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Spotlight | January 2017

DEMONETISATION - Shaken, but not out!

Cash crunch is very much the talk of the town today! Though demonetisation is a bold decision taken by the Government, it has left a sudden jerk in the entire textile chain. Textile retailers faced the immediate impact and other intermediaries in the value chain are facing it now with a lag of a few weeks with reduced orders due to slower offtake.

Speaking on the impact of demonetisation, Sanjay K Jain, Managing Director of T T Limited and Chairman of NITRA, says, “Demonetisation impact on textile industry is going to be deep and impactful. The domestic fabric and garment industry is 70 per cent unorganised and fragmented. They have almost come to a standstill due to shortage of working capital, lack of currency to pay workers and also slow down in receipts form customers. This has in turn impacted the organised yarn and fabric industry as they were suppliers to the unorganised segment. Further the winter sales have been impacted by 30 to 40 per cent leading to stock accumulation at all levels in the chain – this means capital blockage for one year and this will impact summer production as the funding capacity of manufacturers will be badly hit.”

He added, “However the organised sector will gain eventually, once things settle down and demand comes back to normal level in three to four months – as they being better banked will be able to produce using their infrastructure. Unorganised segment has to realise the writing on the wall and quickly start working towards reorganising themselves.”

Laila Tyabji, Chairperson, DASTKAR, said “I’ve worked hard and I’ve saved some money. I didn’t keep it in almirahs or in the trunk under my bed. I put it in the bank. But now I can’t use it because the Government says they’ve run out of notes so I can only take out a little bit. So I can’t pay the artisans who depend on me. And I can’t buy raw material to make new stock. Nobody in my village will take a cheque. They don’t have spending money too. I understand Sarkar wants to catch the big people who have hidden their black money and make them put in the bank. But why can’t I take out my own money when it IS in the bank and I need it?”

This comment of one carpet-maker from rural Mirzapur was echoed by many other craftspeople at the on-going Dastkar Nature Bazaar. Demonitisation has hit the small scale informal sector in multiple ways. Used to an environment where payments were made either in cash or bearer cheques, they now cannot now purchase raw material, pay their workers, or build up stock for future sales. Meanwhile sales and orders in what used to be their peak selling period have also dwindled as all over India people are feeling the pinch and are reluctant to spend money on non-essentials. For craftspeople in Kashmir, Kutch, Rajasthan, Agra and other tourist hubs, the fall in tourism has further added to their woes. Devji Valji, a veteran shawl weaver from Bhujodi, says that visitors to the hugely popular Rann Festival are only 20 per cent of the usual numbers this year.

In rural areas with a neo-literate population, and only spasmodic electricity, where getting a mobile signal is a matter of luck, digital transactions are still a fantasy.

In Varanasi, the Banarsi silk sari trade depends on a complex interlinked hierarchy of multiple skills and processes, ranging from spinning and processing the yarn, to selling it to traders who in turn pass it on the bigger weaving families, who pass it on to smaller artisans for weaving, and from there for finishing, finally sending on the finished sari to middlemen and large stores. One broken link in the chain disrupts the livelihoods of thousands. “Cash and trust kept the wheel of the Banarsi sari business turning for centuries,” said one master-weaver, “It didn’t matter whether we were Hindu or Muslim, trader or weaver. We all depended on each other. Now there is no cash, and no business, and therefore no trust either.” He added, “Even when we pay the weaver by cheque, what use is it if he cannot withdraw the money? When we have to pay a weaver for a sari costing 20,000 rupees, what good is a withdrawal of Rs 2,000?

The strain of dwindling business and shortage of cash has resulted in some curious anomalies. Some craftspeople have lowered their prices in the hope of improving their sales. However, costs of raw materials have actually gone up, as dealers have increased prices in order to compensate for longer periods of credit. In Bhagalpur the cost of tussar yarn went up by a 1000 rupees, reported one group of sari weavers.

Archana Kumari, a young sujni embroiderer who runs her own small group in Northern Bihar, was a couple of days late to the Bazaar last month, as she was trying to organise cash for both her family and her embroiderers. One bank serves 15 villages in the area, and it had no money. It took her five days of commuting and standing in queues before the money finally arrived. In Beawar in Rajasthan, the local bank now issues tokens and informs people when their turn arrives. But the amounts released still don’t cover actual production costs for the leather and durrie artisans, let alone the costs of feeding a family.

Craftspeople are stuck in a hard place, unable to be pay, unable to sell. But nevertheless they remain optimistic. Hoping for better times, hoping that their present pain leads to a better future.

