Demonetization impact on purchasing new material ( from vendor to shopkeeper to customer)

Its said that Indian consumer firms, forms around 40% of sales from wholesale channel. And this wholesale channel mainly works on cash transactions. They are very much likely to witness liquidity constrictions today. This could disturb the supply chain and affect the growth in near. To add on further, consumer firms usually provide tight credit terms i.e. not more than 7 days’ time to distributors. Distributor’s inturn provide credit to wholesaler/dealers and further to shopkeeper. Now due to this overall crunch constriction of the cash-liquidity in the supply chain, consumer firms may be forced to offer easier credit terms to the distributors in the near term .

Well let’s see,
How will a shopkeeper purchase new material in such times of Demonetization (in simpler words)

Well Until now the payment of the new material was done on 40%-60% basis or 30%-70% where 40% or 30% would be the payment made by cheque and rest would be made by cash. Say the shopkeeper has called for 16 lakhs tiles material. Here he may work on 50-50 percent basis where he make a payment of 8 lakhs in cash and rest 8 lakhs by cheque.

But, Demonetization has made that 60% or 70% cash disappear.


Because today the factory guy will not accept the cash payment with old notes and the shopkeeper or dealer isn’t having new notes.

So then?

The shopkeeper will have to make 100% material payment on bill only i.e. by cheque. Here he what happens is that he won’t be able to escape from paying tax of entire material order which he did earlier. Now since the shopkeeper is getting the material with increased rates, he will sell the same with higher rates to consumers. Since the shopkeeper now needs to show all white cash, he will generate the same from customers to show his white entry. What happens is that the material turns out to expensive to end user since tax is applied at every step i.e. from factory level to dealers to shopkeepers to customers to home owners say.

The above example will apply to all other home renovation or new homes related material be it cement, sand, tiles, plywood, anything.

For next 2 months shopkeeper are busy handling money, business becomes second priority

This is for medium businesses especially because of the nature of their business. As I explained before, most of the payments (business is run ) is done by cash. So they’re going to busy trying to make it worth by either depositing it or exchanging it. So you see their entire focus is right over money matters. Business takes second priority now.