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Demonetisation and its impact on fashion Industry - India

From online Retailers to bricks-&-mortar have started to feel the heat of demonetisation, each has different effects. Ecommerce Industry is happy while offline retailers are adversely affected. The India is the biggest producers of cotton which helps Indian textile industry to boom but due to currency crunch farmers are unable to transport to the market. Cash-on-delivery is currently stopped by most of the online retailers.

Demonetisation has affected adversely farmers, households, small industries and businesses as transactions have become difficult due to the cash crunch in the market. By scrapping Rs. 500 and Rs. 1,000 currency notes in one stroke, which comprise 86 percent of the currency, cash flow has been sucked out of the system.  We can’t expect this condition to get resolved in next 50 days. We expect it to continue for next 8 to 9 month.

demonetisation

According to reports, by Mint and Bloomberg ratings agencies have cut their estimates of India's GDP growth in light of the move by the NDA government. Scrapping of Rs 1,000 and Rs 500 currency notes, in an attempt to curb black money, has led to a cash chaos, as banks are struggling to replace the demonetised currency.

"The currency demonetisation move could also dent consumption growth in Asia's third-largest economy, which would have otherwise received a boost from a bountiful monsoon. And, in the short term, the consumption that would have been fueled by black money will come to a halt," Mint mentioned.

Currency flow has been almost blocked, causing consumers to buy with caution. More than 60%  small stores are not functional due to unable to find workers/labours as labours are either standing at ATM line or they are out of cash. Textile Industry is staring at temporary job losses due to demonetisation, as production gets hit, especially in labour-intensive sectors like textiles, garments, leather and jewellery. As many as 4 lakh people, mostly daily wagers, may have either lost their jobs or shunned work temporarily due to the lack of payment so far, and the number is only going to grow if the cash crunch persists, senior industry executives said on condition of anonymity.

20-25% of the roughly 2.5 lakh workers in the leather industry have been adversely affected as they are daily wage workers. The industry has been hit particularly hard as 90% of the units are small and medium enterprises. In the jewellery sector, 15-20% of workers, who are paid daily, have been affected.

With the effect of money demonetisation the transport and production is getting affected adversely, the industry is not getting workers to carry on production and packaging and transporters to send to the destinations.

International Trade

The current chaos has affected the value of Indian rupees against the US. Dollar, the value of rupees is losing it after the announcement of this currency crackdown, we expect the adverse impact on Import and export of textiles and material which could slow down the manufacturing in India.

Production Slowdown

The demonetisation affected production adversely as due to currency crunch owners are not able to pay salary to employees. There is about 85% drop in transportation and 45% drop in production.  If the current condition does not change for the next 2 months we expect it to have more slowdown in production and increased inflation.

Buying capacity

A good economic condition helps to speed up buying and innovation through which we can say fashion trends change. The current condition has forced consumers to save money and there is chaos evaporating against the current economic shock. According to India’s ex-Prime minister Dr Manmohan Singh the adverse effect of demonetisation can cause high inflation, increased price of good. GDP to drop by 2 % if this continues for long. 

Demonetisation and Retailers 

With the slowdown of production retailers may bound to increase price of their items to cope up with the YOY revenue profit, operational cost. To balance the operational cost retailers may be forced to lay off employees and closing of some their outlets.

As employees are not getting paid timely, due to stalled production retailers won’t be able to offer seasonal discounts that could cost them to continue old styles. The consumer’s looking for new style will have to wait for longer. International retailers especially fast fashion retailers like Zara, H&M  might have to worry as they will be forced to give pre-seasonal sales discount to clear its stock fast.

According to US retailer Walmart, which is operational as cash-and-carry business in India,  a majority of its members are small traders deal in cash, hardly they accept online payment.

E-commerce giants Flipkart, Amazon, Snapdeal and Paytm have seen the rise in their business, most of the online retailers stopped picking up the cash on delivery.  Paytm which also runs its PayTm wallet accounted 200% growth in its business.

New update after one month of mammoth demonetisation, things seems like are  not going to settle soon. Initial assumptions were favoring eCommerce industry to be get benefited most but here things tell different story. New reports suggest as cash on delivery being almost 70% of the overall e-commerce business, the sector is likely to take a hit and lose almost 20% of their headcount in the next few months. Companies manufacturing and selling luxury goods would also be immediately impacted sooner or later.

Demonetisation hits garment manufactures severely

According to Hindustan Times, Of the 32 million people employed by the industry, one-fifth are daily wagers, who mostly get paid in cash. “While on one hand, slow sales increase the possibility of stock returns to manufacturers or affect the order book for the next year due to unsold inventory; on the other, slow sales and consequent liquidity pressures on retailers can result in stretched payments to manufacturers,” according to rating firm ICRA. Similarly, 20% of the 250,000 workers in the leather industry will also be impacted.