retail sales of two-wheelers have been severely impacted, down by 30-50 percent year-on-year in various regions in India due to lack of adequate cash in hand for customers. But, they say, since cash circulation will improve over the next few months, there will be a recovery in scooter and commuter bike demand by next fiscal. Etailing, online cabs: An analysis by RedSeer consulting says business was down 15-20 percent for e-commerce companies in November whereas the impact on online cabs was a reduction of 3-5 percent. Both these new economy sectors have seen an increase in non-cash transactions too. Consumer products: Kotak analysts have assessed the impact on this sector at three levels: (1) shortage of cash in the hands of the consumer, forcing her to consume less and at some level, consume only the most basic necessities; (2) shortage of lower denomination currency notes creating a ‘change’ problem in the cash economy and hurting transaction volumes and, (3) shortage of cash at the retail and wholesale level leading to de-stocking across the chain; this factor means that the primary sales impact across most categories is disproportionately higher than the ‘off-take’ impact, at this point. The analysts have said that the liquidity impact is a temporary issue and should get sorted over the next 2-3 months. On wholesalers having to reset their business model towards cashless transactions, they said this could take a while. Overall, demand recovery to ‘normal’ levels could take 12-18 months. Logistics: 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 percent of the vehicles of their members are already off the roads. With the government’s curbs on withdrawal of money and exchange of old Rs 500 and Rs 1,000 notes, the motor transport business is suffering, since 80 per cent of the business is cash-based. 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 200 million people directly or indirectly dependent on this industry.