The Indian government decided almost without warning to phase out 500 and 1000 rupee notes to counter terrorism and the black market economy

The Indian government decided almost without warning to phase out 500 and 1000 rupee notes to counter terrorism and the black market economy

India's domestic clothing industry has suffered a drastic slump in demand and production following the central government's sudden decision last month to withdraw high denomination currency notes accounting for around 86% of the total cash in the economy.

"For the first two weeks [following the 8 November demonetisation announcement] there was almost a 50% crash in retail sales," Rahul Mehta, president of the Clothing Manufacturing Association of India (CMAI), in Mumbai, told just-style, adding: "It has since recovered but is still down by 25% in smaller outlets."

While apparel exporters are paid in dollars and euros, a severe shortage of valid currency notes is also impacting clothing and textile production as almost all wages within the sector in India are paid in cash.

"Production is down to just 20% [of pre-demonetisation level] as most of our labour has left for their villages after they ran out of cash," Vinod Thapar, president of the Knitwear Club of Ludhiana, north Indian textile hub, told just-style. "We could pay them only in old currency notes," which could be exchanged for new notes at banks.

But that has not been easy. The government has set a limit of INR50,000 (US$741) per week for cash withdrawal by the companies, and changing the old INR500 and INR1,000 notes into new INR2,000 ones was allowed only for three weeks, leading to very long queues at the banks.

Individuals can withdraw only INR2,000 (US$30) in a day and that, too, after spending several hours – sometime even a whole night – in a queue, which has caused migrant labourers to skip work and return to their villages.

Demonetisation is also causing layoffs by several clothing manufacturing companies due to the expected fall in future demand, says Mehta. "Sales projections have been reduced by about 20% for summer 2017, which would lead to a cut-down on production and layoffs of production workers."

However, Harminder Sahni, managing director of consultancy firm Wazir Advisors, argues demonetisation will not have any long-term impact on India's US$60bn clothing industry as sales in the organised sector that constitute 35% of the market and have already recovered to the previous levels.

"In cities the salaried people prefer to use [credit/debit] cards because in addition to conveniences, there are always attractive schemes [like cashback] going on with their use," he told just-style.

However, Mehta says that the share of the organised sector in the Indian clothing market is only 20%, and it would not be before the end of March that normality could return to retail purchases.

Even the high end clothing market has not been spared. According to Thapar, the weekly sales of a major (unnamed) Italian luxury brand outlet in Ludhiana has fallen from US$6,000 to just US$450. A large portion of its sales were in cash for purchasing gifts for bribing bureaucrats and politicians, he says – these practices were one target of the demonetisation.

On the positive note, one side effect of demonetisation has been the immediate clearing of many pending payments and bad debts.

But even this windfall cash could cause some problems. It has had to be deposited in the bank, and the income tax department has been watching. "More than 50 notices have already been received [in the last month] by the textile and knitwear industries in Ludhiana," says Thapar.