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

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