The Strategist

India's currency reform results in thousands of employees sacked

12/12/2016 - 14:27

Decision of the Indian Prime Minister Narendra Modi to ban a significant portion of cash in the country (so-called demonetization) hit the Indian economy hard.

Biswarup Ganguly
Biswarup Ganguly
Here’s, for example, Foxconn. The manufacturer decided to lay off 25% of the total labor force since the company's sales fell by 50% after demonetization. This, in turn, forced the company to halve production.

Social unrest and loss of confidence in the national currency impeded growth India's economy, as evidenced by a record decline in PMI of last month.

According to The Economic Times, the government's decision to abolish 500 and 1 thousand rupees’ bills has had a domino effect in the mobile phone industry. Many of devices cost less than 5 thousand rs., and majority of deals are made in cash.

Purchasing power of Indian consumers also crumbled in the past month. Analysts do not expect fast recovery of sales volume, as contrasted to their previous statements.

Leading Indian smartphones manufacturers Intex, Lava and Karbonn are planning to lay off 10-40% of workers because of cutback in production and orders. The phone makers are now monitoring product inventory balances in retail channels, as consumers are postponing purchases after November 8, when the demonetization literally sucked much of the cash market.

Lava decided to close its plant, which employs about 5 thousand people, for one week starting from December 12th. Insiders say this example could be followed by others. According to experts, Foxconn, which manufactures devices for Chinese Xiaomi, Oppo and Gionee (apart from Infocus and Nokia), together with Lava, Intex, Karbonn and Micromax occupies about 50% of market of mobile phones assembled in India.

A source at Foxconn said that the company's plant in Sri City (Andhra Pradesh) now produces 1.2 million devices, contrast to previous 2.5 million. About 1.7 thousand employees of the company have been forced to go on vacation. Production is directly linked to consumer demand, and this trend may continue, level of 2 million units per month does not recover by January 2017.

November 8, Mr. Modi almost immediately has withdrawn from circulation 500 and 1000 rupees’ banknotes. Locals have to exchange old banknotes for new ones until 30 December. However, they could face tax consequences and problems with the law if they try to exchange undeclared large amounts of cash. 

Cash volume in India is broader than in many other developing countries, and these two bills comprised 86% of cash circulating in the country, according to the Central Bank of India.

Not only manufacturers of phones and accessories are suffering now. Agriculture was quite unlucky back in November: no money to buy seeds and fertilizers, no one to sell the crop (wholesale markets and retail took the first hit, losing up to three-quarters of the business), therefore no money to pay employees. Government somehow assisted with the problem with seeds. As for other issues, villages simply had to introduce barter exchange - rice became the main currency.

Analysts say agriculture and trade will suffer a short-term damage. Gradually, the economy will regain cash, and the population will be forced to master non-cash payments. 

Among other industries, real estate sector proved to be the most sensitive of all. "The government's measures will be having negative consequences for developers over the next year or two, - Fitch analysts wrote. - The strongest negative impact will be observed in the premium segment of real estate, which is in demand among the most affluent individuals."

The reason for this is cash, in which buyers pay half the cost of transactions, or even more. Many customers were preparing to part with their cash, when the reform came out of the blue. Now, real estate agents are expecting failed transactions and low demand.

Gold and jewelry are another traditional form of black money investments. This market has collapsed, too, yet it is likely to recover earlier, since amount of investments there is smaller compared to real estate.

Even now there are clear beneficiaries of the maneuver with black cash. Banks enjoy a mushroom growth in deposits, of which they could not even dream before. Plus, there are new customers, who will have to use banking cards for everyday expenses.

Various payment systems are in the big win. Paytm, India's largest system of e-wallets, celebrated next day after announcement on the reform. It was enough to get excited about - in the first hours, volume of funds in e-wallets grew by 1000%, downloaded applications - 200%, volume of transactions - 250%. Results of Paytm’s colleagues have been no less impressive. "This is a powerful and loud signal that cash in India is not welcomed anymore," - wrote Head of the Payment Council of India Naveen Surya.