NEW DELHI, India — While the rest of the world was consumed by Donald Trump’s astonishing election victory in the US on Tuesday, India had its own stunning and historic news to contend with. As part of Prime Minister Narendra Modi’s promise to fight corruption, terrorism and black money (counterfeit or unaccounted cash), he announced in a television address that 500 and 1,000 rupee notes would cease to be legal tender by the end of November 8, and they could be exchanged for new notes by December 30.
As if that wasn’t shocking enough, he made the announcement with less than four hours to midnight. Overnight, 86.4 percent of the country’s currency was brought out of circulation. In any other week, the demonetisation would have made headlines around the globe. The ramifications of such a surprising and radical change to India’s cash-driven economy are yet to fully play out, but there are hints of the growing pains and changes to come.
In the hours after Modi’s announcement, shoppers flocked to stores to spend their soon to be expired cash before Tuesday night was over. Many retailers including Bottega Veneta, Rolex, Dior, Gucci and shops in Mumbai’s luxury Palladium mall extended their hours and notified shoppers that they were staying open late via WhatsApp and telephone calls. People lined up to buy luxury handbags and gift vouchers as well as jewellery and biscuits of gold, many at a premium, as jewellery dealers raced to fill open ledgers for product bought with black money. Some stayed open until 8am the following day, with purchases made after midnight backdated on Tuesday’s daily sales reports.
The late night shopping spike did not go unnoticed by government officials, however. Security footage was seized from some luxury shops in Mumbai, including Bottega Veneta, while the Income Tax department raided jewellery shops looking for black money and transaction discrepancies.
“They did a terrific amount of sales during those three hours, which itself is not a normal situation,” says Darshan Mehta, president and chief executive of Reliance Brands, an international partner in India for brands including Diesel, Superdry, Ermenegildo Zegna, Brooks Brothers and Steve Madden. “And then, of course, the next few days have seen a dramatic dip.”
Indeed, foot traffic has declined sharply in the days since the announcement, and any purchases are being made through credit cards or electronic payment methods only.
As of Sunday, banks had logged 2 trillion rupees ($29.8 billion) of cash deposits or exchanges since Modi’s announcement, and people queued for hours at banks to make their transactions. ATMs across the country are not yet dispensing the new 500 and 2,000 rupee notes, which have different dimensions, and individuals can only exchange up to 4,000 rupees at bank locations. Meanwhile the real estate market, the most popular place to invest black money, is declining even though some dealers are taking advantage of the situation to sell property fast.
It’s a disaster for fashion, it’s a disaster for all luxury goods.
People are already going so far as to cancel weddings, which represent a $38 billion industry in India and directly impact the fashion and jewellery markets. “It’s a disaster for fashion, it’s a disaster for all luxury goods,” says designer Tarun Tahiliani, who is known for his couture bridal gowns in addition to several lines and boutiques across the country, and runs a clean business. “When something is done so drastically at the end of the biggest festival [Diwali] and in the middle of the biggest wedding season [October through December], the consequences are disastrous because already people have started cancelling events.”
Sabyasachi Mukherjee, another highly-acclaimed designer with a thriving bridal business, also thinks the wedding industry will face setbacks. “Luxury is going to be more necessity driven than just mere indulgence driven,” he says. “So a lot of strong bridal businesses, where luxury is a necessity, will probably have to re-imagine their businesses again, because they will be very badly hit.”
In addition to a slowdown in purchases from high-income consumers, Tahiliani is seeing negative impacts on an operational level. Many smaller vendors of embroidery and beading that operate cash businesses are now at a standstill. Mukherjee agrees: “The only barrier to running a ‘clean’ currency business in fashion is, as you go down the ecosystem, you might have to work in remote villages where ancient art and crafts prevail and they do not have a solid banking system for people to be able to open accounts,” he says. “So some craftsmen still have to be paid with cash.”
That cycle will be challenging to change, says Tahiliani. "If you’ve allowed a black economy to flourish, you can’t take away people’s legal tender overnight. You have to make arrangements.” He says it feels as if the society has been turned on its head, but his high-income clientele, just like Mukherjee’s, will bounce back much faster. “Whoever has stashed away unaccounted money will have a lot of accounted money as well.” says Mukherjee. “[They] get into little bit of a shock when that currency becomes paper. But eventually good sense will prevail and the market get regularised and I think in four, five months, the buying pattern will become the same again.”
Mehta also thinks the initial slowdown — a decrease in consumption by about 60 percent, by his estimate — is just a knee-jerk reaction, albeit one with some long-term impact. He likened the situation to China’s own corruption fight in 2014, which in part targeted luxury gifting. “While some of it has recovered, a lot of it — [about] 15 percent of their business — is permanently gone,” he says.
India also saw a contraction in the high-end watches and jewellery markets when the government started requiring PAN cards — identification cards used to keep track of cash and prevent tax evasion — for certain transactions at the beginning of 2016. In a country where loopholes are more than common, however, the PAN cards haven’t provided enough accountability to curb corruption.
Mehta thinks that the new normal in the luxury and premium-plus markets in India will settle over the next year, but will see a permanent contraction of about 10 percent to 15 percent. “If you look beyond the short term, I think this is a tectonic shift in a good way for the country, especially in terms of consumption, e-commerce, omnichannel,” he says.
It’s going to change the culture in India; there is a culture that really hurts our industry where people are proud of cheating the system.
Mehta also expects some relief when the new single, unified tax system takes effect in April. “It will improve not just efficiency but add a lot of dollars and rupees to the margin bottom line, so to that extent you will see growth margin increases although the top line decreases.”
The currency adjustment will also accelerate a societal change that was already in progress, says Mehta, thanks in large part to the Aadhaar, an identification number program that was approved by Parliament in March. “A billion Indians now have a unique identification number, and the moment you have a unique identification number you can open a bank account, which means you can start building a credit history,” says Mehta.
This program, in combination with the estimated 300 million smartphones active in the country by the end of 2016, will impact the way people shop. “I think electronic money in India, over the next four or five years, will just change the face of this economy,” he says. “What happened last week will be a huge impetus.”
Case in point: The success of Hamleys, a British toy store that is part of the Reliance Brands portfolio in India and attracts shoppers from all socio-economic backgrounds. This past Saturday, sales were only down 15 percent, and 100 percent of purchases were made on credit cards or through some form of electronic payment, the latter of which Mehta said was “unheard of” before. While he says the industry should brace for negative comparable sales in 2017, there will be simultaneous new growth. “If I look beyond that, this is a great move.”
Bandana Tewari, fashion features director at Vogue India, also sees short-term pain and long-term gain from Prime Minister Modi’s bold plan. “This level of accountability was required in the market,” she says, adding that only companies with above board balance sheets can hope to secure investor funding. “The shakeout is going to allow a real business system to exist.”
Cecilia Morelli Parikh, co-founder of Mumbai’s luxury concept store Le Mill, predicts growth will come in the form of increased domestic spending. “I think if there’s one thing that hurts us in India, it’s our clients shopping outside of the country when they're on holiday in London, Singapore, Hong Kong, Dubai whatever it is,” she says, adding that many people in India convert their black money by shopping abroad. “I think that the second advance is that it’s going to change the culture in India; there is a culture that really hurts our industry where people are proud of cheating the system.”
Morelli Parikh also hopes the increased tax revenue will encourage the government to lower the high import duties and tariffs on luxury goods. “I think that this in an incredible initiative that I fully support,” she says. “I think it can only help our economy and our industry in the long term.”