On the night of 8th November 2016 Indian economy and business changed drastically. Prime Minister Modi announced the discontinuation of 500 and 1000 denomination currency notes. The stated reason was to curb black money and tax evasion. However, the implications are much wider than just that. Most of the commentators have been focussing on the extinct 500 and 1000 rupee notes and the upcoming 500 and 2000 rupee notes. A much-ignored facet of the situation though, is the 100 rupee and smaller denomination notes. The sudden change has caused people to hoard smaller currency notes. Over 90% of all retail transactions country wide are worth 100 rupees or under. This will have far reaching consequences in retail.
1-2 months’ scenario:
Smaller denomination notes will be low in supply affecting liquidity adversely, especially that of small, cash driven businesses. For a short while it can be countered by providing goods on credit. Meanwhile, consumers will move steadily towards digital payment solutions, especially in tier 1 and tier 2 cities.
3-6 months’ scenario:
Cash only retailers will shift, at least partially towards digital payment methods as a response to consumers’ move to digital payments. End consumers will be hesitant to spend due to increased vigilance and transparency leading to sluggish demand except for the more necessary daily life staples. In the mid to long term, as smaller denomination currency becomes abundant once again, business as usual is likely to resume but the overall retail map will be drastically different once the storm abates.