Almost half of India’s steel production of 80 million mt, produced by the unorganized secondary sector and largely dependent on cash trade channels for sales, will be impacted by the Indian government’s decision to ban high denomination currency notes, senior officials at steel companies have said. The Indian government has banned use of INR 500 and INR 1,000 currency notes and imposed restrictions on amounts of cash withdrawals per week from banks.
Two senior officials, one with a government-owned steel company and another in the private sector said that the worst affected would be demand for galvanized sheets and thermo mechanically treated (TMT) bars, in rural markets for construction largely based on cash transactions. Elaborating, the officials said that of the total Indian production of 30 million mt of TMT per year, about 20 million mt is accounted for by the secondary sector using scrap as raw material.
On the production side, these secondary producers will be hit hard as the scrap trade is largely cash-based and these units will be forced to scale down on raw material purchases as cash liquidity completely dries up.
Additionally, almost half of the TMT bars produced by secondary plants in the unorganized sector is sold in rural markets on cash basis, and demand will be severely hit as rural consumers do not have cash to undertake construction or repairs of houses, as everyone is busy exchanging old currency notes on the one hand and with cash withdrawals from banks restricted, the officials added.
According to several estimates, cash transactions in India accounted for 12 percent of the national GDP while the demonetized currency notes of INR 500 and INR 1,000 constituted 86 percent of the total value of currency in circulation in the country, an indication of how much liquidity has been sucked out of the economy by the government decision, ostensibly to curb unaccounted money.