The recent demonetization of the 500 and 1000-rupee notes has created an uproar, both positive and negative across various industry verticals. However, we cannot deny that the decision has impacted businesses in huge ways over the past few weeks, at least in the short run. Many sectors that have a large proportion of cash transactions have been severely affected by the cash crunch – the initial murmurs about not enough orders being placed or transactions being conducted have now grown into a louder hum of discontent.
Digital Desh recently conducted a drive in Old Delhi, where we spoke to business owners at length regarding their technology adaptions, business models and smartphone usage patterns. The prominent insight that we gained was that the volume of businesses that dealt in cash was significant. Although a good proportion of these businesses also operated online via e-commerce sites and their own websites, they kept up with their traditional offline models quite fiercely.
The impact of this demonetization, therefore, is definitely going to impact these sectors significantly. Firstly, it must be noted that approximately 34-36 percent of businesses in the Old Delhi area are unregistered and therefore, do not pay income tax on their business profits despite falling under the taxable bracket. Under such circumstances, exchange, deposit or withdrawal of the old currency poses a difficulty for these business owners. Due to the limits on deposits set by the RBI, even registered business owners may face challenges exchanging their currency merely due to the sheer volume of cash in hand. Inventory losses due to a freeze in cash flows is also something a good proportion of owners may have to deal with. This means that some parts of the currency will be irreversibly immobilized due to the demonetization; as a result, a slump in economic activity for a few months in inevitable.
On the bright side, however, we foresee this act acting as a boost towards the movement of businesses to the online channel. With SMBs finding it hard to sell online via cash, a digital model will help overcome this difficulty. E-wallets will gain huge traction to overcome the issue of cash transactions as well. In fact, Paytm has already seen a 700% increase in its overall traffic since November with higher transactions and ticket sizes. Businesses with an e-commerce presence that fulfil all legal requirements – including TDS and registration – are safe despite the fall in general profits. In our mission to shift Indian business online, the demonetization, as we see it, is a gigantic step in the right direction.