On the eve of 8th November 2016 honorable Prime Minister of India, Mr. Narendra Modi announced the demonetization of 500 and 1000 currency notes. He also came up with the supporting statement that this step was taken to curb the evil of black money, counterfeit currency coming from cross-borders and remove corruption. This announcement received both positive and negative feedbacks from different sections of the society and industrialists.
This decision has undoubtedly impacted Small and medium-sized enterprises (SMEs), which are a big chunk of the economy contributing 8% percent of the overall GDP whilst employing more than 80 million people yearly. However, before analyzing its impact one should understand the decision making process in SMEs.
In Indian SMEs the decision making is highly centralized and the management takes almost all the decisions. Most of the time these decisions are made out of guts, experience or invalidated data analysis. As a result, delayed or poor decisions are made, which become bottleneck for the growth of the company. Also, managements’ focus and involvement in operational aspects lead to poor focus on many important decisions related to growth, diversification & risk assessment, causing them to stick to the same business model.
In current rapidly changing business environment, it has been evident that economic, political & legal decisions made by government and introduction of new technology can either help a company grow exponentially or gradually making it disappear, depending on the way they react to these changes. Demonetization is a perfect example of one such impactful socio-economic change.
Demonetization has brought various opportunities for the SMEs which they might consider for taking future decisions for faster and stable growth.
Currency Impact on Exports
The value of the Indian rupee is at a historic low. This means that Indian exports will be increasingly cost competitive in the short to medium term. In this scenario, the Indian B2B businesses should rapidly evaluate if their products could have a demand internationally. Those companies that already export should explore ways to enhance the exports share of their turnover. By focusing on exports, SMEs can not only tide over the short term pain of demonetization, but also build a foundation for a more prosperous future.
The rapid growth of global ecommerce business and the presence of global ecommerce marketplaces in India have made entry barriers for exports virtually nonexistent. A weak rupee is the positive trade wind that B2B SMEs can use to set sail in the international markets.
Deposit growth is likely to improve with more money coming into the banks, and impacting the savings positively. SMEs can take the bank loans at cheaper rates and can invest it for capacity enhancement, robust systems implementation and diversification of business.
Capacity Planning and expansion
As there is an export opportunity and loans may be available at cheaper rates companies need to reassess the internal capacity. Also, they need to decide whether to reinvest for growth or pay taxes on profit. Hence Capacity Planning and Expansion becomes an important decision to make.
Demonetization and other related decisions taken by government will drive many SMEs which earlier were using their personal contacts for sourcing, marketing & liaising with government officials to shift to digital mode. As a result, market will become more competitive and SMEs will need to work on internal inefficiencies which can only be overcome by implementation of robust systems so that they can compete against MNCs by reducing costs and improved decision making.
Time to enter into a new market place: ATM Machines, Swipe Machines, Smart phone demands and Money transaction platforms has boomed within a night and is likely to grow exponentially. Due to this, Moulding Industry, Electronics Manufacturing Industry and IT industry are likely to have a positive impact and SMEs can diversify their business in these segments. This Diversification is need of the hour for SMEs to hedge the risk associated with their particular industries.
Along with these opportunities demonetization will cause lesser corruption in Government organizations which will lead to better planning, resulting into harmonious outputs and financial stability. Also, scope of corruption within the company for SMEs will decrease wherein many companies kept on focusing either to save taxes or to save from various government norms.
Digital transactions will help them in better analysis, improved planning and improved ability to hedge the risk which will lead to use the most important resource of any SME, i.e. the management’s time, more effectively that currently goes into handling the cash accounts and transactions. Also, with increased digitalization, hedging the risk by using new insurance products will become important for them.
Demonetization has brought a plethora of difficulties for SMEs for the coming 2-4 months. It has adversely impacted availability of labors, sourcing and cash-flow leading to the underutilization or total shut-down of plants.
For some of the industries demonetization has impacted negatively. Construction and Real Estate industries and other industries which are directly or indirectly dependent on them is impacted for this period. Demand for Luxury items such as Gems and Jewelry, high End Retail, Auto Sector along with Auto Component Sector will tend to decline.
Therefore, looking at the opportunities and challenges of Demonetization it can be concluded that the medium to long-term gains are likely to outweigh the short-term pains. However, change in management’s thinking also becomes the most important and vital aspect with respect to the current scenario. And whether to take demonetization as an opportunity or as a threat; it’s the thinking of the management to grow either bigger or die by resisting the change.