Deepak Pandit

Deepak Pandit is the Founder of PRACSTRATs and Co-Founder of iSEED.

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Demonetization: A Vice or a Virtue For Startups in India

This study aims to make an assessment of the impact of demonetization on the start-up and SME sector in India.

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With the stunning move on the 8th of November by the honorable prime minister of India, everyone, be they in media, social media, domain experts, politicians, business houses and of course the common man became part of the conversation, and a stakeholder in the debate on demonetization. One pertinent question in this regard which needed to be researched was whether this would prove to be a vice, or a virtue for startups and Small & Medium Enterprises (SME) in the country.

Interestingly, with India finally being seen as a key engine of growth for the global economy, countries across the world have also been tracking the after effects very carefully. Lessons for the future? Who knows.


The government of India has undertaken several policy initiatives that aim to kickstart and support the startup culture in the country, along with furnishing the infrastructural support for its sustainability. With its programme “Start-up India”, the government aimed to nurture the ideas of young minds and fosters a culture of innovation in the country by building a strong ecosystem that is beneficial for starts-up evolution. This initiative can be heralded as a major step towards transforming India’s image as the repository of next big “innovative idea”. It would help to take the country’s economy to sustainable growth path by creating millions of job opportunities for its people.


This study aims to make an assessment of the impact of demonetization on the start-up and SME sector in India. The attempt is to explore whether or not this historic move by the prime minister is analogous to cannibalizing effect on of his government initiatives. Thus, the objective of the article is to derive the perceptual essence of demonetization from secondary and primary data that states the impact on Startups and SMEs in context of the event (Demonetization drive)


To accomplish this objective 120 business management students were asked to analyze the impact of demonetization on Startups and SMEs through a mix of primary research and secondary sources, their responses were recorded in terms of written text. Respondent’s brief articulation broadly constitute a description of the event, understanding of Demonetization, and discussion on the impact of the same. A total of 110 such documents were analyzed to explore any prominent conclusion. For the content analysis of these documents 51 primary interviews and 55 secondary sources were referenced by the respondents.

Data Analysis Process

This study has adopted thematic coding process to derive relevant knowledge from this information. To accomplish as stated, manual document scanning has been done by the two individual coders that result in the creation of relevant nodes in the data. These nodes constitute germane themes or sub-themes. Each of these themes or sub-themes in turn constitute a respective frequency of occurrence for every respondent’s document.

The data details are as depicted in the diagram below:-

The overall impact is wavy, with sectorial start-ups and generic effects both riding the tide for certain specifics and stepping down for other categories. Primary and secondary responses gathered about impact on startups highlight four prominent themes that depict the dynamics between the demonetization move and the startup wave in the country. The impact majorly inclining towards adverse effects, highlighted as the themes. The extracted themes are combinations of polarity of sentiment projection in a sector or a sub-sector specification. The first category indicated by the codes are negative impact on venture capital market that held back startup funding. The other theme in the same set of negative impact is the cash rich FMCG sector. (Though specific to the current study, the data collected is only in the small scale FMCG/Start up sector.) The opposite moving themes drawn from the responses revealed boost in digital wallet startups and grocery startups. Apart from negative and positive polarity of impacts, the third category, neutral effects, was seen embodying in e-commerce or online retail startups. Thus the four prominent themes are;

• discouraged venture capital market;

• liquidity hit small scale FMCG startup,

• the growth impetus in wallet and grocery startup

• and the unshuffled e-commerce market.

Besides these four, another theme with lesser frequency in the data, but having presence is initial hustles. This theme deals with the varied perceptions built around demonetization. Each of these would be detailed in the further headings one by one.