Garment sector: The major hit

The garment industry has been going through a crisis for over a year because of drastic decline in demand both in domestic and global markets. Demonetisation has at least temporarily added to their woes in no small measure. Several units have had to scale down production and many others are on the verge of closure. Small retail outlets in rural areas have seen a huge reduction in their sales. The only hope of the industry is that viable alternatives to genuine cash payments will get established without much delay.

Rahul Mehta, Managing Director, Creative Lifestyles Pvt Ltd, feels that reactions have been on expected lines – with Modi supporters eulogizing the PM for his boldest move yet, and opponents tearing into him for creating an unholy mess! “The reality lies somewhere in between, as is usually the case,” he says.

He further adds, “The withdrawal of high denomination currency notes of Rs 500 and Rs 1,000 is sure to substantially clean up business transactions and tax administration in the country. The follow up actions being taken by government for digitalising the economy will complement the positive effects of demonetisation. Currently, a substantial part of business activities in the country is based on cash payments and many of these payments are outside the radar of the tax administration. In addition to the loss of revenue for government, such activities also affect the cost competitiveness of law abiding units in the industry that keep all business transactions transparent and pay taxes in full. Withdrawal of high denomination notes and digitalisation of business transactions will go a long way in remedying this situation.”

That said, the demonetisation has seriously affected a whole lot of production and sales, especially in the SME sector and in rural areas, temporarily. It is wrong to assume that all cash transactions are illegal or there are viable alternatives to all cash transactions at present. Digitalisation should have preceded demonetisation and facilitated cashless transactions at least substantially, if not fully. Now, until the process of enabling cashless payments get completed - and it can take several months - small businesses and poor consumers will continue to face serious problems. This is especially so in the case of the garment industry, since it is mostly in the SME sector where service providers like transporters and input suppliers and even many of the workers will have to be paid in cash until they all get enabled to receive cashless payments. There is a large volume of garments that get sold in small shops and pavements and these are manufactured in small, often cottage industry type, units. Digitalising such units and their sales will be a real challenge and will take months to be completed, even if it is assumed to be feasible.

“Definitely it has created a negative impact on yarn market and machinery manufacturers and feels that this impact will be for a short term period only. The bigger companies will have less impact on the topline as it is already under organised sector and payments are effected through banks. The most-affected will be the unorganised sector as they are yet to change to digital cash/online transactions. As the demand reverts back to normal over the next few months with expected improvement in liquidity, this impact will be neutralised and the economy would not suffer for want of currency,” says Dhandayuthapani (CD), Director of Coimbatore-based MAG Solvics.

“The overall impact on the sector, however, is expected to be limited as one third of the Indian textile industry is estimated to be export focused,” says CD Dhandayuthapani.

M Senthil Kumar, Chairman, The Southern India Mills’ Association (SIMA) has highly appreciated the bold initiative and firm stand taken by the Prime Minster to demonetise currencies of high value. He has stated that it might take at least six months for the textile industry to reach normalcy in its performance.

SIMA chief has stated that the Association has sought for the following remedial measures to enable the industry to mitigate the challenges posed by the cash crunch created by demonetisation.

Thanks to the demonetisation, the Indian textile and apparel industry has lost 30-40 per cent of business. Apparel sale in domestic markets had stopped in the initial days and recovered gradually. Consumers continue to face liquidity tightness, resulting in deferring of purchase. Hence, further recovery might take some time. “The effect on denim sales is even worse. While exports are not affected, the decline in domestic retail sales would definitely hit sales and profit,” says RK Dalmia, Chairman of The Cotton Textiles Export Promotion Council.

RS Jalan, Managing Director of GHCL, feels that this decision will give to the Indian economy in times to come will eventually address all the economical problems and will overshadow the current troubles and hence better our GDP, improve taxation schemes and remove fiscal deficits. He added, “The textile sector is also responding well to this decision and the businesses are gearing themselves up to revel in a prospering economy in times to come. Such effects like consumer spending going down, inventories piling up and delay in arrival of cotton in the market are very short term.”

Jalan added, “The long term effect of such an enacted policy is going to pay rich dividends to the country. It is an effective way to increase tax collection and boost our country’s economy which will also increase the textile business. People have responded well to this situation and they are following the suit by going cashless, opening bank accounts and resorting to electronic payments etc. According to reports, the slowdown in cotton arrivals and resultant marginal up-tick in cotton price post November 8, 2016 is a short-term phenomenon, which has already started to correct, as farmers have gradually started accepting alternate modes of payments. Further, the yarn manufacturers are expected to be insulated from this mismatch, given the sizeable inventory maintained by them on an ongoing basis. Once this chaos gets settled, the labour intensive sectors are likely to benefit more with people opening bank accounts and transactions happening in recorded manner.”

