As much as 86.4 per cent of currency in circulation consisted of Rs. 500-1000 bills in FY16. Prime Minister Narendra Modi’s November 8 announcement demonetising these two currency notes, has hampered the sector. SMEs largely depend on collections in cash and with huge chunk of economy gone, it has generated a rainbow of concerns.
The cash withdrawal limit has been gradually increased to Rs. 50,000 per week for businesses’ sake, but it seems inadequate for the SMEs.
“Demonetisation will streamline a lot of things, as inflation and bank rates will come down in short term. But cash limits are hurting the businesses which depend heavily on daily wage workers. SMEs are facing problems in distributing salary. The cash flow is less and it is going to be difficult for the sector till the cash withdrawal limit becomes at least Rs. 5 lakh”, IamSMEofIndia Chairman Rajiv Chawla told SMEpost.
The lack of cash flow is making it harder for SMEs to benefit from the relaxation. Sectors with wage work forces like textiles, food processing, leather, and gems & jewellery have been hit adversely.
“Wristwatches/Jewellery all these sectors have been hit as an immediate effect of the Demonetisation. Luxury is the last thing on majority of peoples mind these days. Things will normalise in 3 months from now, but as of now majority of people are looking at buying necessities and not luxury or gifts. Since the announcement we have seen a 90% decline in sales”, Jaipur Watch Company Founder Gaurav Mehta told SMEpost.
Basic necessities are the priority for now, pushing these companies down, and even forcing shutdown for days. This is resulting in zero trades.
Surveys suggest a fifth of 3.2 crore textile workers, a quarter of 2.5 lakh employed in the leather sector and a fifth of jewellery workers have not been paid for many days.
“Circulation is really low and the dispatch is NIL which is resulting in zero trade fair, factory is almost closed since last 2 weeks. It’s becoming difficult to give salaries as there is money crunch going on”, KNG Agro Foods Founder Ssiddharth Goel told SMEpost.
Similarly 27 per cent of Indian SMEs who are online today use e-Commerce. Cash-on-delivery (COD) is affecting online retailers since about 70 per cent of overall transactions are made via COD.
Apart from SMEs, Micro Finance Institutions (MFIs) have also been caught up in the heat of demonetisation. MFIs, which largely extend small loans, have stopped disbursing new loans. A recent report of Rating agency Crisil claimed that companies offering micro loans would be impacted in the near term as repayments are made largely in cash.