Discussion of themes

• The discouraged venture capital market and cash hit FMCG sector

The negatively impacted starts up i.e. venture capital market and small and medium enterprises is the prominent theme derived from the analysis. The respondents emphasizing on this theme, illustrate that since bulk of transactions in small and medium based enterprises are cash based, it slows down the economic activity of these firms. With liquidity crunch, they find it difficult to pay their workers, suppliers and partners and hence hinder completion of service or sale. Further, the respondents found that demonetization adversely affect the venture capital market. They specify that the government of India under various policy initiatives like Digital India, Make in India and Start up India announced several measures to boost funding for starts up. But the funding received set back with demonetization move. The venture capitalists will be reeling under the sense of uncertainty and insecurity .Thus, some projects, which they otherwise would have funded, might have lost ground. Our responses indicate that venture capital investments that dropped 24% during the first nine months of 2016 is further expected to fall further due to demonetization drive.

• Growth of wallet and grocery startups

The positive impact on e-wallet companies comes out as an important theme from the analysis of given responses. The respondents discovered that demonetization created lucrative market for companies providing mobile wallets and digital payment systems that have increased their user base by up to 10 times since demonetization was announced. These companies have taken advantage of this opportunity and made digital payments through their application a common and easy solution for citizens. They depicts that the daily transactions through e-wallet services such as Paytm, FreeCharge and MobiKwik increased from 1.7 million on November 8 when demonetization was announced to 6.3 million as of December 7 . This clearly shows that mobile wallet companies have witnessed an exponential expansion. Similarly, the dearth of cash encouraged customers to purchase grocery from virtual platforms, which specifically in India had not attracted attention so far, as cashless purchase was possible in this medium.

• The unaffected e-commerce sector

Another theme that could be drawn from the analysis is the neutral effect in the e-commerce sector. Majority transactions in the online retail sector were till off late Cash on delivery based (according to recorded statistics , approximately 70%). As a result, major e-commerce companies witnessed fall in the number of transactions which in turn affect their sales. Some companies even rescinded their COD options which led to a reduction in the businesses of e-commerce companies, albeit temporarily. However, presence of alternative modes of payment made enabled easy transfer of the mode of payment and balanced business during the phase, leading to an overall neutral impact. Besides, responses revealed that e-commerce companies encashed on the demonization move that urged the customers to make more purchases from online shops.

• Initial hustle

Another thematic conclusion drawn from the responses, which come from various sectors, are initial issues posed due to the move. There are two sets of responses depicting two points of views; one those treat these hustles as the initial pain before the gain. These respondents, majorly from the online retail sector, admitted to the disruption in business due to the move but considers it as a long term gain. The second set of respondents, majorly physical small and medium scale FMCG startups, bore more of a short term approach to analyzing the hustle. Terming the move problematic for smoothening operations, they took initiatives to combat some of the problems (shifting to combo pack offers, shifting to wallet payments and petty amount credit sales). The latter shared conclusions majorly with the SME in various sectors.


Considering the sheer scale of the demonetization move, and the struggle it took to ‘remonetize’ by the RBI and banking system, leads to some interesting conclusions. An obvious one is that the Indian economy remains a relatively concentrated economy, with moves even at the vast scale of demonetization getting transmitted very quickly to the top layer of consumers and other participants. The very fact that things bounced back to ‘normal’ so quickly, effectively in less than 2 months, demonstrates that for this layer, adapting was not as big a challenge as experts expected. On the downside, there is every possibility that players in this layer will be able to revert back to their old ways of excessive cash transactions when they can. The thematic conclusions portrayed in the article, depict varied impact it had on startups, specifically small sector. Some could learn the ways out and adapt to combat the existing cash crunch, some got a boost, while some could not endure the thrust of the move. Overall, timely re-monetization brought things to normal, besides portraying the positive perception of the move amongst small scale entrepreneurs, who expect long term gains in short term pain.


Deepak Pandit

Deepak Pandit is the Founder of PRACTSRATS and Co-Founder of iSEED.

Data Analysis is done by Ms. Oshin Tish & Ms. Deepti Ahuja PhD Candidates, IIM Rohtak

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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