New Delhi: Last year, consumption was India’s big growth story. Indian consumers were ranked by pollsters as the most confident spenders, and India was, for a spell, the fastest growing major economy, making it an attractive market for global brands.

Then came Prime Minister Narendra Modi’s war on black money in the form of the 8 November invalidation of high-value banknotes that took out 86% of the currency in circulation by value. Indian consumers, used to paying for everything, from mobile phones to used motorcycles, with cash, were suddenly left with nothing to spend.

An abrupt slowdown in spending because of a cash crunch that lasted several weeks hit consumer-facing companies that reported a sharp decline in profits as sales dropped in the quarter ended 31 December 2016. To be sure, the lingering impact of demonetisation was felt in the subsequent two quarters as well

“Demonetisation had a significant impact on our India business in Q4. It hit individual retailers significantly. And, there are still some lingering effects," Indra Nooyi, global chief executive officer of American food and beverage maker PepsiCo Inc., said in an investor call on 15 February 2017.

Pepsico’s rival Coca-Cola Co. also highlighted the impact of the ban on Rs1,000 and Rs500 banknotes. James Quincey, at that time the CEO designate of Coca-Cola, told investors in an earnings call on 10 February 2017, that “demonetisation in India effectively drained liquidity, but will ultimately help companies in the organized sector".

Hindustan Unilever Ltd (HUL), India’s largest packaged goods company, reported a 4% drop in volume during quarter ended 31 December 2016.

Dabur India Ltd’s sales in the same quarter dipped 6%. “The wholesale trade was severely impacted by demonetisation, and we had witnessed a massive amount of destocking across the entire trade channel," Dabur India chief executive officer Sunil Duggal said in a statement then.

The government said the impact of demonetisation on consumption was temporary. But it wasn’t until the September quarter of fiscal 2018 that signs of a recovery in consumption emerged. During the quarter ended 30 September 2017, HUL reported a 4% increase in sales volumes and Dabur posted a 7.2% rise.

To be sure, consumption received a boost from festive demand in the September quarter, leading to a bounce back in rural demand as well. Both Coca-Cola and PepsiCo reported a sales recovery. Coca-Cola’s sales volumes rose 6% in the September quarter. In an earnings call, Quincey said Coca-Cola’s India business “successfully moved past the recent difficulties related to demonetisation and implementation of a goods and services tax (GST) during the first half of the year".

PepsiCo’s Nooyi echoed the sentiment. “In the South Asian subcontinent—India, Pakistan, Nepal, Sri Lanka, we face the normal upheavals from GST, the demonetisation—or remonetisation, I should say. We are through all that now. And hopefully, the business will start to steadily recover in India,"Nooyi said in an investor call last month.

Other consumer goods companies also indicated an improvement. “The aftermath of demonetisation lasted till the first quarter of 2017. The consumer durable industry de-grew by 40% in November and 15% in December of 2016 and by 3% in January 2017. There was no growth recorded for the months of February and March but sales picked up in the month of April 2017. However, the recovery of the demand for consumer durables from the effects of demonetisation must to be discussed in conjunction with the impact of GST, which started to trickle in since May," said Kamal Nandi, executive vice president and business head, Godrej Appliances.

Consumption revival took more time than expected because of the implementation of GST, which required massive destocking of inventories in sectors including packaged consumer goods and durables in the run-up to 1 July, when the new indirect tax was rolled out.