A customer pays for her purchases at a stall in the Colaba Causeway in Mumbai, India (Photographer: Kainaz Amaria/Bloomberg)  

Businesses Feel The Demonetisation Pinch: Supplies Hit, Wages Delayed 

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Small and medium sized businesses across the country are struggling to cope with lower consumer demand, fewer supplies and pending salaries on account of the demonetisation of Rs 500 and Rs 1000 currency notes, despite the government’s move to enhance the cash withdrawal limit to Rs 24,000 per account per week from Rs 20,000 earlier.

Representatives from the Raipur Iron and Steel Trade Association in Chhattisgarh told BloombergQuint that the market is working at one-fourth its capacity and traders stand to lose about Rs 40 crore over the next one month. Raipur’s traders are not alone.

Demonetisation has resulted in demand drying up in the clothing retail market which will hurt retailers as well as manufacturers in the short term, said Rahul Mehta, President of the Clothing Manufacturers Association of India.

Manufacturers are scaling back their production targets for the season in anticipation of subdued demand. However, since the industry works on a longer concept-to-market cycle and businesses have enough raw material, the reduction is unlikely to be high. Instead, manufacturers will cut expenditure as much as possible to save on cash, Mehta said.

Transport Business Worst Hit

Transporters are among the worst affected by the cash crunch as trucks require a constant supply of cash to pay for fuel and other on-road expenses. The industry has therefore virtually come to a halt, said Naveen Kumar Gupta, Secretary General of the All India Motor Transport Congress headquartered in Delhi.

Gupta said that 40-50 percent of the business has been paralysed after the demonetisation announcement on Tuesday.

The main issue is that 80 percent of our operation costs are cash based. With the limit of Rs 24,000 per week, not a single truck can move. Those who have 5-10 trucks need a commensurate amount to run these trucks but that’s not happening.
Naveen Kumar Gupta, Secretary General, All India Motor Transport Congress

Explaining the plight of drivers stranded on the road for want of cash, Gupta said that many truck drivers are getting fleeced by roadside eateries.

“They have to pay for fuel and food in cash on the highways. Old currency is not acceptable at the eateries, drivers are starving on the road. Some people are paying Rs 500 to get food worth Rs 100 on the road,” Gupta said, adding that road transport is a big contributor to the GDP (gross domestic product or economic output) and the economy could come to a halt if the transport industry is disrupted.

“Raw material is not reaching factories, essential commodities are not reaching consumers and it’s going to have a cascading impact on the economy,” he added.

Also Read: PM Modi, Your Team Blundered In Separating Demonetisation From VDIS

No Money, No Labour

Many small businesses depend on cash payments and are finding it difficult to pay daily or weekly wages. Shubhojit Ghosh, director of Continental Engineering Works, a Mohali-based electrical equipment manufacturer in Punjab. Ghosh said that shortage of cash has turned into a “huge issue” for the company which relies on contract workers for its manufacturing operations.

We need cash for basic level labour payments and that’s a huge issue. Some of them (labourers) are paid weekly and that requires cash in high denomination and that’s not available.
Shubhojit Ghosh, Director, Continental Engineering Works

“The wholesale market has been impacted badly because of the cash flow crunch so raw material supplies aren't coming in. We are forced to procure components for the next six months to make sure that our suppliers accept cheques and don't deny us the goods,” Ghosh said.

Ghosh is already suffering the impact of slowing transport services.

“If we have the goods ready, we can't transport them on time to the markets. We are expecting three to four months of slowdown at this point of time. At this point, we aren't sure how much the revenue is going to be impacted but there's going to be a slowdown in production since there are no parts or labour available because of the lack of cash. Everyone is asking for Rs 100 notes which are not available in the quantity that we need,” Ghosh said.

Also Read: Government Raises Withdrawal Limits To Ease Cash Crunch

Construction: Labour Woes

The construction industry is also suffering a double whammy, worried that the lack of cash will subdue demand even as construction work is hurt by the non-availability of labour.

Jayant Sheth, Proprietor of Mumbai-based Struct Mast Engineers said overall efficiency has gone down at his firm. “The problem of withdrawing cash from the bank for every small need means that employees are spending many hours at the bank,” Sheth said. “Our business is also suffering because we employ a sizeable number of highly-skilled labourers on a casual basis who are paid in cash. We can’t file for certain tenders because clients want to be paid in cash.”

Sheth said his firm pays migrant labourers four advances a month as expense. These payment happen typically in cash and shifting to cheque payments is tough.

We are offering cheques but many of them don’t have bank accounts here while some don’t even have them at all. They don’t want cheques so they are unwilling to come to work which is a severe impediment to our business.
Jayant Sheth, Proprietor, Struct Mast Engineers

Sheth said business will be impacted, but the full extent can only be judged only when the government solves the liquidity problem.

“The business is going to be hit on all sides if the position continues and I am hopeful that it will ease by December 30. The government is trying on its part too but no business can’t survive without cash,” Sheth said.

Also Read: War On Black Money Or Peace With Magenta Money?

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