Demonetisation Snailed It
Falling demand from moneyless country cousins hit consumer goods firms
In 1917, in a magazine called ‘Sandesh’ that he edited, Sukumar, father of Satyajit Ray, wrote a story called ‘Hashir Golpo’, or Laughable Story. It was a tale of a postmaster — a very exalted post at the time — and his penchant for telling tales that nobody, not even his bosom buddies, found funny.
The story of the economy is turning out the same way. The government claims things are fine after the bizarre cash clampdown of November 8, 2016. Numbers, from business or factories and farms, tell a different story. If everything was fine, sales of stuff like biscuits, shampoo, hair oil, potato chips and bhujia, and so on, would be galloping, right?
Kissan Fall in Ponds, while…
Well, they aren’t. In its February 5 edition, this newspaper carried a report about the reality faced by companies that make so-called ‘fast moving consumer goods’ (FMCG), in jargon, from soap to chyawanprash. The results are dismal. This newspaper reported that between October and December 2016, sales of Godrej Consumer Products, which produces Cinthol soap and Good Knight insecticides, among other things, fell 0.4%.
Hindustan Unilever Ltd (HUL) is India’s largest FMCG company, a subsidiary of British-Dutch conglomerate, Unilever. It has been in business in India for 84 years. Many things that you use at home everyday, like Pond’s and Pears soaps (launched when the company was called Lever Brothers), Brooke Bond and Lipton tea, Bru coffee, Kissan juices and jams, Lakme shampoos and creams, Fair and Lovely bleaches and so on, are market leaders. HUL sales fell 1.2% between October and December.
It gets worse for companies like Dabur, founded in 1885 by Daktar S K Burman — the first two letters of his honorific and the first three of his surname make up the brand name — which claims to be the world’s largest producer of mass-marketed ayurvedic products, including chyawanprash, a bestselling ‘tonic’ paste. Dabur sales dropped 6.5% between October and December.
Marico, a successful latecomer, compared to HUL and Dabur, has flagship brands like Parachute coconut oil and Saffola cooking oil in its portfolio. Never mind: its sales sank 7.5% in the same time. Colgate-Palmolive, a diversified soap-to-pet food maker, which is listed only in the US and India, saw sales plunge 7.7% after demonetisation.
On February 8, analysts at brokerage Motilal Oswal reported that profits after tax (PAT) for 13 FMCG companies that it follows, have been flat year on year, for the October-December quarter — for the first time in 12 years. This is only a top-down view of the impact of notebandi, but it is important for two reasons.
One, it proves that corporate India is umbilically bound to rural Bharat, where more than 70% of citizens live and toil. Two, that notebandi has hit Bharat and India in equal measure. To see why, remember there is no red line between cash and cashless sectors in the economy.
A company like HUL will happily pay suppliers with cheques or through electronic transfers, but will gleefully accept small cash sales from millions of distributors across the hinterland for, say, hair oil or detergent sachets that weigh a few paltry grams. Where, then, is the red line?
…No Parachute for Saffola
Almost everything you eat — from cereals and vegetables to meat — is produced in the hinterland, where bank branches are scarce and ATMs non-existent. Most transactions are in cash. Farmers buy fertiliser and seeds in cash, pay farm workers in cash. When 86% of the cash dried up, so did rural India.
This newspaper has reported that newly harvested vegetables like potatoes and tomatoes are being dumped on highways or fed to cattle, because farmers cannot afford the cost of transporting these to local markets — where prices have crashed because cash has evaporated. Today, when there’s some cash available in cities, this has led to a different problem.
The drop in supply from villages, where cash is scarce, has created supply bottlenecks in cities. So, middlemen and traders in India will profit at the cost of Bharat. Food price inflation will shoot up in India. Bharat will not gain from this.
There have been knock-on effects: truck rental rates have dropped, truck sales are stagnant, the entire economy is slowing. On Wednesday, we learnt that the capacity utilisation of plants that generate electricity using coal or gas, is at a 10-year low. Why? Probably because thousands of small or mid-size industries are backing down, making less. Meanwhile, the government will keep gloating about the gains from notebandi; citizens will find no cheer.
Anyway, back in Sukumar Ray’s story: his audience is jaded with the half-dozen ‘humorous’ tales the postmaster repeats incessantly. So, one day, they decide not to laugh.
The postmaster is not amused, and asks, who else can tell better tales than him? His audience selects Bishu, not the best raconteur in the world, to tell a tale. And for every sentence Bishu stammers out, they fall over each other in laughter — only to put the postmaster down.
Keep calm and slither on