In­dia’s cash crunch hits busi­nesses hard

> Can­cel­la­tion of 500 and 1,000 ru­pee notes threat­ens to push Asia’s third-largest econ­omy into liq­uid­ity cri­sis

The Sun (Malaysia) - - SUNBIZ -

MUM­BAI/NEW DELHI: Like mil­lions of In­di­ans fed up with cor­rup­tion and coun­ter­feit­ing, Vi­mal So­mani cheered Prime Min­is­ter Naren­dra Modi’s shock move to re­place all high-value ban­knotes. Two weeks on, his busi­ness is be­ing ham­mered by the en­su­ing cash crunch.

Sales at So­mani’s alu­minium foil maker, Rock­dude Im­pex, have fallen by roughly a quar­ter in the past week, and the cash short­age that fol­lowed the “de­mon­eti­sa­tion” drive has left his sup­ply chain in tat­ters: his trucks are stranded with no money for fuel, work­ers won’t load goods for free, and dis­trib­u­tors can’t pay up.

Modi’s move on Nov 8 was aimed at crack­ing down on cor­rup­tion and flush­ing out funds stashed away in In­dia’s “black econ­omy”. But the can­cel­la­tion of 500 and 1,000 ru­pee notes, more than 80% per­cent of cur­rency in cir­cu­la­tion, threat­ens to push Asia’s third-largest econ­omy into a liq­uid­ity cri­sis.

Con­sumer spend­ing makes up 56% of In­dia’s US$2 tril­lion (RM8.83 tril­lion) econ­omy. But with just the small stock of smaller de­nom­i­na­tion notes avail­able and a strug­gle to get hold of new bills, con­sumers are hold­ing back.

The gov­ern­ment has ac­knowl­edged that the dis­rup­tion would last weeks be­cause of de­lays in note print­ing and tech­ni­cal prob­lems with ATM ma­chines, but Modi has made a plea for pa­tience un­til Dec 30. The gov­ern­ment said it could not have printed new notes or re­cal­i­brated cash ma­chines in ad­vance for fear of the move leak­ing out.

Mean­while, sup­ply chains at small, medium and even larger com­pa­nies are break­ing down, un­der­lin­ing just how much cor­po­rate In­dia – not just the shadow econ­omy – re­lies on hard cash.

“The en­tire sup­ply chain has bro­ken,” said So­mani, who em­ploys 150 peo­ple across In­dia from his base out­side Mum­bai.

Prob­lems at Rock­dude go from its net­work of sup­pli­ers to its 1,500 dis­trib­u­tors and 150 stock­ists. Its sales team, spread from Delhi to Na­ga­land in the east and all the way to the south, is rapidly run­ning short of cash to pro­mote a planned new prod­uct, even for the rick­shaw rides they use to travel.

Rev­enues have frozen, So­mani says, but fixed costs con­tinue, in­clud­ing wages. These are paid on­line, but his staff can­not get ac­cess with­out be­ing given time off to queue at the bank.

“We are cut­ting pro­duc­tion,” he added. “If this goes on for two more months, then it will hit us very badly.”

An ex­ec­u­tive at a mid-sized hair oil man­u­fac­turer, a beauty sta­ple in In­dia, said sales had crum­pled as con­sumers sim­ply stopped buy­ing sham­poos and lo­tions. Whole­sale markets, which op­er­ate in cash, are shut. Dis­trib­u­tors have no cash.

“We are plan­ning to ex­tend some dis­counts to the dis­trib­u­tors so that they at least re­plen­ish the amount of stocks they are sell­ing, in­stead of not buy­ing from us at all,” he said.

“We are cut­ting pro­duc­tion ev­ery day,” he added.

Like many of the busi­ness­men in­ter­viewed by Reuters, he de­clined to be named, given the sen­si­tiv­ity of the is­sue.

In the year to March 2017, the cash crunch is es­ti­mated to pull down In­dia’s gross do­mes­tic prod­uct growth from last year’s 7.6% by as much as 4.1 per­cent­age points.

Bro­ker­age Am­bit Cap­i­tal says it does not rule out a con­trac­tion in the Oc­to­berDe­cem­ber quar­ter.

Cor­po­rate op­er­at­ing prof­its are tipped to fall by as much as 40% in the cur­rent quar­ter. – Reuters

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