Analysis on the impacts of demonetisation on Indian PEB industry
The government has recently announced demonetisation in the country declaring that the use of Rs 500 and 1000 banknotes would be invalid from 8 November 2016. Simultaneously the government also announced the issuance of new Rs 500 and 2000 banknotes in the exchange of old notes. It stated that the demonetisation is an effort to end the corruption, to crack down black money etc. Undoubtedly this is a good step to lead the country in a right direction however due to demonetisation the country faced severe liquidity crunch which have ultimately affected many businesses including construction.
Impact of demonetisation
Impact of demonetisation can be both good or bad. Let us understand how demonetisation has an impact on PEB industry and how PEB industry will balance the impact. “Since the PEB industry is mostly driven by CAPEX investments of different industry segments where in companies invest in future expansion only when demand exceeds supply, PEB industry is also impacted due to the ongoing demonetisation which has led to severe cash crunch in the market. However, the impact of the reduced money supply will lead to deflation or contraction in demand or a mix of both will vary from sector to sector and for different tine periods based on the nature of goods and services. This will adversely impact the consumption demand in the economy in the short term as people hold back the purchases and buy only key essential items or things required to meet their day-to-day requirements,” briefs D Raju, Managing Director, Kirby Building Systems – India on the impacts of demonetisation on Indian PEB industry.
Indian GDP growth will be affected in both the quarters Q3 and Q4. RBI has already reduced the GDP growth from earlier projection of 7.6 per cent to current estimate of 7.1 per cent for the year 2016-17. Moreover, this expected impact on GDP may not be significant as some of this demand will only be deferred and will re-enter the stream once the cash situation becomes normal. The economy will benefit from the reduction of the black money, which will lead to higher tax collection, better business environment, less corruption and transparency in the long term resulting in higher GDP growth. “This will enable the PEB industry to grow much faster and we are positive about this in the year 2017 with Kirby India poised to grow much higher and contribute to India’s sustainable infrastructure development and be a part of the country’s growth story in coming years,” says Raju on being optimistic about the PEB industry.
Demonetisation may have affected the PEB industry still the industry is trying to balance the situation and PEB is an essential component of the housing sector believes Kishor Pate, CMD, Amit Enterprises Housing Ltd. He says, “The demonetisation move has put a general dampener on all construction activity, including the PEB industry. For now, the entire construction industry is trying to regain equilibrium in an environment which was previously driven by cash payments to a significant extent. However, one must also keep in mind that the PEB industry is one of the most critical components of the affordable housing sector, since it enables homes to be built at lower costs and in much faster time-frames. The government is now deliberating offering fresh incentives to both developers and buyers of affordable housing by ways of rationalised interest rates, and this will significantly boost the demand for PEB solutions in the future.”
Announcement of demonetisation of currency has kept many transaction on hold as well as the there is reduction the sales which has affected the PEB industry reveals Rohan Agarwal, MD Geopreneur Group. He states, “The PEB industry will be affected the same way the real estate industry will be affected. Due to demonetisation, the sales of PEB industry will also get slow due to the law passed by the government for demonetising the currency of
Rs500 and 1000 which has kept many transactions on hold. The government authorities who demand cash for passing plans will be on a standstill, until the way is figured out for the same. Due to the reduction in the pace of sales, the construction will be slow and henceforth, the PEB industry will be affected.”
The demonetisation drive by the government a month ago aimed at eradicating black money and bringing the country under the tax net has hit consumption in the cash economy. The steel industry was just emerging from a tough year after China and Russia flooded the country with cheap imports. “Coming to PEB industry, I don’t foresee a total decline or negative impact as such. The demonetisation exercise had both good and bad on every sector. With this move, the citizenry and country as a whole is slowing but steadily moving towards digital economy and people are accommodating with online payment systems even for small purchases. This has a significant positive impact on e-commerce companies and organised retailers. With the growth in the e-commerce segment and organised retailers, the demand for logistics infrastructure like warehousing will rise to its peak, which is a huge opportunity for PEB business. With the abundance of cash through tax collections, the government is expected to improve the infrastructure facilities to global standards as part of its smart city and swachh bharat missions. Any positive impact on infrastructure segment would yield benefit to steel and PEB industries which needs no debate,” briefs P V Rao, Managing Director, Pennar Engineered Building Systems Ltd.
He also said, due to demonetisation the banks are flooded with cash surplus. The centre and RBI are expected to take measures to reduce the interest rates and ease the credit availability to the new entrepreneurs, which will fall in-line with the India’s thrust on manufacturing sector and the Make-in-India initiative. Thus, PEB players would benefit in gaining good order book for industrial buildings, structural steel etc. Further the implementation of GST would lead to expansion of organised sector. However, in short-run, the there is a drastic impact on business across all segments especially construction sector.
Dr. Sandeep Gupta, Managing Director, Richa Industries Ltd says, if talk about PEB sector specifically there are lot many activities involved in which cash transaction play vital role, due to sudden stoppage of currency slowed down the procurement and dispatch processes with the due course of time it is expected that things will be picked up and expected to have minor impact on day to day activity.
“On the other hand, most of the major investments are kept on hold, people try to avoid huge investments and keep their hands back from any diversification or expansions, which has impacted PEB industry to grab new projects specially in private sectors,” adds Dr. Gupta.
Smaller firms are facing more issues than the popular manufacturers as they just entered the market and had to pay a heavy price. Many small sectors affected a lot due to same. The major problem will be for less educated or uneducated business man who is not very acquainted with digital transactions.
“The demonetisation has shuddered every part of the country. But it’s too early to judge anything right now, we must say it will take another 1 year to get the things come on right track and analyse the impact of same in near future. Every sector is affected somewhere due to this move but for betterment of country this minor and short term discomfort can be carried on,” feels Dr. Gupta.