Mumbai: Nearly four months after the crackdown on cash, the paper bills have bounced back.

At Purushottam supermarket in Maharashtra’s Latur, cash transactions are back to previous levels. Cash usage fell in the early days of demonetisation amid a crippling currency shortage, admits its owner Ravindra Agarwal, but as the currency presses cranked up, customers picked up their habits where they left them.

“Customers prefer to pay cash for bills of Rs2,000-3,000," says Agarwal, whose store accepts mobile, credit and debit card payments. Cash usage, which was close to 60-65% before demonetisation crashed in the first few weeks of cash shortage, before climbing back to the same level, says Agarwal. He also notes—like other shop owners—that customers are making fewer discretionary purchases.

Five-hundred kilometre to the west, at India’s largest wholesale market in Mumbai’s Masjid Bunder, the story is the same. However, the cash preference here is from the trader’s end.

“We started accepting Paytm wallets after the note ban, but have now stopped using it," says Ravi Sangoi, 52, who has been running Bharat Bazaar mini wholesale and general store for 30 years. His reason: Paytm wallet transactions are free, but there is a 2% fee when the merchant transfers the wallet balance to his bank account. And shopkeepers want to avoid this. Like others Mint spoke to, Sangoi adds that sales remain depressed. “Consumers are not indulging. They buy as per need. Earlier, when a consumer entered the store, he didn’t hesitate to try something new, or an expensive soap or deodorant. Now he sticks to the bare minimum," says Sangoi.

Also read | Sectors which have been affected the most by demonetisation

At Agarwal Enterprises, a large distributor of food flavours in the same market, owner Pawan Agarwal is more bitter: “Demonetisation was done the wrong way," says Agarwal, who caters to makers of biscuits, ice creams and confectionaries. “The method and implementation were wrong. Also, the outcome was not achieved. There were no benefits. Smaller companies with local setup of one or two machines were unable to make a daily living following demonetisation."

The hit

In the December quarter, aggregate net sales of eight consumer goods companies across lifestyle, gems and jewellery, and value retail fell 2.9% from a year ago. In the same quarter, aggregate net profit of Shoppers Stop Ltd, Trent Ltd, Titan Co. Ltd, Gitanjali Gems Ltd, CESC Ltd that runs the Spencer’s retail chains, Bajaj Electricals Ltd, Videocon Industries Ltd and Bata India Ltd stood at Rs79.26 crore, down 84.1% from a year ago.

Consumer packaged goods makers were not spared either. Aggregate net profit for nine consumer staple companies fell 1.4%, while aggregate net sales grew marginally at 0.54%. The nine companies included Colgate-Palmolive (India) Ltd, Dabur India Ltd, Emami Ltd, Godrej Consumer Products Ltd, Hindustan Unilever Ltd, Marico Ltd, Nestlé India Ltd, Procter and Gamble Hygiene and Health Care Ltd, and Jyothy Laboratories Ltd. Clearly, consumers are not loosening their purse strings.

“People have cut back on their spends on electronics, apparel and household items. They are not indulging right now," says Arvind Mediratta, managing director (MD) and chief executive officer (CEO) of organized wholesaler Metro Cash and Carry India Pvt. Ltd.

The impact is worse in rural areas with a patchy banking coverage. “Two-wheeler sales are a good indicator of rural economy and they are yet to pick up," says Mohan Ghatge, chairman and MD of Kolhapur-based Ghatge Patil Transports Ltd. He expects another six-eight months for the rural markets to pick up.

“People in rural India are still not comfortable dealing with non-cash payment methods and also, the banking and formal sector has still not reached the last mile," says Ghatge, a dealer for Hyundai Motor India Ltd, Daimler India Commercial Vehicles Pvt. Ltd and Mercedes-Benz India Pvt. Ltd.

Impact on SMEs

“Demonetisation impacted consumers’ purchasing power," says Sunil Kumar Sinha, principal economist and director at India Ratings and Research Pvt. Ltd. As bankers tackled demonetisation-related issues in the first two months, other banking operations stalled and some small and medium enterprises (SMEs) dependent on banking credit lines closed down in this period, says Sinha.

