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Issues Surrounding India’s Demonetization Subside

The cash crunch many apparel businesses felt following India’s demonetization’s seems to be ending.

When the government canceled the large 500 rupees ($7.30) and 1,000 rupees ($14.61) notes 66 days ago, it left the largely cash-based country in an uproar. The bills were pulled to reduce corruption and remove counterfeit funds from the market, which were allegedly used for funding terrorism. It was also intended to encourage Indian citizens to use banking services and cripple the parallel economy that was responsible for unaccounted cash available in the economy.

In return, the government is issuing new Rs 2000 ($29.22) and new Rs 500 ($7.30) currencies. Citizens and businesses were given the opportunity to exchange the now-defunct currency for the new notes, which were issued by the Reserve Bank of India (RBI). But for many, the switch over was not a smooth process.

However, Sourcing Journal recently spoke with industry officials and textile owners there, who generally believe things are improving and could be back to normal in the next few weeks.

“Things are improving now, as industry is getting money from the banks. Initially, the industry has faced huge problems, as the sector relies on cash to pay its daily laborers/workers and for raw materials,” V.D. Zope, chairman of Textile Association (India), which was established in 1939. “We have seen a shutdown in Bhiwadi area of Maharashtra, Gujarat, Punjab states, where the textile firms were shut for the initial few days post demonetization, but gradually things started improving.”

In response, the textiles ministry came forward with a directive to all textile owners to open bank accounts for laborers who are working with them, so they can be paid immediately, which, Zope said, was a very good move.

Due to cash availability, Zope reported, prices of cotton have dropped and textile owners were not buying cotton. However, he speculates that everything will be back to normal in about 20 days.

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Many believe the overall impact will be limited as one third of the Indian textile industry is export-focused. Textile exports from India during the last financial year (April 2015-March 2016) stood at $40 billion, around 10 percent of total exports.

ICRA, a Mumbai based research and credit rating agency, said in its recent report that “though demonetization is expected to be felt across the textile value chain in the near term, it is only expected to be a short-term phenomenon.”

“The slowdown in cotton arrivals and resultant marginal up-tick in cotton price post November 8, 2016 is a short-term phenomenon, which has already started to correct, as farmers have gradually started accepting alternate modes of payments. Further,  the yarn manufacturers are expected to be insulated from this mismatch, given the sizeable inventory maintained by them on an ongoing basis,” the ICAR report stressed.

Because it’s largely a cash-based system, farmers have been stuck with inventory. This has created an artificial supply shortage and a drop in cotton prices, the report stated.

KS Selvaraju, secretary general of The Southern India Mills’ Association (SIMA), said the government has taken the right step to strengthen the economy. Because of the are numerous opportunities for tax evasion in the textile sector, he feels demonetizing of high denomination notes will help in maintaining transparency in the financial transactions.

Prem Kamal, director of Empitex Fabrics Pvt. Ltd, India’s leading manufacturer and exporter of apparel, agrees that the government made the right decision and credits the textiles ministry for helping to alleviate issues with denomination, and he believes business will return to normal within the next couple of weeks.

“Even though there were digital and cashless payment gateways available in the market, the majority of us were using cash for business. After demonetization, we have been made to look at other avenues so that it does not hamper our daily functioning. It was necessary for India to move forward in the 21st century.” Kamal stressed.

A source in the Federation of All India Textile Manufacturers’ Associations (FAITMA), a leading trade body of the Indian textile industry, said in the wake of demonetization, the textiles ministry has helped open 500,000 bank accounts for associated workers in the industry in a period of three weeks.

The textile ministry is also training workers on how to use alternative payment methods, be it mobile banking, e-wallet or online banking. Industry associations and councils have also been advised to promote digital payments for enabling cashless transactions.

Not everyone is happy though. A textile owner from Gujarat, who wished not to be named, said that even after 60 to 65 days, the regular lack of liquidity had forced industrialists to cut down operations.

He said the ceiling for withdrawing money from savings and current bank accounts that had been imposed has not been released, and it needs to be lifted immediately.

Adding further, he said that demonetization was a giant vacuum, sucking up resources of micro, small and medium enterprises (MSMEs)/small scale units and weaker sections and delivering them to the large-scale business corporate and powerful individuals.

Overall, he feels that while the policy might prove fruitful in the long term, small business runs on cash in the short term, and execution should have been better planned.

By Jagdish Kumar, Sourcing Journal contributor