Currency crisis: Trade gasps for breath across India

From consumer retail to cement, steel, logistics, transportation and automobiles, the back-end is struggling to get going, due to the liquidity crisis

Devendra Shetty runs a small canteen in central Mumbai. On most days, it does brisk business but the past week has been bad. Demonetisation of Rs 500 and Rs 1,000 notes, Shetty explains, has not only meant fewer customers walking in for lunch. He’s also having a tough time with suppliers.

"Most of them ask me how I will pay them. Our business works on cash. Typically, we clear payments as quickly as possible, to avoid having to carry too much credit on our books. Now, I'm forced to pick up supplies on credit till this currency crisis eases. I don't like this," he says.

This is a dilemma shared by millions of traders, entrepreneurs, small-time retailers, transporters and intermediaries. India's back-end, which works on cash, has almost come to a standstill because of the demonetisation drive announced last week. Goods are not moving because truckers and logistics players are not willing to take these without cash. Trade, at the same time, is short of funds and, hence, not willing to stock beyond a point. So, a straight impact on manufacturers. 

Take retailers of fast moving consumer goods (FMCG), considered among the most widespread of trade networks. This business has suffered badly, especially at the ‘last mile’, where the density of retailers is high.

It is estimated of the country’s 12-15 million retail outlets, 9.4-9.5 mn are the traditional ‘mom and pop’ or ‘kirana’ stores. Cash is the preferred mode of transaction, as it allows them to keep costs down, make payments quickly and ensure the cycle of demand and supply is met easily. "Kiranawalas operate on very thin margins. They run a tight ship, funded typically by cash," explains Sumit Malhotra, managing director, Bajaj Corp, maker of Bajaj Almond hair oil. "This entire system goes out of gear if there is a liquidity crisis. And, contrary to popular belief, this will take time to be restored, at least three to six months."

FMCG companies expect sales to suffer in the December quarter, due to destocking by traders and retailers. The revenue impact could be 10-15% in the quarter for the sector.

Take also the steel and cement trade; it hasn’t moved in the past few days. The revenue impact for steel is estimated be huge, according to sources at the Bombay Iron Merchants' Association. "There is no movement of stocks in warehouses. Nobody is doing anything for the past two to three days and the entire buy-sell cycle has been disrupted," said a source at the body. 

Cement is worse. A key constituent of the building and construction industry, initial checks reveal dealers are not buying new stock. The cause is not only a liquidity crunch but also fear whether the real estate market will use up their material due to a slowdown there, on account of the demonetisation drive. Typically, the average life of a cement bag is five to six weeks and dealers cannot keep a high level of inventory for long,  experts said.

Already in the September quarter, growth in cement demand had fallen to 2.55% from 5.5% in the June quarter and 11.5% in the March one. Analysts estimate the 440-million tonne market will end 2016-2017 with growth not more than 2-2.5%, against 4.6% the previous year.

Transporters say truck rentals will shoot up as small operators, who work on only cash, go out of business. Ashok Shah, chairman, V Trans India, says: “Big companies like ours which runs approximately 1,100 trucks daily have credit arrangements. That is not the case with small operators, who have to pay Rs 50,000 to drivers for various expenses over long routes. With the shortage of liquidity, these trucks will make fewer trips, impacting transportation and pushing up rentals."

The transportation impact is fairly widespread, as everything from perishables to non-perishables is delivered via road in India. According to sector estimates, the ratio of goods transported by road in India vis-a-vis rail is 70:30. A liquidity crunch, syas Kultaran Singh Atwal, chairman, All India Motor Transport Congress, hits at the heart of the business.

Automobiles are also not spared. Dealers say the propensity to pay the down-payment for a car in cash is more in rural areas, as agricultural income there is mostly in cash. A paucity of liquid funds, therefore, will mean people in rural areas are likely to defer purchases, impacting sales. Around 35% of passenger car sales come from the rural markets; in two-wheelers, this share is around 50 per cent, says Vishnu Mathur, director-general, Society of Indian Automobile Manufacturers. Nobody is excited at this stage, he says. 

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