How will demonetisation impact the Indian electronics industry? Who will gain and who will lose in the long term? While looking for answers to these questions, the Electronics Bazaar team got some interesting insights
By EB Bureau
The demonetisation of the nation’s most widely circulated currency notes in November 2016 has triggered a chain of reactions, and the jury is out on how hard the Indian economy will be hit in the next two quarters, before getting back on track. Though this is not the first attempt at demonetisation, it seems to be an effective and well-planned one. A series of policy announcements over the last twelve months can now be viewed as important steps towards this transformational move.
Due to this demonetisation, money supply will reduce in the short term—at least till the new currency notes get widely circulated. Let’s try and understand the impact of this cash ban on the Indian electronics industry.
The immediate effects
Topline impact
The biggest impact of the cash crunch is being observed in sectors that are driven by cash transactions. Slowdown in discretionary spending is hurting consumer durable sales. Sales of white goods—for example, televisions, refrigerators, washing machines, air conditioners—may slump as much as 70 per cent, as a large part of the market is driven by cash. This may continue for the next six months, till there is adequate circulation of new currency notes. Mobile phone purchase, too, will be affected.
According to market research firm IDC, this ongoing cash crisis is expected to pull down feature phone shipments sharply by 24.6 per cent and that of smartphones by 17.5 per cent during the quarter ending December 2016, compared to the previous three-month period. However, this fall is expected to be temporary, as shipments are likely to return to normal and channel inventory health will improve by the second half of the next quarter.
The Indian government aims to establish and monitor an implementation framework, with strict timelines, to ensure that nearly 80 per cent of the financial transactions in India move to the digital-only platform.
IDC also anticipates that the induced cash crunch will impact the purchase of PCs, as lower availability of cash will force postponement of discretionary purchases. Given that more than half of the PC purchases from retail and exclusive stores in India are done with cash, IDC anticipates that demonetisation will bring down the PC market by 33 per cent in Q4 2016.
This temporary but massive drop in demand is likely to affect the topline performance of most electronics brands and original equipment manufacturers (OEMs). Recognising this, most of them have displayed great agility in reducing their production volumes. This, in turn, will impact the entire electronics industry value chain including suppliers and manufacturers of components, products, machinery, etc.
A few recommendations for promoting micro ATM machine manufacturing
1. Aggregation of demand by a government agency—once the demand and specs are frozen, companies can quickly establish and expand capacities.
2. It should be ensured that this demand is met by Indian manufacturers and these machines are not imported from China—both tariff and non-tariff measures should be put in place for this.
3. The government buying agency should offer payment on delivery, so that the company can begin manufacture with low working capital. This will attract several companies to begin the assembly of these machines quickly.
4. There should be zero import duty on parts, plus a duty (at least 10 per cent) on import of the POS machines and micro ATMs.
5. The immediate policy change of excise duty exemption on the manufacture of POS machines may not be a good idea, since the parts/components/EMS manufacturers have not been exempted from this duty.
6. Specifications in line with Indian usage and customised requirements should be drafted immediately and shared with the industry.
Supply chain disruption
The road transport and logistics segment in the country is mostly cash driven, and 65 per cent of the country’s freight is carried by road. According to the All India Motor Transport Congress, about half of an estimated 9.3 million trucks were off the road eight days after the demonetisation announcement, as drivers abandoned vehicles mid-way into their trips after running out of cash. These drivers didn’t have enough money for food, truck maintenance and to make payments at state borders.
In the short term, this can create a huge supply chain management challenge for the small manufacturers in the electronics industry, as most of them do not maintain a very large inventory due to huge storage costs.
A fall in non-compliant trading
Non-compliant trading companies mainly import electronic components—either completely knocked down (CKD) or semi knocked down (SKD) products—from China, and under-invoice these to save on taxes in India. The balance is paid into the bank accounts of the sellers in Hong Kong through illegal hawala channels.
With the demonetisation, these non-compliant traders are finding it hard to send money through hawala channels, since the cost of the process has shot up. According to an industry source, the rate of one Chinese Yuan (CNY) was approximately Indian Rupee (INR) 16 in the grey market, against the official exchange rate of INR 9.9, as on December 7, 2016.
According to industry experts, demonetisation is going to have an unintended impact on Indo-China trade, especially in the area of electronics. It may also open up more revenue earning opportunities for the government, with a sudden rise in the taxes collected on goods imported from China in the coming months, as the value of these goods will go up due to tax compliant trading even though actual imports may dip.
