How demonetisation has impacted key sectors
A look at the short- and medium-term impact across businesses, one month into the note ban
REAL ESTATE: REALITY HITS HOME
Developers and consultants say that home sales have slowed down significantly as consumers defer home purchases. Land transactions are at a standstill. Developers have deferred launches of premium projects while prices of land and properties, particularly luxury homes, are likely to drop in the next 3-6 months. Even secondary (resale) property markets sales have dropped by 50%, say brokers and analysts.
OUTLOOK: While the short-term impact is negative, developers expect things to return to normal over the course of the fiscal year. Some are hoping that rate cuts in the coming months would boost home sales.
BANKS: IN THE MIDDLE
IMPACT: Mixed over short-term, neutral to positive in the long term
A big surge in low-cost deposits will help banks in the short-term. It means lower cost of funds and better margins. The rise in balance sheet size will also help when credit growth picks up. As yields fall, owing to excess liquidity, banks stand to book treasury gains too. However, on the flip side, loan disbursements are stagnating. With production estimates reduced, there is no need for working capital either. Lenders will be hard pressed to find incremental credit demand even during the busiest of the seasons. And asset quality could worsen as the economy slows.
OUTLOOK: Non-interest income for banks would increase, but asset quality and credit growth will be hit in the short-term. Over the long term, demonetisation should benefit banks because they will likely attract a disproportionate share of savings and see greater fee income from electronic payment opportunities.
CONSUMER PACKAGED GOODS: NO DISCRETIONARY SPENDING
Consumers have cut back on discretionary spending. The whole business has been hit because it is largely dependent on cash. The traditional trade has been hit hard, especially wholesalers and kirana stores where transactions are largely in cash. Still, things are recovering; sales are now down only 20-25% on a year-on-year basis compared to 50% in the first week after the note ban. Rural sales have been hit more.
OUTLOOK: Third quarter numbers for packaged consumer goods sellers will be severely hit, despite the wedding and holiday season. In the long term, things should bounce back as the economy is re-monetized, and firms lower in the supply chain too move to non-cash payments.
CONSUMER DURABLES: SLUMP SALE
The market for white/brown goods still operates 80% on cash, thereby affecting volumes. Makers of durable goods are launching new schemes to tempt consumers to go cashless. Some of them are also extending discount offers and promotions such as waiver of processing fees and instalment schemes with delayed start of payments.
OUTLOOK: Sales are recovering, but still about a fifth less than a year ago. Sales in the third quarter will be hit.
ORGANISED RETAIL: SELLING NON-CASH
The sector is a clear beneficiary of demonetisation as consumers flock to large stores which accept non-cash payments. The nature of purchases at modern retail stores has changed. Consumers are stocking and purchasing more of daily needs and essentials such as fruits, vegetables and staples such as sugar and flour.
OUTLOOK: Sales were up by 15% on a week-on-week basis in the first week after demonetisation was announced at retail stores of Future Group and 25% compared to a year ago. This is true even a month later; sales continue to be higher by 25% compared to the year-ago period. In the long term, things will be positive as some of these new consumers will stick to shopping at large stores.
AIRLINES: FLYING ON ONE ENGINE
There has been a significant impact on inbound travel. Some airlines have seen bookings go down by about 16% in the week after demonetisation compared to the one before that. Discretionary travel has been the worst hit. Poor sales have forced all airlines to bring forward their airfare sales—usually reserved for the low season starting January. International traffic to West Asia and South-East Asia, especially by traders and low-wage workers, has been hit. Business jet operators say several charter flights have been cancelled as payments are often made in cash.
OUTLOOK: Because fuel prices have been low, airlines have been able to fill seats by offering cheaper fares but the real impact of demonetization will be visible in December, January and February when the final revenue and traffic numbers are released.
AUTOMOBILES: SKIDDING OFF TRACK
Demand has been hit. Most firms expect to see a decline in sales. In two-wheelers, where transactions are through cash, sales have taken a massive hit. Hero MotoCorp Ltd, for instance, sold 480,000 units in November, down from a monthly average of 600,000 units.
OUTLOOK: It will take a while for demand to improve, say dealers, but the good part is that enquiry levels have not dropped and that suggests it is a matter of time, may be three months, before the industry gets back on track.
TOURISM: THE ROAD LESS TRAVELLED
The most difficult period of demonetisation sits squarely in the busiest season for the tourism industry. There was a slump in hotels and associated services bookings in the first week after the currency withdrawal. However, the premium hotel segment has not seen any impact as bookings are mostly done in advance and online. So the hit has mostly been confined to the unorganized sector.
OUTLOOK: Hotel and travel bookings have made a slow comeback. Offshore travel has been negatively impacted as foreign exchange usage abroad is mostly in cash.
INFRASTRUCTURE: CORE IMPACT
IMPACT: Negative for now, positive in long term
Power demand and road traffic have been hit. Road companies faced short-term cash flow problems because they weren’t able to collect tolls, but things are limping back to normalcy. Wage payment to labour can be an issue for some time, which can impact execution in the short term.
OUTLOOK: The demonetisation and ensuing switch to a less cash-dependent system will aid transparency in the construction sector especially. With economic growth likely to be hit, the government will likely step in and spend more, which will result in increased revenue for the sector.
MICROLENDERS: BATTLING AT THE MARGINS
IMPACT: Negative over short-term, positive in long term
Microlenders had to defer cash recoveries for some time after the demonetisation was announced. Local lenders in parts of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala are trying to earn brownie points by telling people that their loans have been waived off after RBI gave microlenders a breather. Now, with cash withdrawal limitations, firms are seeing more cash transactions. Centrum Broking said that the repayment rate across India stood at 74% over 9 November to 25 November. While some microlenders have reported high collection rates, it will take a couple of things for things to get back to normal, says Sa-Dhan, a grouping of microfinance institutions.
OUTLOOK: Over the long term, demonetisation could pave the way for more people to turn to the organised sector for microcredit.
PHARMA: TEMPORARY DOSE
IMPACT: Negative for now, neutral over the long term
Pharmaceutical product sales likely fell 8-10% month-on-month in November with sales of medicines for acute diseases feeling the adverse impact of demonetisation due to lower patient turnout, although retail sales of medicines for chronic diseases rose in the first fortnight, as patients stocked up medicines by using old notes at pharmacies, which were among the few outlets accepting old banknotes. Offtake from wholesalers and stockists was sluggish and companies have extended the credit period by 7-21 days.
OUTLOOK: Owing to advanced buying of medicines for chronic diseases and seasonally weak December-March period for the industry, sales of drugs are expected to remain subdued. The impact of demonetisation on the sector is likely to be temporary as demand for drugs is largely inelastic but the growth rate in the coming months may be slower than the 9-10% witnessed in the first 6-7 months.
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