The fallout, says Sinha is grave. As capacities remain underutilized, private sector investments have dried up. In December, India’s industrial production contracted by 0.4% on the back of demonetisation of high-value currencies. Capital goods, which is a proxy for investment demand in the economy, contracted 3% in December.

The liquidity squeeze after the note ban forced many people to go digital. However, data from the Reserve Bank of India shows people have not really embraced the new channels. In fact, with cash taken away, they reined in spends.

Also read | Why a note in the hand is worth two in the account

“You can’t force people to go cashless," says Sinha. “You have to educate them and make them aware of the benefits. In the past too, the government assumed people would use toilets if it just built them under the Swachh Bharat programme. However, people continued to defecate in the open, forcing it to change its narrative to encourage people to use toilets."

Parveen Dalal, head-sales (India business) and business (Saarc) at Godrej Consumer Products, says, “Demonetisation can’t work by itself but along with steps like the limit on cash transaction at Rs3 lakh and goods and services tax (GST), the evasion of taxes will reduce." However, he says he is yet to see a significant shift in the way the trade works.

India’s traditional trade accounts for 92% of the Rs2.6-trillion packaged goods industry and of this, nearly 40% is wholesale, which mostly transacts in cash at the lower level of the supply chain

Amitabh Mall, partner and director at the Boston Consulting Group, India, points out, “There is a need for businesses to reinvent the traditional wholesale channel. This will require investments in training, hiring more people on distributors roles, and increasing the visits to B-class and C-class outlets."

In traditional supply chains, manufacturers appoint distributors who directly service retailers, apart from wholesalers who service retailers. However, wholesalers usually service smaller retailers not serviced by the large distributors or work in remote corners where the company-appointed distributor does not reach.

India’s traditional trade accounts for 92% of the Rs2.6-trillion packaged goods industry and of this, nearly 40% is wholesale, which mostly transacts in cash at the lower level of the supply chain. According to Mall, wholesalers operating on cash work on thin margins and their businesses could become unviable if they have to pay taxes or charges for use of digital payments.

Even in the Rs3.75 trillion apparel industry, the organized sector accounts for 35% of the overall trade. Here too, sales in the wholesale channel and smaller towns were more severely impacted than in urban India, Aditya Birla Fashion Retail Ltd, which owns brands like Van Heusen, Louis Philippe, Peter England and Allen Solly, said in a presentation on 3 February following its earnings announcement. Sales have recovered to about 90% of normal levels by end- December, said the company.

ALSO READ | Are consumer goods firms prepared for GST regime?

However, not all brand retailers have managed as well. “The recovery will depend on the individual strength of the brand. Some could be more impacted than others," says Rahul Mehta, president of the Clothing Manufacturers Association of India, adding that in the long term, a lot of micro- level companies which were not a part of the official economy will have to shift to the official economy to survive.

“The government’s demonetisation move had a pronounced impact on the unorganized retail sector," says Rajat Wahi, partner and head (consumer markets) at KPMG India, as it is significantly cash-driven. However, even organized retailers in high-value items including luxury items and consumer durables witnessed contraction in revenues in the December quarter as they had a high dependency on cash. “Cash transactions in the luxury sector before demonetisation accounted for 60-70% of the total value," says Wahi, adding that this is now changing as the consumers are using non-cash payment channels.

Modern trade gains

The unexpected beneficiaries though are the organized retailers, organized wholesale cash and carry, and even online marketplaces like Amazon and Flipkart. “This important step of demonetisation by the government together with introduction of GST in 2017 will be an inflexion point for the growth of modern retail and wholesale in the country," says Krish Iyer, president and CEO of Walmart India, who feels that his company is well placed for growth for the next few years.

“Modern trade is growing at a very fast rate for us at over 100%," says Rodrigo Lima, MD at Danone India, who expects the channel’s contribution to grow from 10% of its overall sales to be close to 20% within a year.

The modern trade channel made up for the slowdown in general trade and wholesale to some extent, says K.K. Chutani, executive director (consumer care business) at Dabur India.

However, it is to be seen whether this is a temporary blip. “Demonetisation has led to a surge in the modern trade channels. But will this last," wonders CEO of Jyothy Laboratories S. Raghunandan, who feels India’s traditional wholesalers are far more flexible, offer credit and doorstep delivery and order taking, and will be able to adapt to the changing environment to survive.

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