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Demonetization hurts

Awaiting the upturn

Posted on Tuesday, 01 August 2017. Posted in Industry News . Written by Naresh Khanna and Dev Dutta

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The mainstream media including the financial press have been writing about the net negative impact of 1 to 1.5% in November on the Indian FMCG industry as an immediate consequence of the 8 November demonetization order. While much of the press is quoting Nielsen figures on the size of the Indian FMCG at Rs. 2.56 lakh crore in 2013 and Rs. 3.3 lakh crore in 2016, IPPStar’s research data shows that in fact the Indian FMCG product turnover is closer to Rs. 4 lakh crore in 2016–17. The research figures (www.ippstar.org) take account of the country’s food processing industry, which is the largest FMCG component as well as its small-scale industries as the larger organized players.

Assuming that Nielsen’s overall figures may be an underestimate, its estimate of the reduction in November sales due to demonetization at Rs. 3,840 crore is also likely to be an underestimate. Nevertheless, on the basis of various news reports quoting consumer product company executives as well as reports from ordinary consumers, one can say that demonetization has hit the FMCG industry hard in spite of the hopes for a strong recovery after the good 2016 monsoon.

Apparently, the purchase by retailers of personal care items such as toilet soaps, toothpaste and shampoo have seen the steepest decline. Reports suggest that urban off-take declined by 3.1% in November over October while rural India remained flat at 0.4% growth attributed to “smaller packs, smaller currency transactions and a flourishing barter system.”

Pharma sales grew in rural areas, according to Nielsen, since chemists were allowed to accept old currency till 24 November. Household spending has declined across categories including impulse and essentials in comparison to everyday essentials such as atta, rice, pulses and sugar.

Availability, employment and the use of small packs and sachets to launch new products as well as the expansion of distribution to drive sales are seen as major factors in driving FMCG product growth. Of these, unemployment caused by demonetization may turn out to have the highest negative impact on both product and packaging industries.

Equipment and converters react to demonetization
Packaging converters have been hit hard by the slowdown in distribution, stocking, purchasing and consumption right from November with early feedback reflecting a decline of 20% in packaging orders in December. Leading converters expect the demand to recover in March 2017 with an overall decline in the four months from November 2016 to December 2017 of at least 15% due to cash and supply constraints.

TP Jain of Monotech, a leading supplier of equipment and consumables to the packaging and label industry says, “Demonetization has slowed down order intake as well as execution of orders in hand because payments from customers or disbursement from banks have almost come to a standstill. We somehow managed our sales in November but it has gone down by almost 50% in December. It appears that the impact will last at least until the first quarter of 2017.”  

Packaging converter entrepreneurs such as ML Agarwal of Central India Packaging have mixed feelings about riding out the crisis. He says, it is ‘remonetization’ rather than ‘demonetization’ and right now “since upstream buyers are affected, the inflow of orders has reduced but there are signs of normalcy are also visible.” He further states, “The situation will normalize by the mid of this year, with cost of funds going down and boosting demand. In the long term, expected lowering of taxes and more money in the banking system should kick-start the investment and production growth cycle. This will lead to more demand for packaging.”

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