Will Demonetization Impact Amazon’s Growth In India ?

As Amazon (NASDAQ:AMZN) invests heavily across the globe, India is one of the key growth countries for the company, with e-commerce in the region at a nascent stage and a huge potential for growth. However, economic policies in the country can impact this growth for Amazon. In a sudden and unprecedented move, on November 8, 2016, the Indian government announced that high value currency notes (Rs. 500 and Rs. 1000) will no longer be legal tender, eliminating nearly 86% of the currency in circulation, creating a huge cash crunch in the economy. In a country where nearly 90% of transactions are carried out in cash, a bold move to transform the region into a “cashless” economy has created chaos. The move is intended both to reduce untaxed “black” money and rampant corruption in the country, and to bring more accountability in cash-based informal industries.  That said,  experts believe that this could impact the country’s economic growth significantly in the short term. Ambit Capital, a reputed research company in India, has revised its FY18 GDP growth estimate to 5.8% as opposed to the 7.3% figure earlier. The cash crunch has impacted business of several industries and can have a significant impact on the “Cash on Delivery” model of e-commerce companies in India.  About 70% of online shoppers in India, including those on Amazon’s platform, opt for cash while buying a product.  Cash payments are more frequent for high value products where the unaccounted “black” money is spent on luxuries. While online grocery companies have seen a surge in revenues with the demonetization move, as consumers look to buy essential commodities through digital payments, gross merchandize value (GMV) of other high value commodities is likely to be impacted negatively. According to Forrester Research, the cash crunch will bring the cash on delivery (COD) share of e-commerce sales down significantly and increase the online payments.

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Reduction In Cash On Delivery – Short Term Pain But Long Term Gain

COD is considered as a necessary evil in the Indian e-commerce market.   While it boosts sales of online companies, it obstructs their cash flows and makes it difficult to scale operations. There are several additional costs involved with this payment method and the risk of returns and thefts with this form of payment are higher. The recent government push towards a cashless economy will encourage more online payments and reduce the total share of COD in e-commerce sales from the current high of nearly 80% of total transactions. This should help e-commerce companies including Amazon to reduce overhead costs and other risks associated with the COD model. However, in a region where a small section of the population owns credit or debit cards (12% according to a 2014 report), a shift towards a digital payments will be difficult and can impact revenues significantly in the short term.

Slowdown In Economic Growth

The goal of the demonetization move in India is to make the economy stronger and eliminate the parallel cash economy which is unaccounted and untaxed. While this can impact the GDP negatively in the short term, it should have positive long term consequences. For e-commerce companies such as Amazon which already have a digital payments system in place, it should lead to higher online payment and eventually eliminate the painful cash on delivery option. However, in the short term, Amazon is likely to witness a decline in GMV from India as the economy adjusts to the “new normal”.

India is a strong growth market for Amazon and in June this year the company invested an additional $3 billion in the country. The demonetization move will impact the economic growth in the country in the short term and could well be reflected in Amazon’s revenues from the region.  But we believe that, in the long term, Amazon should benefit from this move.  Lower inflation, lower interest rates and a lower budget deficits are likely to be the long term positive macroeconomic effects of the move, which should stimulate economic growth and benefit businesses in the region. However, as the country undergoes this huge transformation from a cash dominant economy to a near cashless economy, Amazon might feel the pinch in terms of lower volumes in the region, in the short term.

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