Demonetization Temporarily Weighing on Different Sectors the Eithecial Dilemma of Short-Term Pain for Long-Term Gain (Download PDF)

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The ban on Rs. 500 and Rs. 1,000 notes has influenced a raft of sectors. There is a mix of responses seen in the various sectors after demonetization. The various sectors have behaved differently in lieu of demonetization as mentioned in the table below. Several other industrial sectors are expected to scale back services or production. However it is widely believed that demonetization would lead to significant long-term gains

Image of Old currency of India

Image of Old Currency of India

Image of Old currency of India

Table contains shows Demonetization is weighing on different sectors

Table contains shows Demonetization is weighing on different sectors

Different Sectors

Overview

Positive impact

Negative impact

Hospitality/travel

The trip can wait

Rise in digital payments

Drop in inbound tourism, cancellations increase

FMCG

(Fast moving consumer goods)

Demand intact, but where is the money?

Pending dues flowing in from wholesalers

Rural buying power reduced

Banks–NBFCs

(Non-banking financial company)

No time for money-spinners at this rate

Increase in CASA deposits for most banks

MFIs, NBFCs miss collection cycles

Luxury market

Bling goes out of fashion

Huge, immediate spike in sales.

Layoffs in short term

Gold

Shine is lost for now

Prices may fall post December

Sales reduced to a trickle

Effects on Automobiles

  • Utility vehicles sales expected to be down 40 - 50%, commercial vehicle sales down by 50 - 60% and two-wheelers 20 - 40%
  • Sales of commercial vehicles, two wheelers and luxury cars are the worst hit by the demonetization move. Carmakers are skimping on production to streamline inventory and have reduced dealer (wholesale) targets by up to 40%.
  • Footfalls at dealerships across the country have dropped by 50 - 60%; bookings have fallen equally by 50%.
  • Rural markets, which account for nearly two-thirds of entry-level motorcycle sales in the country, are in pain because cash does vehicle purchases.
  • To offset the impact, manufacturers through dealers and finance companies have started offering lower interest rates and zero down payment to push sales.

Effects on Hospitality/Travel

  • The number of inbound tourists visiting national monuments has dropped significantly after the note ban.
  • Popular tourist destinations of Indian travelers such as Thailand, Singapore, Malaysia, Maldives, Hawaii, Vietnam, Sri Lanka, Nepal, China, Indonesia and Dubai have all seen a drop in bookings.
  • The currency ban has caused huge uncertainty and disrupted transactions for smaller hotels, restaurants and food and beverage operations, which accept cash.

Effects on FMCG

  • FMCG companies are already staring at a 20 - 30 % fall in sales post the note ban - and much of it is coming from rural India.
  • While most analysts expect sales of essential items like soap and toothpastes to continue unhindered, categories like body cream, special body oils, deodorants, high-end shampoos, snacks and fries, chocolates, special enriched food items and ice creams may log lower sales in the interim.
  • People mostly use cash in rural India since most FMCG companies have a large rural portfolio, may see some dip in their earnings over the next two-three quarters.

Effects on Banks–NBFCs

  • The government’s demonetization drive have puncture the earnings of most banks this quarter.
  • Demonetization help most banks improve their CASA (current account, saving account) deposit counters, albeit not many analysts expect this money to remain in the bank for long. Albeit not many analysts expect this money to remain in the bank for long.
  • Most banks are now forced to cut rates - on both deposits and lending -over the next few weeks.
  • Most NBFCs and MFIs have announced ‘collection holidays’ till such time there’s sufficient money in the system.

Effects on E-Commerce

  • Sales are down 60 - 70%
  • Of the 1 million items shipped daily from e-commerce companies, 60 % are on cash-on-delivery (CoD). Suddenly priority for shopping get lower.
  • Customers are adopting electronic payments at delivery and this has seen 10X growth
  • A day after the decision to ban Rs. 500 and Rs. 1,000 notes, e-commerce companies capped CoD orders to below Rs. 1,000 with all purchases above this amount to carry out by digital wallets or cards.

Effects on Luxury Market

  • Overall market drops by 50 - 60%
  • Market already reeling under the impact of global and local issues - from weak outlook to mandatory PAN requirement for purchases topping Rs. 2 lakh - got another hard knock due to demonetization.
  • Luxury buyers could also go into hiding as they wait for the implications of GST and budget proposals.

Effects on Gold

  • Price may drop below Rs. 28,000 per-ten-grams post December.
  • Zaveri Bazaar, the famed market, registers business worth Rs. 125 crore on an average day. Post the note ban, this has dropped to a mere Rs. 13 crore worth of sales per day.
  • Jewellers are also worried about tax raids as there are widespread reports of black money hoarders using gold to clean up their cash-in-hand.

Despite of the difficulties citizens are facing, citizenss of the nation are ready to join hand-in-hand to curb the menace of black money in India.

- Published/Last Modified on: November 30, 2016

Policy/Governance

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