In ICRA’s assessment, the impact of demonetisation is likely to be the most severe for winter-wear retailers and manufacturers focused on the domestic market, who witness 60-70 per cent of their annual sales during the period October-February. Though from the manufacturers’ end, the shipments typically take place by September-October, pressure on sales in the retail space during the subsequent peak season can indirectly affect manufacturers. Tirupur Exporters Association (TEA) welcomed the Government’s move, but requested to allow withdrawal of higher amount, based on the average amount they have been regularly withdrawing from the banks for the past six months, which would help them to meet the payment of weekly wages and other sundry expenses without having any difficulties.

Dhandayuthapani adds, “In South India, textile labour force consists of migrants and many of them don’t have bank accounts. The payments to them are still to be made in cash only and as bankers are burdened with heavy load. But now the time has come to open up bank accounts. I can feel personally the retail sales are slowly recovering. Cities have somewhat recovered and rural areas has to catch up. The Government should ensure that digital payments are implemented in these areas also to make the cause a successful one.”

Meanwhile, the apparel sector, however, has hailed the overall demonetisation scheme as good for the long term, on expectations of transparency in the entire value chain. Many handloom, powerloom and cottage fabric manufacturers continue to operate largely in cash. Any business with retail connections generates unbilled amounts; in garments, a large section of retailers at the bottom of the pyramid deals largely in cash, without generating bills. Demonetisation is expected to curb all unbilled sales.

“There has been a relatively low impact on the rupee against what was anticipated. However, even a decline in the rupee forex value would have a positive impact for textile exporters as it would lead to greater margins on export orders in progress and allow for better price competiveness in the international market”, says Dhaval Dadia, Managing Director, DCC Print Vision LLP.

Prmod Bafna, Creative Director, Warp & Weft, a premium fabric gallery in Bangalore and a part of one of the respected names in the apparel industry, said “Domestic market sales dropped drastically, which led to a dampening business season. While this will recover, we’re not sure how long the market will take to bounce back from this, as premium buying has always been linked to cash flow directly, and it’s still not very certain how many months this will take until people are more comfortable, and also linked to the fact that there would be no more surprises. The premium and luxury segment are not going to be on anyone’s immediate list for some time. We would hope the government is able to spring back form this, and provide businesses a stable operating environment, which has been largely missing.”

Sanjiv Khandelwal, Co-founder, XSTOK.com said, “Trading had come to a complete standstill in the initial days and it’s only in the last few days when there are signs of some activities. In addition to the trading market, the supply side has also been adversely affected as textiles is a highly labor-intensive industry. Companies are finding it difficult to pay wages to workers and not able to procure raw materials. Overall cost of conducting business has increased resulting in mills shutting down or delaying production.”

He was a bit optimistic about its impact in the long term. He added, “The initial impact of demonetisation has been negative but overall, depression is only temporary and the markets are sure to bounce back as the demand exists but currency doesn’t. The sudden cash starved end consumer of India is the key and once the currency situation normalises, the daily business shall be conducted as is.”

Khandelwal added, “There is a considerable scope for the Indian textile industry to adapt and grow. We believe, this is much needed catalyst for the industry to transform itself and enter the 21st century. The cashless and cash transparent environment is sure to boost online sales.”

Vaibhav Jain, CEO, Deco Window, feels that demonetisation has a short-term and a long-term issue in the home furnishing industry. He says, “In the short term, people are left with very little cash to spend that can barely take care of their immediate survival needs like food, etc. Even people with a little extra cash are consciously spending their cash definitely not on furnishing their home.”

Vaibhav feels that for most of the furnishing industry, is a necessity and within 6-8 months we should see a stabilised market. He adds, “Demonetisation has its own pros and cons on the industry but I am sure the industry will sail through this phase as well. This will not last forever and we are looking forward to rise in demand of our products.”

Dhandayuthapani feels that the Government should use the money to give incentives to the textile industry as this is the second biggest employment providing segment. He adds, “Also we have to plan for the GST regime and considering the inherent nature of textile industry, it is justified to keep the sector in the lowest slab of the GST. The positive impacts of GST on overall economic growth along with incentives would make the industry more competitive. Textile industry is extremely happy to witness continuous focus and support by the government to various segments of textile manufacturing sector and industry is confident of creating huge employment opportunities in the years to come and textile sector will be the ideal example for the success of Make In India.”

Rahul Mehta concludes: “With the advantage of hindsight, one can say that the intentions were good, but the execution could have been better. The immediate objectives may not be met to the extent hoped, but it is a step in the right direction – provided it is followed up with several other decisions and actions. Will the Government come up to expectations? Only time will tell.”

- KARTHIK MUTHUVEERAN

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