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Ever since 8th November 2016, when demonetisation left Rs 500 and Rs 1,000 currency notes bereft of any value, there has been speculation about its real impact on the Indian economy. Some are of the view this would sabotage discretionary demand. Others believe it to be just a deferral rather than destruction of the demand. Many others have no idea how it will play out and are just hoping for the best.
The impact on the economy will be seen in the months to come. The impact of demonetisation move on the Indian textile sector is worth taking note of.
First, the cash crunch led by demonetisation has weighed on textile sales. Textile retail showrooms and shops are witnessing a fall in their daily sales. This has in turn led to a rise in inventory levels and a fall in demand from retailers.
Second, the effect of demonetisation has intensified for textile industries. This is because the cotton price has increased by around Rs 2,000 per candy. As the cotton arrival to the market came to a grinding halt during the first 10 days after demonetisation, there is seen an increase in prices of cotton (used as the primary raw material by the textile industry). The rise in prices, coupled with cash crunch, has led to a fall in supply. The impact of this is loss of revenue, decrease in margins, and a fall in exports.
Third, the demonetisation move has increased the cost of doing business for the textile industry. This is seen as companies are not able to pay wages to workers. One should note that textile is a labor-intensive industry. One case in example here is the textiles cluster of Tirupur. As per an article in Livemint, the textile industry in Tirupur employs thousands of workers who earn their wages in cash. However, most of the factory owners are not able to pay their workers due to the cash shortage. This has led to many workers leaving their jobs and a 40% business decline for factory owners of Tirupur.
Going forward, the impact of above factors has meant a loss of clients for textile manufacturers. Many clients are levying penalty on manufacturers for the loss caused, while others are seen blacklisting them for a certain period or cancelling orders. In either of the case, there is a loss of revenue.
So there are many permanent casualties that the textile industry may face due to the demonetisation move. If the industry continues to grapple with above issues, one can expect further woes.
Also, the above scenario is just a part of the puzzle. While demonetisation is being hailed as the panacea to suck out the black money from the system, the move comes at a cost to the economy in many terms. As one of our latest editions of The 5 Minute WrapUp says, 'We have all been caught up in what is seen. There's not enough attention being paid on what is unseen.' The article explains some of the unseen effects of demonetisation on corporate profitability, real estate, interest rates, stock markets, etc.
The current economic situation in India is unprecedented. The need of the hour is competent, honest and unbiased views on the government's war on cash aka demonetisation.
We believe, Vivek Kaul has done an excellent job in this regard. You could do no better than read Vivek Kaul's insightful little report on this subject, Demonetisation: The Good, Bad and Ugly. It has some great information on how demonetisation could impact things like your investment and your property.
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