Consumer packaged goods companies are considering extending lines of credit and arranging banking facilities to help their business partners tide over the liquidity crunch that is expected to follow the withdrawal of Rs500 and Rs1,000 bank notes.
About 90% of India’s $600 billion retail trade is unorganized and about 60% of all trade transactions are in cash. “The entire impact will be on the cash economy and more in general trade than in modern trade (chain stores),” said Rajat Wahi, partner and head consumer markets at KPMG India. Wholesale trade in India is largely cash-based and the liquidity crunch could disrupt supply in the short term, he explained.
To be sure, any impact will be temporary. But manufacturers such as Godrej Consumer products Ltd (GCPL), Dabur India Ltd and Marico Ltd are not taking chances and are trying to devise ways of helping retail and distribution partners overcome the liquidity crunch.
“There is a possibility of short-term liquidity issues in the distribution system, particularly wholesale, but we are putting measures to cope with it,” said Saugata Gupta, managing director and chief executive of Marico, maker of Parachute and Saffola oils.
GCPL, known for brands like Cinthol and Hit, is already in discussions with its partners. “We are evaluating whether we should offer some short-term credit to help our partners tide over this situation,” said GCPL managing director Vivek Gambhir. Things will become clearer in the next few days, he added.
Dabur India is evaluating the extension of credit lines to its partners on a case-to-case basis.
“We will have to maintain a balance between revenues and risk when taking such measures,” said Lalit Malik, chief financial officer, who pointed out that there would not be any disruption in the company’s supplies. He said there could be some disruption in the short term in the kirana trade at the retail level as traders may postpone purchases to tide over the liquidity crunch.
The biggest impact will be on the lower middle class and the urban poor including maids, drivers and vegetable and fruit vendors besides neighbourhood grocery stores as they deal only in cash, said Anil Talreja, a partner at consulting firm Deloitte Haskins and Sells. He said such people would account for about 10% of the overall retail sales.
Meanwhile, organized retail and cashless online transactions could be the beneficiaries of this move. “However the reduction of cash-based transactions in the trade will certainly increase tax compliance and provide a more level playing field to the organised players,” said Marico’s Gupta.
For organized retail, close to 40% of the sales are card-based and this is likely to increase, following this announcement, said a retailer who did not want to disclose his identity.