After demonetisation and GST, winter of discontent in Ludhiana

People question the manner in which demonetisation was executed and ask why there wasn't a bigger interval between note ban and the new tax regime

Winter is coming to smoggy, polluted Ludhiana, the centre for hosiery, garments, and textiles. October-February is when business booms in this city. But if you ask traders and manufacturers, this time could be different. Business could be slower. That is because this winter will be the first one after demonetisation, and the goods and service tax (GST).

Business Standard spoke to a number of people who form a vital part of the textile and hosiery supply chain. The industry, which has traditionally been cash-intensive, has taken a massive hit and demand is still not close to pre-demonetisation levels. There have been lay-offs, businesses are running at wafer-thin margins, there is a shortage of working capital, and businesses are downsizing.

Industry voice

Harinder Pal Singh sits in a glass cabin perched above his factory floor in an industrial area on the outskirts of the city. His company, Poonam Textiles, makes sweatshirts and t-shirts, which it sells to wholesalers, retailers, as well as through six self-branded stores. When I walked into his office, he was downloading from WhatsApp a newsclip featuring BJP leader Subramanian Swamy, on his iPad.

Singh’s jovial demeanour turned serious when he was asked about the impact of demonetisation and the GST on the garments and textile business. “My turnover, in 2015-16, was around Rs 11 crore. In 2016-17, after demonetisation, it went down to around Rs 8 crore. We have recovered a little, but this winter may not be as good. For smaller businesses, it is even worse.”

Singh has two stores in Ludhiana, one in Dehradun, and three in Delhi. “I am exiting the Delhi business. There is just no demand. All three stores will be shut down by the end of November. We wanted to expand our business to boost margins by cutting out the suppliers and middlemen. That is why we opened our own stores. After the note ban and GST, if you ask me if I would take that decision, I will say no. Expansion is impossible now,” he says.

As we speak, a worker walks in from the factory floor. “Sir, koi kaam nahi hain (there is no work)”. “Koi gal nahi beta. Do din ruk jaa, naya order aa sakta hain (no worries, son. Wait a few days, we may get a new order),” Singh replies. He admits to me that for an industry dependent on cash, the note ban has hit hard. “See, a customer will pay usually for clothes or garments in cash. That cash goes up the chain from the retailer to the supplier/wholesaler to the manufacturer. When cash dries up, the supply chain gets crippled. The effects are still showing.”

Singh maintains that even before demonetisation, most of his transactions were through cheques or online banking. But retailers and suppliers have no hesitation in admitting that because of heavy cash usage they used to maintain two books, one of which was for the taxman’s eyes. Of course, after admitting that, they seldom want to come on record.

“In the past retailers would not always maintain proper records, or present bills. After the note ban and GST, the good thing is that has changed. People have had to get their GST numbers. But then there are the very small businesses, which don’t come under the GST. Not all of them have PAN numbers either. A number of them are out of work already since nobody wants to deal with them,” says a retailer.

“October-February is also the wedding season. So far this year, the demand is just not picking up. The labour force here is migrants, from UP and Bihar. As such, there is a shortage. If sales remain muted, I may have to downsize,” the retailer said.

Note ban at work

According to industry sources, India’s garments industry is Rs 25,000-30,000 crore. Ten-fifteen per cent of that comes from woollen products, and 90 per cent of that is based out of Ludhiana. According to the latest data, dated 2011-12 and available on the website of the ministry of micro, small and medium enterprises, the MSME textile and apparel industry in Ludhiana district hires 106,000 people. Businesses say there have been job losses. But queries to multiple industry bodies have elicited no response to how many people were laid off exactly.

In this flashy, wealthy city, where every second car is modified with after-market parts (you will even find humble Maruti Altos running on faux-chrome alloy wheels and fat tyres), people admit that there was a lot of unaccounted wealth. Harinder Singh says that in the initial days after Prime Minister Narendra Modi announced demonetisation on November 8, there was a glut of cash as people were placing orders and paying employees three-four months in advance.

This is echoed by brothers Rajinder and Ashok Uppal, who run Punjab Metal Fabricators, which makes components for sewing machines. “There was so much cash. Even clients who never paid on time promptly paid in advance. But after that came the shortage as banks just could not distribute money in an organised manner. We don’t doubt the government’s intentions regarding the note ban and GST. Our problem lies with the very shoddy implementation,” said Rajinder Uppal.

“Our business was 60-70 per cent through cheques or online banking and 20-30 per cent cash before the note ban. The cash component has reduced now. The biggest problem we now face is the lack of clarity regarding the GST. Sewing machines are in the 12 per cent bracket. But there is confusion regarding the components. Some say 12 per cent, some say 18 per cent. GST officials at the local level are not of much help. We have made representations even in Delhi, but not much has come of it,” says Ashok Uppal.

He says that while some industries have bounced back, like sewing machine and bicycle components, the city’s biggest sector, textiles, will continue to suffer. The government should have had some gap between implementing the note ban and GST. They happened just eight months apart. The view is that before the businesses could fully recover from one, the other happened,” says Rajinder Uppal.

The complaints

Another problem, this one GST-specific, which businesses face is that chartered accountants and advocates, who understand the intricacies of the new, nationwide tax, are in short supply. Accountants are charging more, and that eats into the margins. “We have hired another person just to deal with GST issues. There are multiple filings to be done and we are still trying to understand the impact on our business,” said Parash Jain. His company Hem Knitwears, with a turnover of Rs 50 crore, supplies yarn to manufacturers across the country.

“For us, it is a margin game. And since the note ban and GST, margins have been squeezed further. I understand why the GST was necessary but I am not so convinced about demonetisation. First, the government made a mistake by printing the Rs 2,000 note. I feel there are other ways to go after those with black money. The 75 per cent amnesty scheme could be done even without withdrawing notes from circulation,” Jain said.

The Pradhan Mantri Garib Kalyan Yojana was launched by the Centre a month after demonetisation. It provided an opportunity to declare unaccounted wealth and black money in a confidential manner and avoid prosecution after paying a tax, surcharge, and penalty, which added up to 50 per cent on undisclosed income. An additional 25 per cent of the wealth will be invested by the government and will be refunded after four years, without any interest.

There is certainly a growing murmur against the Centre. “The note ban and GST have made even die-hard supporters of Modi question the government’s abilities. I still believe his heart is in the right place,” says Harinder Singh. “However, I believe that had doctor sahib (former Prime Minister Manmohan Singh) ever implemented such schemes, he would have ensured that things went smoothly. He has the economic expertise and would have done things in a more intelligent manner.”

“You require expertise to ensure people don’t suffer. Small businessmen come to Ludhiana from across North India to buy clothes. What about them? You can be a good person. But that does not mean I would allow you to do heart surgery just on that basis,” Singh says.

Next: Bhiwandi