At the stroke of midnight on November 8 last year, when old ₹500 and ₹1,000 notes became illegal, three sectors were impacted the most by its consequences — consumer, auto and non-banking finance companies.

Overall, the rural economy was the worst affected. A year down the line, recovery is still underway in rural India even though most of the sectors have once again found their feet.

“In general, the rural economy was impacted more than the urban. The result was clearly visible in the sales of two-wheelers,” said CRISIL Chief Economist Dharmakirti Joshi. Unlike metros, rural areas did not have ATMs or digital payment options. Given the cash dependence, and the fact that even small-denomination notes were not in active circulation, the demand in rural areas was badly affected post-demonetisation.

Rural India accounts for over 50 per cent of two-wheeler sales, which were down 12.8 per cent year-on-year for Hero MotoCorp and 13 per cent for Bajaj Auto in December 2016. “Sectors such as consumer, auto and NBFC were impacted the most. The cash component and wholesale businesses are high in rural areas, so the impact was felt more in those markets for B2C sectors,” said Gautam Duggad, Head of Research - Institutional Equities, Motilal Oswal Financial Services.

FMCG, which completely runs on cash, saw a rapid decline in sales. HUL’s net profit was flat in the December 2016 quarter. Subsequently, it recovered to grow at 6 per cent in the March quarter, but its volume growth was the lowest in five quarters. HUL Chief Executive Sanjiv Mehta, in a presentation in the last fiscal, said growth in rural markets lagged that of in the urban ones for the first time since 2011-12. And demonetisation is also one of the reasons behind slow rural recovery.

Stressed economy

“Rural economy is also undergoing stress as farmers are forced to sell produce below MSP (Minimum Support Price). Though output has gone up, the remuneration of farmers haven’t,” Joshi said.

Similarly, even microfinance (MFI) loans, which suffered after demonetisation, continue to be stressed. According to India Ratings, delinquency, which was 0.47 per cent in October 2016, peaked at 11.09 per cent in January 2017 and was 7.06 per cent in July 2017.

Analysts, however, agree that the impact of demonetisation was restricted to the first few months, and later, most of the sectors began to look up. G Chokkalingam, founder, Equinomics Research and Advisory, said: “Over 80 per cent of the cash came back to the system. So the effect (of demonetisation) was temporary. The economy had slowed down much before demonetisation. Even before the drive, the IIP (Index of Industrial Production) was growing at less than 2 per cent,” he said.

Path of recovery

Duggad said most sectors are getting back on track. “Numbers from Q1FY18 show there has been a steady improvement.” While Hero Motocorp reported 6.7 per cent rise in sales in September 2017, the number for Honda Motorcycle and Scooter stood at 5.7 per cent.

Besides this, Duggad said the entire banking, financial services and insurance (BFSI) space benefited due to increase in liquidity, which resulted in a system-wide decline in interest rates. “This, in turn, pushed down the cost of funds — the benefits of which can be seen in the bottom-line of companies in the first half of this fiscal.”

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