Severe slowdown

Print edition : December 23, 2016

A unit in Mumbai manufacturing components for industrial pipes. Photo: SHAILESH ANDRADE/REUTERS

Small manufacturers in Maharashtra who operate on cash may close shop. This will lead to retrenchment.

SEVERAL industrialists who had initially stated that the demonetisation decision of the Narendra Modi government was a positive move and would be beneficial for economic growth in the long term now admit that the slowdown in consumption in view of the liquidity crisis is beginning to take its toll on manufacturing. This, they say, will have a cascading effect and hurt several areas, particularly employment.

Frontline spoke to a few large and small industrialists to obtain their views on what demonetisation means for industry. The question was met with a range of opinions, including whether the move is worth it. Indian industry and corporate India was supportive of the demonetisation drive in the first few days of the announcement on November 8. The position changed as the weeks unfolded. While most of them agreed that the short term would see a lot of pain, they said the long term was uncertain but the economy should settle down. Given that demonetisation was here to stay and there were few options available, industry was resilient enough to see this big move through, they said.

Sunil Mehta, who manufactures power generators, said: “There are plenty of reports and predictions. I don’t believe anyone has any idea or can predict what the next few months are going to be like. We are already seeing a massive drop in demand in consumer goods. Once you have sucked out more than 80 per cent of the cash liquidity from the system and have not replaced it quick enough, it is bound to start showing negative trends. When consumption drops, then you will see a huge reduction in industrial manufacturing as well. It has a spiralling effect and we are experiencing the beginnings of that.”

Mehta said industries were dependent on each other and a slowdown in manufacturing would hit the economy. “For instance, we supply generators to construction companies. With no money in the system, real estate has been hit, and therefore construction will slow down. Similarly, the cement sector caters to construction and it will see a downturn as real estate has been impacted. We supply large industry with captive power plants. If it goes slow, we also reduce production. In the past week we have slowed down by 20 per cent.”

When the gross domestic product (GDP) falls or shrinks, it will have a severe impact on economic growth. Is the move worth the so-called tax windfall the government is hoping to gain by demonetisation? “Is the cost of this upheaval going to be beneficial in the long term? I hope so because what the government has done is irreparable.”

The steel manufacturer Navin Aggarwal said since there was no precedent of demonetisation in recent times it was hard to estimate the impact it would have on Indian industry. However, he said: “The short term will see a lot of pain, especially to industries sensitive to demand, mainly fast-moving consumer goods [FMCG] and transport.” Aggarwal said while most transactions in their unit were through bank transfers and cheques, cash, especially in large sums, played a part when steel merchants came to purchase material. He said: “Processes have to start changing to bring in transparency. We have installed a credit card machine on our shop floor. But then how do we charge Rs.4 lakh on a card machine? The banks will have to be extremely well equipped to deal with large businesses. It is interesting though to see the shift towards a cashless market. There is some feeling of empowerment when a merchant pays via card. Of course, he will have to account for every penny, which was not the case before.”

When it comes to employees’ salaries, Aggarwal said established industrial units made cheque payments, but employees would face the same kind of inconvenience people were dealing with across the country: inability to withdraw cash and get change for higher denomination notes, and long queues outside banks and ATMs. He said if the slowdown continued there would be a percentage of retrenchment. “This is the unfortunate aspect of any slowdown. It is human resource that will face the brunt of the malaise.”

“The status of the automobile industry in a country is globally recognised as an indicator of growth,” said Gautham Patil (name changed), an automobile component manufacturer in Pune. “The immediate impact of demonetisation was a fall in automobile sales. This will have a downstream effect on all ancillary and small component manufacturers. When an economy is going through a tough time, automatically the car industry will see a decline. No one buys cars or two-wheelers when times are rough,” he said.

Two-wheeler sales dropped by almost 50 per cent since demonetisation, he said. This drastic fall is expected to recover only by 2018. With a drop in sales small auto part manufacturers, who operate on cash, may close shop. This will lead to retrenchment.

“We have reduced the shift timings in the factory because production has slowed down,” said 35-year-old Raju Dutta, who works in Patil’s unit. “We have been assured of our salaries. I took a half day leave to stand in the queue at the bank. I am not afraid of losing my job. Our boss told us not to worry.”

Patil said they tried to keep the morale of their employees up. “We don’t know what the future has in store. But I think everyone is in the same boat. Workers, employers, both understand that.”

An industry analyst said: “Big discretionary spending has stopped and that will have a cascading effect on industry. It will take at least six months for confidence levels to return.” An expert in micro finance, he said the informal and unorganised sector took the biggest hit. Workers employed by factories or businesses can repay their loans through banks. Those who pay in cash and are unable to access it will have a hard time for a few months.

An industrialist from one of the country’s oldest business houses, who manufactures pumps and transformers in the Pune industrial belt, said the impact was not so much on big industry as they were in a position to bear the slowdown for a short period. However, “companies whose end payment is cash, such as FMCGs, are in for some trouble. Indians are recent converts to consumption. They have begun to go back to need-based buying. This will have an effect on industrial units that are manufacturing consumer goods.”

The immediate impact, he said, would be felt on lower value goods. The larger industry is anyway driven by bank transactions and white money.