Big
Impact of Demonetization across sectors like Retail, Real Estate and Banking
A few weeks after
Narendra Modi, India’s prime minister, declared 86 per cent of the country’s
bank notes invalid overnight, corporate India is only beginning to understand
how the move is likely to change the way companies do business.
For many, the measure
could prove historic. Digital payments companies, for example, are reporting
that demand for their services has increased several hundred per cent, and some
have brought forward their growth targets by a year or more.
Other sectors have
more reasons to worry. Consumer goods companies are trying to determine whether
the short term interruption to sales, which are often made in cash, might lead
to a more protracted downturn and there is a property slump that might last for
over two years.
For the economy, as a
whole, my prediction is that this will pause growth, which has been
running at more than 7 per cent a year. The Sensex share index has lost 6 per
cent since the announcement, falling under 26,000 for the first time since May.
Many economist, have
described the move as being like shooting at the tyres of a racing car.
However the long-term
implications might yet be positive, if the government can use some of the extra
revenue it expects to garner from the measure to offer a fiscal boost, such as
sweeping tax cuts in next year’s budget, by giving more funds in the hands of
people to send rather than trying to increase the government spending as it
would take its own time and the result would be rather very disappointing.
If that does happen,
by giving more breaks to the people on the whole I expect much of corporate India to recover
after the turmoil. But whatever happens, different sectors are likely to feel
the benefit or the pain to very different degrees.
Banks
Beleaguered bank staff
might not feel it right now, but demonetization is likely to prove a major
boost to their banks balance sheets, as a slew of money that might have
otherwise stayed as cash is now deposited.
My estimate is that 80
per cent of the country’s notes will return to the banking system, which will
increase deposit growth by up to 10 per cent.
Of which I expect
about half of that to stay in the system long term, which would increase pretax
profits — especially at public sector banks that usually have bigger retail
networks by up to 15 per cent.
The problem for all
banks, however, is that both consumer spending and the housing market are
expected to slow in the next few months as people rein in their spending and
companies struggle to keep their supply chains going without cash.
These competing
pressures have sent Indian bank stocks on a rollercoaster ride. Shares in State
Bank of India, for example one of the biggest public sector lenders initially
climbed 12 per cent in the first few days after the move, but have since fallen
back 9 per cent.
Consumer goods
Consumer goods
companies are counting the cost of the sudden shortage of cash. From items as
small as medicines or household goods to larger appliances such as dishwashers
or washing machines, much of India’s consumer economy runs on banknotes.
Sale of white goods items such as air conditioners
and TVs, almost 40 per cent of such purchases come via cash which will be hot
major time due to this move.
Luxury consumer goods
would be hit even harder as a large part of sale is this segment is done using
cash and a major hit is anticipated.
Even companies with
large financial clout are having to adjust. A number of multinational consumer
companies have started renegotiating credit terms with its
small-scale distributors around the country that have seen sales collapse.
Property
India’s property market
is likely to be one of the hardest hit from demonetization, not least because
buying or building houses has been the most common way to launder black money. But
due to the fact that 15 or 20 per cent of real estate transactions in India
involve illicit cash.
My estimates are that It
may take several years for currency to normalize in the ‘black’ economy. This
would slow down transactions, and hurt prices of real estate and land.
However bigger, more
reputable developers will be unaffected, given that most of their transactions
come via bank loans. Larger companies will also be able to take market share
from smaller rivals in the long term. Hence the larger and well established
developers who have systems and processes in place would benefit at the cost of
the smaller developers.
The secondary sales
market in real estate would slow down major time and the kind of slow down
would be in place for the next 2 to 3 years.
Hence the real-estate
industry that was already in the ICU has been put on the ventilator and days to
come would be very hard.
Ecommerce
While
bricks-and-mortar retailers struggle to attract customers many of whom are instead
standing in line at the bank this should
be an opportunity for India’s ecommerce companies to hoover up market share.
Executives from many
of those companies, including Amazon, Flipkart and Snapdeal — India’s biggest
online retailers — have welcomed the move. But in the short-term business has
suffered, mainly because about 70 per cent of online commerce in India is paid
for by cash on delivery.
The trend in the last
week or so after the immediate shock is seen that the
fall in cash-on-delivery transactions has offset the rise in card payments.
While business from the larger towns and cities has gone up, overall sales fell
7 to 8 per cent following the government’s announcement.
Several online platforms
have even put temporary restrictions on purchases paid for by cash on delivery.
Others are offering discounts on card transactions.
However, many are
optimistic about what this could mean for the online market in the long term.
However the reality so
far is that the 6% fall in the Sensex index since large bank notes were
declared invalid 70% Amount of online commerce in India paid for by cash on
delivery and this would take a major impact on the online business as the
cashless penetration would be reasonable in Metros and larger cities but in
tier 2 and tier 3 cities the preferred form of payment is cash on delivery
which would take a long time to normalize and the impact would be felt on the
overall numbers.
_ Farzan Ghadially