On Tuesday, finance minister Arun Jaitley termed the shortage of currency in circulation "temporary in certain states” and that it is “being tackled quickly.”
Since FMCG consumption is directly dependent on cash velocity, it is directly impacted.
New Delhi: India’s consumer-facing companies are getting jittery as the cash crunch this year across four states heading for assembly elections, and several surrounding ones, could derail the just recovering buoyancy after the twin blows of demonetisation and GST implementation.
Andhra Pradesh, Telangana, Karnataka, Bihar, Gujarat, Delhi, Madhya Pradesh, Chhatisgarh and Uttar Pradesh have been witnessing currency shortage over the past few weeks. Elections are underway in Karnataka, and scheduled later in the year in Madhya Pradesh, Chhattisgarh, Rajasthan and Mizoram by January 2019. The general elections will be held by the summer of 2019.
The pre-election campaigns involve political parties spending heavily on campaigns and promotions mainly through cash.
“We are seeing some stress coming from rural markets over the last two weeks in select markets. Circulation of money is under stress within trade channels. Consumer spending is not yet impacted, like the way it was during demonetisation. Hopefully, what is happening is temporary,” said Anil Chugh, chief executive (consumer care business - India) of Wipro Consumer Care & Lighting, which makes Santoor soap, Safewash detergent and Yardley fragrances.
The consumer goods sector had taken almost 10-12 months to bounce back to growth after the government's demonetisation move in November 2016, with Rs 500 and Rs 1,000 notes being demonetised to deal with black money in the economy. While demonetisation and the rollout of the Goods & Services Tax (GST) had put pressures across consumer sectors, market research firm Nielsen said consumption of fast moving consumer goods saw an uptick in 2017 with volume growth to almost double digits, compared to 7-8 per cent in 2013-16.
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While the Reserve Bank of India said it has ramped up printing of currency at all the four currency presses and that shortage in some pockets is due to logistical issues of replenishing ATMs frequently, company officials flagged concerns about hoarding of cash for elections impacting liquidity and therefore consumption.
Since FMCG consumption is directly dependent on cash velocity, it is directly impacted. So far by and large, while supply of high value notes including Rs 2,000 has been restricted, low value notes have been available. "If the cash situation dries up again, then it would impact consumption. As of now, our trade partners are reporting stable trends but we are maintaining a cautious approach,” said biscuits giant Britannia’s managing director, Varun Berry.
On Tuesday, finance minister Arun Jaitley termed the shortage of currency in circulation "temporary in certain states” and that it is “being tackled quickly.”
“If low denomination notes become scarce, then it will definitely impact consumption. More than three-fourths of everyday grocery consumption continues to rely on cash, though the cash component in the FMCG sector has diminished at the supply, wholesale and distributors channel levels in favour of digital transactions,” said Dabur India chief executive Sunil Duggal.
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Dabur, which makes Vatika shampoo and Real juices and derives half its sales from rural markets, is also banking on predictions of a good monsoon to fuel consumption.
“Any erratic supply of cash, if sustained, would always impact trade channels and consumption, and the economy can’t afford any more disruptions. As far as consumer goods are concerned, these are often low-ticket purchases that depend on cash transactions,” cautioned Debashish Mukherjee, partner, consumer and retail, at AT Kearney.
