Impact of the Black Money Surgical Strike on Small Business Community

Surgical strike on black money is the latest trending topic of discussion since its announcement on Tuesday by our Prime Minister, Sri Narendra Modi. This is an attempt to help India fight against black money and the prevalent condition of rampant corruption. The banned ₹500 and ₹1000 notes in India would be replaced by RBI issued new series of ₹500 and ₹2000 currency notes.

The sudden announcement has surely left everyone with a mixed sense of shock and surprise. Cash having high value has become just a piece of paper with the span of a day. This has led to a lot of initial chaos and a sense of panic among the common citizens.

What is the impact of this announcement on the small-scale businesses and secondary markets? Nearly 40% of Indian economy is driven by SMEs and traders. who deal with cash based transactions on a daily basis. Since majority of such businesses do not have the facilities of EDC machines or online transactions, there is bound to be an adverse impact on the businesses, at least on a temporary basis.

Impact on Small Businesses:

The attack on black money would cause considerable impact on the small businesses, both on short and long term. While some will be positive, one has to be prepared for the negative impacts as well.

1. Impact on businesses based on cash transactions:

One such case of negative impact would be in the used car market wherein most of the transactions are cash-based and most of the money involved in the transactions is black money. However, looking at the bright side, this currency replacement would also mean a scope for better valuation of used cars, bring transparency in the system and have a positive impact on the automotive industry. It also means eradication of all the fake currency currently in circulation.

2.    Heavy Deflation:

This surgical strike on black money would lead to sudden deflation as people possessing black money might not be able to exchange it without coming into the scrutiny of the Income Tax department. The total money currently under circulation would come down drastically and the value of the money would increase.

3.    Drop in prices:

Due to the sudden shift in the supply and demand of money, there will be a significant drop in the prices of commodities and gold in the market. During deflation, there is also a tendency among the public to delay purchases until prices fall further. This would lead to a fall in the productive capacity of the production units and a fall in investments.

4.    Impact on the Small Businesses and Production Units:

This currency replacement would mean a decrease in circulation of money. This would mean a decline in the profits of the SMEs and the production units, thereby forcing them to sell their products at a cheaper rate. This would decrease their profits and cut-back on the costs of production. The companies in such cases have to decrease employee salaries, lay off workers or close the units. Thus, India’s fight against black money might also mean a temporary increase in unemployment unless handled in a different way.

5.    Fall in Equity prices:

This would also be difficult on the secondary market trading of equity, stock options and other financial instruments. There would be a fall in the prices of equity as the public owning them would be keen on selling off their investments which now has a decreased rate of return. However, there would be an increased interest in bonds. The increase in value of money due to the banned 500 and 1000 rupee notes in India would lead to significant impact in business related debts. While there will be significant decrease in the interest rates, the effective cost of the debt would go up due to the increase in the value of money. So, small businesses would end up paying more.

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There are many pros and cons of this first step in India’s fight against black money. It is still too soon to comment on the possible outcomes and the potential impact in the business after the ₹500 and ₹1000 notes were demonetised on Tuesday. It is definitely a bold and strong step on the behalf of the government which has to be appreciated as a Surgical Strike on Black Money in the true sense.

It is expected that a lot of people across the country witnessing cash crunch. Considering the financial crunch, fortunately there have been alternate payment methods – digital payment methods open wherein public can hassle free pass their day till the banking and ATMs gets back to normal functionality.

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