Demonetization and Its effect on the ceramic Industry

8^th November 2016 will go down in History of India as a day when it was shocked, awed, surprised and amazed at what the government did. At precisely 8:30 PM, the respected Prime Minister Shri Narendra Modi announced Demonetization of Rs. 500 and Rs. 1000 notes. This would lead to a total overhaul of the economy in India.

While there will be short term and long term implications of national proportions, we will focus more on its effects on the ceramic Industry.

Ceramic Industry and Cash

Since long (or rather forever) the industry has been dealing largely in cash. From salaries to Purchase payments to transport to petty expenditures, cash is the norm of payments, BIG and small.

It can be safely mentioned here that if money is actually the blood of body Indian ceramic eco system, cash would constitute of red blood cells. It wouldn’t be right or even possible to mention as to how much of this was legal and how much was not in alignment with Tax Systems. But, the industry worked on CASH.

Assuming it to be an industry with a massive turnover and lot of which is in cash, the total figure would be humungous.  

In the past decade, many company’s managements have worked hard to avoid cash transaction and make their books clean, there was a lot to be desired. With the last decade also witnessed tremendous sprouting of new units in Morbi, Thangadh and Himmatnagar regions, it will be fair to say a lot of dealing was done in cash on a day to day basis.

Short Term Impact: Cash Crunch

Common sense would teach us that lack of Red blood cells would lead to a person becoming sick. If this lack is around 80%, the person would surely die or go into a Coma. For ceramic industry, death is not on, but Coma is. Yes the Industry will enter a state of Coma for some weeks if not months.

With old Cash becoming worthless and lot of time lag in new currency being replaced, there will be a heavy cash crunch situation in the nation. With a lot of illegal money being largely wiped out, it will be near impossible to replace that cash. Adding to this will be the limits of withdrawal of cash that will further put pressure on businesses.

Smarter well managed units will bounce back faster, but as the whole eco system will be effected, it will be difficult for the most prudent to get back on track.

At present, the industry is already crippled by severe liquidity crunch.  As per Time OF India Report Nov 24, 2016, 05.56 AM IST, this is what the President of Morbi Dhuva glazed tiles association, Mr Nilesh Jetpariya had to say, "We surveyed around 470 manufacturing units operating in the cluster and sought their feedback on the impact of liquidity crisis on their production. Sixty percent of them said they had already closed their units down and 20% would stop production in the next few days,"

Of around 700 small and big manufacturing units of ceramic and related products, 500 are expected to shut down by 30^th November, and this is a large number.

Short Term Impact: Workers’ Challenges

Laborers, most of whom come from Bihar and UP are largely illiterate. Most of them do not have bank accounts. The remaining do not know how to operate them wisely. With their habit being of receiving cash only, they will face an immediate challenge. With no cash on hand, non of the companies will be able to pay salaries. While some of them will make arrangements to open bank accounts faster and educate their labors, it would be near impossible task to support all. As explained by Nilesh, "Production unit owners do not have cash to pay their laborers who are mainly from Uttar Pradesh and Bihar. Many of these workers do not have bank accounts. With caps on withdrawal, we are unable to draw required cash from the banks," 

The Morbi cluster alone employs around 1 lac employees directly and atleast 50 thousand indirectly, all of them will be adversely affected on the short run. Ass to that the clusters of Thangadh and Himmatnagar, we can suppose a total of 3 lac workers will feel the pinch instantly.

Short Term Impact: Transportation

Another major hurdle will be transportation. More than 400 trucks of various sizes supply material and carry out nationwide delivery of products. All of these rely heavily on cash payments. With severe cash crunch, many of them have already stopped the wheels rolling. Many of these transport vehicles travel as far as Nepal, Meghalaya, Kerala, Tamil Nadu and Kashmir. Some of them are on road for more than 15-20 days. It is nearly impossible for them to travel all the way without cash.

If the transportation stops, even the best managed companies cannot dispatch or receive raw material, leading to stop in production.

Short Term: Domino Effect

Like in all industries and product based sectors, domino effect will be seen in every element of the eco system. When a single element shuts down it takes slows down its suppliers as well as customers, leading to the total chain coming down. This phenomenon was expected to be very fast and just 20 days in to demonetization, it has already had its effects.

Cash crunch though lasts for about 45 days, it will take at least 60 days to get back on track. There will still be laggards with weaker management capabilities who would find it tough to get into normal production after 120 days.