Wednesday 14 December 2016

Shall we throw caution to the wind?


There is reason to feel pessimistic, if 'pessimism' is the word we prefer to use instead of  'cautious' , for no other country of India’s size has such a huge informal sector. The share of the informal sector employment in India at 83.6% is the highest in the world. Quite possibly, almost all of the enterprises in the informal sector operate on a cash basis. The disruption to their business model could be both severe and permanent. Their livelihoods threatened, they could fall below the poverty line. Of course, we the urban elites and middle classes, won't understand that as long as we continue to the clientele class.


Its been a month since 8 November 2016, and counting..

It is little over a month since our  Prime Minister made his announcement on the withdrawal of specified banknotes (SBN) -  this is, by the way, the terminology that the Reserve Bank of India adopts on the exercise that has been underway since 9 November 2016 - the costs appear disruptively high and are nealry impossible to estimate given the size and scale of the cash-dependent economy and geographical breadth of the country. So, even the experts who, almost a month back, had thought that the disruption would be transient and scant and that the government decision had a significant upside to the economy with little downside are changing their minds. Now, even they feel that the wealth effect (loss to the hoarders of the SBNs) could be transient and scant while the costs of disruption are significant and enduring.

According to latest data released by the RBI, Rs.14.2 trillion worth currency notes of Rs 500 and Rs 1,000 denominations were in circulation as on 31 March 2016. The amount of old currency notes deposited at bank branches has risen over the last month. According to RBI data, banks had collected Rs 11.55 trillion as on 6 December 2016. In comparison, the central bank had released currency notes worth Rs 4 trillion back into the system as on 5 December 2016.

The Asian Development Bank (ADB), yesterday, became the first  of the multilateral agencies to reduce India’s growth forecast for the current fiscal 2016-17 to 7% from 7.4% estimated earlier in the backdrop of government’s decision on the SBN. In its Asian Development Outlook 2016 update, ADB said its lower growth projection for India is due to weak investments, a slowdown in the country’s agriculture sector, and the lack of available cash due to the government’s decision to ban high-denomination banknotes. Fitch Ratings has already downgraded India’s growth forecast to 6.9% in 2016-17 from earlier estimate of 7.4% while Morgan Stanley has reduced its projection to 7.3% from 7.6% for the same period.

Not surprisingly, our lawmakers last week cleared around  Rs.60,000 crore in additional spending for the fiscal through March 2016, which includes a 10% increase in a rural jobs program, which PM Modi once mocked!


A month of demonetization and the collateral damages!

The traditional trade has been hit hard, especially wholesalers and kirana stores where transactions are largely in cash. Still, things are recovering; sales are now down only 20-25% on a year-on-year basis compared to 50% in the first week after the note ban. Rural sales have been hit more.

The market for white/brown goods still operates 80% on cash, thereby affecting volumes. Makers of durable goods are launching new schemes to tempt consumers to go cashless. Some of them are also extending discount offers and promotions such as waiver of processing fees and installment schemes with delayed start of payments.


There has been a significant impact on inbound travel. Some airlines have seen bookings go down by about 16% in the week after demonetization compared to the one before that. Discretionary travel has been the worst hit. Poor sales have forced all airlines to bring forward their airfare sales—usually reserved for the low season starting January. International traffic to West Asia and South-East Asia, especially by traders and low-wage workers, has been hit. Business jet operators say several charter flights have been cancelled as payments are often made in cash.

Sales of two-wheeler vehicles fell 5.9% in November, the first decline since December 2015, according to the Society of Indian Automobile Manufacturers’ figures released last week. In two-wheelers, where transactions are through cash, sales have taken a massive hit. Hero MotoCorp Ltd, for instance, sold 480,000 units in November, down from a monthly average of 600,000 units.

Cement demand, especially in the trade segment, contracted significantly in certain regions of the country given the prevailing liquidity crunch. Channel checks suggest that dealer counter sales, which are 50-70% cash-based, were hit up to a similar quantum in the first week post November 8 2016, as has been pointed out in a report by Antique Stock Broking Ltd. On a month-on-month basis, sales volume in the trade segment slipped 20-50% in November, according to a Reliance Securities Ltd report. Not only cement demand, supply of building construction material like sand, steel and gravel has also taken a beating since a large part of such transactions is done on a cash basis. In a bid to keep the business running, companies are extending credit periods by 5-10 days across regions. Dealers, however, don’t foresee a major recovery in cement demand or in prices as yet in December 2016.

Pharmaceutical product sales likely fell 8-10% month-on-month in November with sales of medicines for acute diseases feeling the adverse impact of demonetisation due to lower patient turnout, although retail sales of medicines for chronic diseases rose in the first fortnight, as patients stocked up medicines by using old notes at pharmacies, which were among the few outlets accepting old banknotes. Offtake from wholesalers and stockists was sluggish and companies have extended the credit period by 7-21 days.

Even the country's retail inflation has now dipped to a two-year-low in November as demand plummeted because of the government's decision to scrap the Rs 500 and Rs 1,000 notes, which accounted for 86 per cent of the value of currency in circulation. Indians, who typically conduct 80 % of their transaction in cash, bought less, restricting retail inflation to 3.63 per cent - a two-year low and well below the RBI's target of containing inflation at 5 %. According to CPI data, the fall in retail inflation was mainly because of lower food inflation, which stood at 2.11 per cent in November 2016 against 3.32 per cent in October 2016. The data showed that discretionary spending in goods and services in the retail inflation index, excluding food and fuel, which constitute 16 per cent of the CPI basket, appear to have been affected by the restricted access to cash.

However, some have emerged as winners as well

Organized retail is a clear beneficiary of demonetization as consumers flock to large stores 
which accept non-cash payments. The nature of purchases at modern retail stores has changed. Consumers are stocking and purchasing more of daily needs and essentials such as fruits, vegetables and staples such as sugar and flour. Sales were up by 15% on a week-on-week basis in the first week after demonetization was announced at retail stores of Future Group and 25% compared to a year ago. This is true even a month later; sales continue to be higher by 25% compared to the year-ago period. 

Paytm, a mobile payment and commerce platform, backed by Ant Financials (Alipay), Alibaba Group, SAIF Partners, among other, One97 Communications Ltd has emerged as the largest mobile payment company, with more than 164 million users. In fact, Paytm raked in over Rs.220 crore in retail sales at offline stores during its cashfree festival, which was held between 9 and 12 December 2016. 


Are their concerns that are technical with going cashless?

However, in a recent reveling talk Qualcomm Senior Director Product Management Sayeed Choudhury said, “You will be surprised because most of the banking or wallet apps around the world don’t use hardware security. They actually run completely in Android mode and users password can be stolen. Users use fingerprint which might be captured ... in India that is the case for most of all digital wallets and mobile banking apps,” According to Choudhury even the most famous digital payment application in India is not using hardware level security.

So, I guess, we don't have too many reasons to throw caution to the wind.


Disclaimer / Caveat: Whatever I have stated is publicly available information and does not represent the view of the firm I work for.

(This post is not copyrighted and may be reproduced freely with appropriate attribution of source)

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