In a bid to curb black money and encourage a cashless economy, the government of India implemented demonetisation, whose impact is being felt by the food processing industry and consumers alike.
This has led to a change in the expenditure by consumers. As a result, they prefer to purchase essential items. This, in turn, has led to the reduction in the number of orders by the companies due to the dip in sales to the tune of upto 40 per cent.
The supply chain, which includes transportation, has been disturbed, and cash crunch is also making the industry nervous. However, experts are of the opinion that this is a short-term effect.
Sagar Kurade, managing director, Suman Projects Consultants, and past president, All India Food Processors’ Association (AIFPA), said, “The policy has led to a change in the spending pattern, whereby consumers prefer to buy essential food items due to limited cash in hand.”
“In the short term, fast-moving consumer goods (FMCG) food companies are witnessing a decline in sales in the range of 25 to 40 per cent. The industry hopes that as the Reserve Bank of India (RBI) removes its restrictions, the spending pattern will return to the pre-November level,” he added.
Kurade added that according to a 2015 report by PwC, cash transactions in value terms stood at 68 per cent in India. In comparison, this stood at 45 per cent in China and 14 per cent in the United States.
This reflected uncomfortably high dependence of the economy on cash. Further, according to McKinsey and Company’s 2013 report, 26 per cent of India’s gross domestic product (GDP) is in the form of a shadow economy. This further hinders the evaluation of a digital economy.
“Hence, the unorganised sector, the rural economy and the micro-, small and medium enterprises (MSME) within the food processing sector are feeling the pinch of this policy in the short term. At the farm level, farmers’ dependency on credit and loans seems to have gone up, so as to ensure taking advantage of the sowing/harvesting season,” Kurade stated.
M M Rahman, managing partner, Baker’s Point, said, “Initially, when the decision was announced for about two weeks, it was difficult for small players in the bakery segment to sustain. But slowly, as the time progressed, the transactions became smoother.”
“Due to demonetisation, one area which is of concern among all the small players in the food industry is the circulation of coins. Small players running bakeries have accumulated a lot of coins, which are not welcomed by banks,” he added.
“One of the players among us has accumulated coins worth Rs 40,000 and the bank has agreed that it will accept coins worth Rs 5,000 every week from January 2, 2017,” Rahman stated.
“With regard to purchases of raw materials, the small players usually opt for payments by cheque or real-time gross settlement (RTGS). What has actually been hit is the hidden expenses incurred in the supply chain like wages to helpers and others,” he added.
“Some of our workers are now being paid in coins to handle the situation. Hence, there is the burden of more work on the limited manpower of every bakery manufacturer,” said Rahman.
P M Sankaran, president, Bakers’ Association of Kerala (BAKE), said, “The bakery business has been affected largely. This has brought down manufacturing by 15-20 per cent, which is majorly seen in the southern part of India.”
“These small players in the market were expecting a recovery during the Christmas season, but due to very low circulation of cash, they are disappointed,” he added.
“Besides the drop in sales, one of the things to worry is the purchase of raw materials. If these raw materials are purchased in larger amounts, it will cost less as per general industry standards followed. Bulk purchases are also affected, as small players only deal in cash transactions,” said Sankaran.
“The small players are largely hit as they have a small area of operation and limited stocks with regard to the raw materials and finished products,” he added.
“Some of the big players are seen educating small players to switch to cashless mode through regular workshops and seminars. Players offering e-wallets are on the rise and are encouraging small players to opt for their platforms for transactions,” stated Sankaran.
However, there is an underlying hope for the future.
“Over the medium to long-term, the agriculture and food processing sectors can look to benefit from this policy due to a better business environment, less corruption and more transparency, lower interest rates as well as the widening of the tax collection base,” said Kurade.
Girish Chitale of Chitale Dairy stated that in the dairy industry, there were several product categories. These included primary products, such as milk, paneer and dahi, and secondary products, such as shrikhand or sweets.
“While there has been some impact on the sale of the secondary products (which has begun to normalise now), the primary products remained largely unaffected,” he added.
“We have completely transformed our business into digital mode. We do payments largely digitally, except for some portion, which is done in cash. Demonetisation has its impact on the businesses on the sale of the secondary products but that too is now getting normalised,” he said, adding that both the farmers and the traders are fast catching up with the nuances of digital payments.
Anant Choudhary, founder and director, Freshmen’s Valley, said, “The demonetisation has indeed helped small and medium enterprises (SMEs). It has enabled a robust banking process, wherein there is a back-end integration with farmers for them to receive the right amount of money for their raw material.”
“We, at Freshmen’s Valley, have emphasised and implemented secure network payment policies for our farmers and associates since our inception. The current demonetisation scenario has had a marginal impact on the distributors and retailers, but going forward this is the only way for a positive and secured environment,” he added.