Cash deposit machines (CDMs)
CDMs are distinct from ATMs in that these machines accept cash deposits in envelopes, although they are operated in a similar way by using a debit card. The advantage is that all successful transactions are immediately credited to the customer’s account. CDMs can count the notes; verify denominations, quality and authenticity; and do everything that a bank teller can.
The long term effects and the way forward
Long term gain for ‘Make in India’
Demonetisation presents a huge opportunity for the manufacturing sector, especially in the Indian electronics industry. The industry, thus far, was struggling due to the cash driven trading of electronic components, which bypassed the tax system.
Since most of the black money or surplus cash will now be sucked out of the system, cash transactions will be less, and so will the non-payment of taxes. Implementation of GST in the near future will also make it more difficult to avoid tax.
The combined effect of demonetisation and GST implementation is likely to provide the sector a much needed boost. According to industry sources, this could in fact result in a positive sentiment for FDI in this sector. The government has also decided to encourage this positive mood by announcing several relaxations and incentives for the Indian electronics industry.
Who gained?
- Who got hit the most?
- Domestic manufacturers
- Suppliers of money transaction machines (ATMs, CDMs, passbook printers, etc)
- Non-compliant traders
- Scrap dealers
Digital payment machines in demand
The demonetisation move by the government will push consumers into adopting and embracing cashless, digital payments. According to data from Nielsen Mobile, weekly installation numbers for mobile wallet apps doubled in the week post the announcement, as compared to the previous week, clocking an all-time peak growth of 28 per cent. Though a large part of this could have been due to aggressive advertising by the companies behind these apps, smaller businesses like restaurants and cafes, ‘kiranas’, small vendors, autorickshaw drivers, etc, were also quick to adopt digital payments through smartphones.
The Central government has set up a high-level committee, headed by NITI Aayog, to identify all possible modes of digital payment across all sectors of the economy as it gears to transform India into a cashless economy. Other members of this committee include secretary, Department of Financial Services; secretary, MeitY (Ministry of Electronics and Information Technology); DIPP secretary; secretary, DIPAM (Department of Investment and Public Asset Management); MD and CEO of the National Payments Corporation of India; secretary, Ministry of Rural Development; and the chairman of National Highways Authority of India.
The committee will engage regularly with central ministries, regulators, state governments, district administrations, local bodies, trade and industry associations, etc, to promote rapid adoption of digital payment systems, and help the nation transform into a cashless, digital payments economy across all states and sectors.
NITI Aayog will also implement an action plan on advocacy, awareness and handholding efforts among the public, micro enterprises and other stakeholders. That apart, it will organise training for and capacity building of various states and union territories (UTs), ministries and departments of the government, representatives of states and UTs, trade and industry bodies, as well as other stakeholders.
This is a much-needed step in the right direction, and the digital money transaction machine suppliers and manufacturers will surely benefit from it. The consumer need for and government focus on digital payment, due to the demonetisation, will open up a huge opportunity for suppliers of money handling equipment like POS/micro Automated Teller Machines (ATMs) and cash delivery machines.
To promote self-service and make all banking services available round-the-clock, banks are installing cash deposit machines (CDMs) and passbook printers in e-banking kiosks. According to an industry expert, the Department of Industrial Policy & Promotion (DIPP) is looking for POS/micro ATM manufacturers in India. This opportunity will percolate across the industry value chain, including the suppliers of electronic components, products used in those machines, manufacturing service providers, manufacturing equipment suppliers, etc.
Government to transform ration shops with the help of micro ATMs
- The Department of Financial Services (DoFS), under the Finance Ministry, sent out a circular to all Indian states on November 7, 2016, urging them to help fair price shops and public distribution shops in supporting financial inclusion, by supplying them with electronic point of sale (ePOS) machines or micro ATMs.
- More than 500,000 fair price shops across the country will be equipped with ePOS machines and function as micro ATMs in two years, a move that will largely help address the issue of poor ATM networks in rural areas.
- Almost 160,000 fair price shops, out of a total of over 540,000, have already been fitted with ePOS machines that enable shops to give out subsidised rations in an automated way through Aadhaar biometric authentication.
- The remaining fair price shops are supposed to be fitted with ePOS machines by 2019, creating the biggest possible addition to micro ATM networks in the country.
- During the current demonetisation exercise, the Centre had asked banks to deploy micro ATMs in rural areas and also asked banking correspondents (banking mitras under the direct benefit transfer scheme) to go door-to-door to help people withdraw cash.
