Impact of Demonetisation on India's Exports - Chart Of The Day 24 December 2016 - Equitymaster
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Impact of Demonetisation on India's Exports
Dec 24, 2016


Have you been to Tatanagar or Batanagar?

If you have, you would know that these towns are known by their factories for a reason. The workers at Tata Steel and Bata factories account for the majority of the population. And the prosperity of these towns is based on the growth and profits of the respective businesses.

These two are the most iconic factory towns of India. But there are dozens of others that house India's largest textile, auto and gems and jewelry manufacturing hubs. These towns are proof of India's post liberalization manufacturing prowess.

India's manufacturing sector had an inflection point post 1991 reforms. The megatrend unleashed tailwinds that were to drive businesses for decades. The factories offered jobs to the local community and attracted skilled workforce across the country. The tailwinds therefore did not just help the businesses scale new heights. But they also multiplied the earnings and consumption power of their employees. The economic benefits compounded over time.

The IT services sector was still at a nascent stage. So the best talent in India aspired to go to the factories.

The golden age of India's manufacturing, however, did not last too long. The sector lost its glory within a decade. And Information Technology became the go-to business for entrepreneurs. Jobs moved from factories to large IT offices. And increasingly the blue collared workers found fewer employment opportunities.

Over the years, the employment scenario in India has come to be a catastrophe. The few manufacturing businesses that are thriving seek automation. IT business themselves will hire in far lesser numbers. Therefore, the only way to create more jobs, is to incentivize Indian and foreign companies to manufacture more in India.

PM Modi's Make in India seemed like the perfect plan. It was also timed to perfection as companies sought to move away from China's labour atrocities and poor quality. Make In India could have been the next leg of 1991 reform tailwinds.

Unfortunately the perfect plan remained on paper!

But all was not lost. India's export hubs still housed a whole host of mid and small sized manufacturing units. Towns like Tirupur, Kanpur and Surat employed millions in the textile, leather and gem factories. They accounted for the lion's share of India's exports.

If not Make In India, at least Made in India was still thriving.

The demonetization on November 8th came as a big blow. The small business were not as prepared for the change as their larger counterparts. The entirely cash dependent factories found it impossible to go cashless within days. Some factories shut down. Others laid off temporary workers. Migrant labourers moved back to villages on loss of livelihood. The factory towns saw a sharp drop in consumption.

India's export growth has nosedived in the month following demonetization. For now we look at it as a temporary crisis. A quick resolution to the currency crisis may evade the collapse of Made In India.

But that's not all!

Resurrecting India's factories, big and small, is now more critical than ever. Helping them create and retain jobs has become an economic and social necessity. There is lots to be done to help Make in India and Made in India be the tailwinds for next few decades.

Budget 2017 may be the last chance to do so.

Meanwhile, we are keeping our ears to the ground. At The India Letter team, following the cues of megatrend tailwinds is core to our management meetings. We consciously make it a point to visit factories and meet management of companies in niche business, at obscure locations. We obviously do not expect all of them to make it to our recommendations! But the few that do are a potential goldmine of sorts.

Data Source: SBI Ecowrap

This Chart Of The Day was published in The 5 Minute WrapUp - After Make In India, Collapse of Made in India?

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