Mumbai: Consumers will postpone their small and large spends in the short-term following the withdrawal of 500 and 1,000 bank notes, hitting India’s consumption economy which is predominantly cash-based.

While spends on packaged consumer goods such as groceries will bounce back to normal within two-three weeks, large discretionary spends on auto, consumer durables and eating out may take longer, said experts.

“We do not see any major impact on general consumption as most consumers in India use small-denomination notes for small-value items and transactions and they can anyway exchange their current high-denomination notes with new ones at their banks," said a 9 November Kotak institutional Equities report.

“There would be a modest negative impact on consumption of high-value items as entities and individuals with large amounts of undisclosed cash (and income) focus on managing their finances rather than on spending in the short term," it added.

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In the short term though, there will be pain for everyone.

“The entire impact will be on the cash economy and more in general trade than modern trade," said Rajat Wahi, partner and head of consumer markets, KPMG India.

About 90%of India’s $600 billion retail trade is unorganized; about 60% of all trade in India is done in cash. In sectors such as gems and jewellery, this proportion of cash transactions is as high as 70-80%, said Bachraj Bamalwa, director, All India Gems and Jewellery Trade Federation.

When it comes to small purchases, it’s just postponement of consumption.

“The impact will have temporary effect in shopping and retail in the coming 2-3 weeks. This could be made up in the subsequent 2-3 weeks," said Adi Godrej, chairman, Godrej Group.

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“Demand for real estate and big-ticket consumption is likely to be hit most profoundly," said a note from Ambit Capital Ltd. “In the short term, this (scrapping high-value currency notes) is likely to cause economic activity to freeze with India’s black economy estimated to be 20% of the size of India’s GDP."

However, in some sectors such as gold and residential real estate, the government has made it mandatory to use PAN (permanent account number) for all cash transactions.

“It will take longer for these sectors to see demand recovery," said Wahi.

An auto analyst at a domestic brokerage, who declined to be identified, said the currency demonetizing will have a systemic impact on purchase of discretionary items such as cars and two-wheelers. “We don’t see the demand bouncing back after a month or so. The impact will play out at least for the next one year," he said. With lot more people starting to pay taxes, both income and wealth will get adversely impacted. This, in turn, will be a negative for items of discretionary purchase, he pointed out.

“Lot of Rs500, Rs1,000 notes are used in two-wheeler purchase so there will be a disruption till RBI (Reserve Bank of India) pumps in enough cash," said Eric Vas, president of the motorcycle business at Bajaj Auto Ltd. Almost half of two-wheelers sold by Bajaj are bought on credit; the rest is through either cash or cash instruments like cheque or demand drafts.

This is the month in which lot of crop money comes in as the harvest reach the markets, said Vas. Therefore, rural auto sales are typically high in these two months. Consumers’ ability to pay and buy any product now will be impacted. It will postpone sales till enough notes come into circulation.

“This is going to be a wash-out quarter for automobile companies," said Nikunj Sanghi, a dealer for Mahindra and Mahindra Ltd and HeroMoto Corp Ltd based in Alwar, Rajasthan. The move, he said, will have a greater impact on four-wheeler sales. The margin money paid for purchasing cars, particularly in tier I and tier II cities, is paid in cash, he said. Even road taxes are paid in cash. “Considering that it accounts for close to 8-10% of the value of the car, it is going to be a big impediment in car purchase," said Sanghi.

Cars and two-wheeler sales in India have been expanding at a brisk pace. Passenger vehicles in September rose 20% to 2.78 lakh units, the highest in terms of monthly sales in more than four years while sales of two-wheelers grew 21.59% over the year-ago period to 1.86 million during the month, according to auto industry lobby Society of Indian Automobile Manufacturers or Siam.