Demonetization and its Impact on Retail Industry

WHAT IS DEMONETIZATION

The term demonetization is not new to the Indian economy. The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But these notes were demonetized in January 1946 and again in January 1978, according to RBI data.

Demonetization is the process of stripping or removing a currency unit of its status as legal tender from general usage or circulation. The process of demonetization involves either introducing new notes or coins of the same currency or completely replacing the old currency with new currency.

WHY IT IS DONE

The goal of the demonetization move in India is to make the economy stronger and eliminate the parallel cash economy which is unaccounted and untaxed. There are multiple reasons why nations demonetize their local units of currency. Some reasons include –

  • To combat inflation
  • To combat corruption
  • To discourage a cash system.
  • It also curbs the fake currency.

The demonetization of INR500 and INR1,000 banknotes was a policy enacted by the Government of India on 8 November 2016, ceasing the usage of all INR 500 and INR 1,000 banknotes of the Mahatma Gandhi Series as legal tender in India after 9 November 2016.

The government claimed that the demonetization was an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country. The move was also described as an effort to reduce corruption, the use of drugs, and smuggling.

IMPACT OF DEMONETIZATION ON RETAIL INDUSTRY

Demonetization move has definitely impacted the India retail industry in the short term due to lack of liquidity in the economy. However, the impact is felt more by the small traders and the unorganized retailing segment like low-cost retailing such as the local kirana shops, owner-manned general stores, paan/ beedi shops, convenience stores, handcart and pavement vendors, rather than the organized retailers like Reliance Retail, Big Bazaar (Future Retail), Spencers, More, Auchan etc.

Pankaj Mohindroo, National President of the ICA, said the drop has been in the range of 40-60 per cent in different markets. The impact has been more in rural areas and relatively less in urban areas.

 “The impact is temporary, but huge. We expect a 30% drop in sales at organized places while in unorganized places it will go down by over 65%,” as expected by Nagendra Palle, chief executive of Mahindra FirstChoice.

POSITIVE IMPACT:

There is no doubt that demonetization is a great move for a better future of India and its economy. It will definitely influence many more shoppers to start using plastic money in the long-term. Already, malls see usage of credit/ debit cards and e-Wallets go up during big sales, when banks and fin-tech start-ups offer cashbacks or discounts. This is trend will rise substantially in the long term as such payment methods become more mainstream.

Retailers will encourage alternate/ digital payment solutions will help the marketplace become more transparent and structured. The luxury segment, with its historically high incidence of black money acceptance, will see more transactions in white than ever before.

E-wallets are the new form of paying and receiving money in secured manner.   e-Wallets are like real cash except that the cash here is digital. They can be easily compared to a wallet we carry physically in our pockets. e-Wallets allow adding money using Debit Card, Credit Card or Net Banking.

It will lead to more cashless economy which may take the transaction cost down and resulting in more productivity.

The organized retail industry in India, which consists about 5% of total retail market, is estimated to touch 15% by 2025 — and the recent push by Govt. to use digital payments could make the organized retail sector reach 20% of the total retail industry in India by year 2025.

E-commerce is expanding steadily in the country. It is expected to reach US$ 700 billion by 2020. In an industry forum organized, top executives from companies such as Flipkart, Snapdeal,  Shopclues, welcomed the move saying it will pave the way for digital payments, aid the process of financial inclusion and the overall transformation in the economy will translate into long-term benefits for the industry.

Many people move towards Bigbasket,  Grofers, ZopNow etc. for online grocery shopping as they were having problem with cash crunch and preferred to make the payment through digital medium. But these companies provide services only in limited cities specially in Tier-1 cities like Bangalore, Chennai, Mumbai etc. So Small cities people has to struggle to manage cash for their daily use products.

NEGATIVE IMPACT:

As Indian retail segment generates a lot of cash transactions, there might be reduction in the sales over the next one or two quarters. This impact is being felt largely by small traders and the unorganized retailing segment prevalent on many high streets across the country, as compared to the organized retailing and malls. Since most of the retail industry in rural area is based on cash, it is going to impact them.

Experts believe that demonetization could impact the country’s economic growth significantly in the short term. Ambit Capital, a reputed research company in India, has revised its FY18 GDP growth estimate to 5.8% as opposed to the 7.3% figure earlier. The cash crunch has impacted business of several industries and can have a significant impact on the “Cash on Delivery” model of e-commerce companies in India. About 70% of online shoppers in India, including those on Amazon’s platform, opt for cash while buying a product.

The demonetization of the currency has adversely affected retail, almost by a 40% drop in sales, customers are differing their decisions on big ticket purchase for now. We are confident that the sales will pick up once everything has stabilized,
said Navin Khanna, director, BoConcept.

Currency demonetization has caused consumption to fall at the rate of 30 per cent in segments including luxury and Food & Beverage.

Industry body KPMG, who tracks development of the Retail sector said, this fall could range between 30-40%.

It is hard to estimate the drop in sales at this point, but based on conversation with various retailers and brands, this could be in the range of 30-40% for these few weeks for brick & mortar retail,
said Rajat Wahi, Partner, Management Consulting, KPMG India.

SOURCES

http://www.forbes.com

http://www.jrfinancial.in

http://retail.economictimes.indiatimes.com

http://economictimes.indiatimes.com.

http://moneycontrol.com

About Upasana:

Upasana holds M.Sc. in Physics. Currently She is working as a Senior Analyst Intern with NikhilGuru Consulting Analytics Service LLP (Nikhil Analytics), Bangalore. Previously she was associated with a premium educational organization for 5 years.

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About the Author

dyuti
Dyuti is an Analytics Enthusiast. She is an MBA in Finance and B.E in Computer Science. She has years of experience in the field of Analytics and is also the Co-founder, CEO, Nikhil Analytics. She has prior worked with companies like HCL Technologies, Deutsche Bank ,WNS, Reliance Capital etc.

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