Demonetization Causes Currency Crisis, Badly Affects Different Sectors

By Reina Ilagan

Nov 30, 2016 05:28 AM EST

Indian Prime Minister Narenda Modi announced the demonetization of old Rs 500 and Rs 1,000 notes on November 8. Rs 500 and Rs 1,000 account for 86% of all the currency in circulation. This started a series of negative effects on different sectors including e-commerce, smartphone makers, automobiles, travel and food, and movie theaters.

The government's decision was in line with its aim to promote cashless and digital economy, encouraging more Indians to open bank accounts. He believed that the move will discourage money hoarders.

The demonetization causes industrial sectors to scale back services or production, and badly hits small industries, transport and real estate.

The automobile industry saw a dip in sales of two-wheelers, commercial vehicles and luxury cars. Carmakers are cutting back on production to streamline inventory.

According to Gautam Modi, a Mumbai-based Audi dealer, sales fell by more than 45% in November. Rural markets, where vehicle purchases are made in cash, were also negatively affected.

The impact of demonetization urged manufacturers through dealers and finance companies to offer lower interest rates and zero down payment to push sales.

The travel sector was also in pain due to demonetization, with restaurant reservation in Delhi NCR dropping by 28%. Mumbai also dropped by 7%, and Bengaluru by 2%.

With India's tourism sector already in bad shape due to pollution, the demonetization aggravated the situation, resulting to a significant decrease in the number of inbound tourists. Airlines also saw a drop in bookings and occupancy. Cancellations also increased.

The currency ban also affected transactions for smaller hotels, restaurants, and food and beverage operations which accept cash.

When it comes to FMGC or fast-moving consumer goods, companies already experienced a 20-30% fall in sales after the note ban, mostly coming from rural India. This is expected to drop to 35-40% over the next to quarter.

"People mostly use cash in rural India; they don't use cards like the way people in cities do. Since most FMCG companies have a large rural portfolio, we may see some dip in their earnings over the next two-three quarters," said Abneesh Roy, senior Vice President and FMGC-retail analyst at Edelweiss Securities.

The government's demonetization drive may reduce the earnings of most banks this quarter as they mostly process Rs 500 and Rs 1,000 deposits, exchange and withdrawals. Revenue-yielding operations have been less of a priority among most banks.

Siddharth Purohit, senior banking analyst at a retail stock brokerage commented that bank earnings may take a hit in the third and fourth quarter.

"We may not see loan book growth as most banks are busy facilitating the demonetization process. They're not aggressively selling a lot of credit products now. That apart, the SME and real estate sectors, to which most banks lend a significant part of their book - are in a state of lull," he added.

Non-banking financial companies and microfinance institutions had also been under severe stress on their collection cycles.

The e-commerce had also been badly hit, with 60% of its items on a cash-on-delivery basis. Sellers and e-commerce companies, however, stand for different views regarding the demonetization.

Luxury market experienced an overall market drop of 50-60%. Prices of gold may drop below Rs 28,000 per-ten-grams after December.

The entertainment sector was also among the sectors badly affected. Average viewership dropped to just 55 people per show in the first week of demonetization.

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