NEW DELHI, India — Retailers are feeling the pain of Prime Minister Narendra Modi’s decision to scrap large-denomination rupee notes.
While retailers and e-tailers saw a big jump in sales in the 24 hours after the prime minister outlined his plan on Nov. 9 to scrap 1,000 and 500 rupee notes (worth about $15 and $7.50 at current exchange), the subsequent weeks have seen major disruption. India is 68 percent invested in cash, with credit cards only recently beginning to make inroads.
Left with only 100 rupee notes, and a promise of soon-to-be-issued 2,000 rupee ones, consumers initially panicked and began buying jewelry and luxury fashion and beauty items. Investments in gold soared. More than two billion rupees, or about $3 million, were spent that first evening after the announcement in Mumbai’s Zaveri jewelry bazaar alone on Nov. 9, according to traders.
The government said on Nov. 11 that all sales by jewelers would come under scrutiny as well as the ticket size of purchases. Income tax raids on jewelers followed.
Meanwhile, stuck with wads of worthless money, and no cash to spend, customers flocked to banks and automatic teller machines. Many machines ran out of money.
As consumers struggle to come to grips with the new monetary regime, the lack of liquidity in the economy has slowed all transactions, with retail sales falling sharply. And retailers are bracing for even steeper declines.
“In the next two to three months I believe that sales will fall 20 to 50 percent,” said Vivek Bali, business director of Sephora India. “It’s hard to say how it’s really going to go — a lot of our customers use credit or debit cards already, but a lot of shopping gets done in cash.”
Other retailers echo Bali’s estimates, that there would be at least a 20 percent drop in sales over the next three to six months and are looking at balancing their supply side issues. Describing Modi’s decision as a “bold initiative,” Christopher Woods, managing director of CLSA Ltd., the Asia-based equity broker and investment group, said, “The question is, how long will the pain remain? Six months or one year?”
Adi Godrej, chairman of the Godrej Group, praised the monetary initiative and the long-term measure, but noted that “the new cash injection has not been sufficient; there is going to be an effect on consumer offtake in the short term.”
For e-tailers, which work largely on a cash-on-delivery model, the situation is tense. Many — like Amazon, Flipkart and Myntra — reduced, then completely stopped cash on delivery before eventually reinstating it. They’ve said that delivery agents have been trained to help customers who want to opt for card payments.
“As an interim measure, we have restricted new cash on deliver orders to 2,000 rupees [about $30] to make it convenient for buyers and delivery personnel,” a spokesperson for e-tailer Snapdeal observed.
Analysts said the inability to make cash payments has overwhelmed any idea of shopping and that previous orders made online were canceled due to lack of available cash. They noted that some firms, such as mobile wallet players Paytm and MobiKwik, also used the opportunity to urge consumers to switch to mobile payment systems.
“We expect a 10 times impact with this policy change,” said Upasana Taku, cofounder of MobiKwik, adding that its earlier plan of processing $1 billion in payments by 2017 had now changed to $10 billion in the same time frame.
Retailers observed that consumers also are likely to reconsider future purchases given the government’s announcement that the first 250,000 rupees, or $3,730, deposited in banks would be tax free, with anything above that taxed at 200 percent. There will be investigations into the source of cash and whether it is commensurate with tax returns, leaving customers more tight-fisted, and careful about their overall spending.
Modi has predicted that about 10 trillion rupees, or $149 billion, out of 17 trillion rupees, or $253 billion, in currency notes will get channeled into India’s banking system as a result of demonetization. While there has been growing political and business criticism of his move, many retailers, corporate leaders and Bollywood spokespersons support his policy, helping him win popular support.
“Change is not always comfortable. Everyone will find their way to embrace it if they focus on the larger picture,” said Aishwarya Rai, who is a leading Bollywood actress and ambassador for beauty brand L’Oréal Paris, praising the demonetization decision as a “strong move” in a larger plan to wipe out corruption.
But others, including hundreds of smaller retailers across the country, are worried. The jewelry business, for example, has become completely paralyzed across India. “It will take some time before the business picks up,” said Bachhraj Bamalwa, director of the All India Gems and Jewellery Trade Federation.