On July 1, 2017, India introduced the Goods and Services Tax to replace the patchwork of indirect taxes that existed at the time and to improve tax compliances. As the tax regime completes its first year, Scroll.in reporters interviewed people running a variety of businesses: handicraft-makers in Guwahati, textile manufacturers in Surat and Tirupur, paper-goods dealers in Mumbai, weavers in Banaras, large and small engineering units in Hosur. Most of them were people Scroll.in had spoken to a year ago to understand their hopes and apprehensions about the new tax. This time around, they were asked a different question: what were their experiences with GST like? The sum of their observations provides the answer to a larger pattern: how GST is reshaping India’s manufacturing economy.
To begin with, there is its sheer unprecedented nature. In all the years since Independence, India has never seen something like it. “We have heard of coin shortages but never a cash shortage,” said MS Sriram, visiting faculty at the Indian Institute of Management-Bangalore’s Centre for Public Policy. “I certainly have not in my life. This is new.”
How the shortage played out is odd too. It is acute in some states but not in others. For instance, in Tura, the largest town in Meghalaya’s Garo Hills, an official at the main State Bank of India office, which disburses cash to the bank’s other branches in the region, told Scroll.in that cash reserves had dwindled to almost a fifth of the required amount. “There is pressure from other branches to release money, but we have not been able to give even half of what they have been demanding,” the official said.
The discrepancy is visible within states too. In Maharashtra, Mumbai is fine but Nashik is not. In Tamil Nadu, big banks in Hosur say they are getting all the money they need but their counterparts in surrounding villages say the situation is bad. “We contact our sister branches to see if any of them has surplus cash,” said the manager of a public-sector bank in Belathur, a village about 20 km west of Hosur.
There are other puzzles. The cash squeeze showed up not gradually but suddenly. Reports began coming in from several states from February. If the cash squeeze was only due to a growing mismatch between cash supply and the demands of the growing economy, it should have shown up gradually, experts say.
As a report in Scroll.in noted earlier this month, several theories emerged to explain the shortage, covering the gamut from obvious to plausible to off-the-wall. Shortly afterwards, several Scroll.in reporters fanned out across the country, speaking to people in both cities and villages, to try to identify the genesis of this shortage.
Out today, with my colleagues Abhishek Dey, Mridula Chari, Vinita Govindrajan and Arunabh Saikia, a more deeply reported piece (than the previous one) which seeks to trace this cash squeeze back to its (idiotic) origins. Do read.
atms are again running dry in india. and theories claiming to explain why are doubling every day. out today, a quick report with my colleague rohan which seeks to separate plausible theories from the disingenuous (or just plain stupid) ones.
On one hand, small industrial units are shutting down. This is not a recent development. Micro, small and medium units in the state started getting into trouble about five years ago, well before the central government demonetised high-value currency notes in November and introduced the Goods and Services Tax in July. As Scroll.in reported from Surat, several factors were at work – rising imports from China, the entry of bigger players with greater economies of scale, and government policies such as import duties that favoured bigger companies over smaller ones.
On the other hand, financial investments have boomed in Gujarat. Two years ago, a sharebroking firm in Rajkot, Marwadi Shares, was adding about 1,000 new customers every month. That is now up to 6,000 new customers a month, said Ketan Marwadi, its managing director.
Three months ago, when the central government was getting ready to roll out the Goods and Services Tax, the textile industrial cluster of Surat, Gujarat, India’s biggest manufacturer of synthetic fabrics, was distinctly nervous.
At play were two conflicting views of how the new tax regime would affect India’s predominantly informal business sector. The government said GST would make it impossible for firms to evade tax. Even small companies would enter the tax net, boosting both the formalisation of India’s economy and tax revenue. Companies in the Surat cluster, however, were unsure if they could pay these taxes and remain competitive.
Such fears, dismissed by GST supporters as no more than a desire to avoid paying taxes, resulted in the industry petitioning the government several times. When that failed to deliver relief, they went on a general strike in mid-June. The government still did not yield. There was a police crackdown, and the strike petered out. GST was rolled out as planned on July 1.
The street resounded with the clacketing of powerlooms – five or six machines in dark, poorly ventilated rooms with split levels. Most of these were family-run businesses. The looms were on the groundfloor with families working by day and sleeping upstairs at night.
Now, the inner city is more quiet. There are still powerlooms aplenty in the industrial clusters around the town. But within the town, they increasingly show up in junkyards and the shops of scrap merchants. The premises that used to house them now lie empty or have been repurposed. Some are used by people in the embroidery trade. Others serve as parking spaces for two wheelers.
The castes that traditionally operated these looms – Khatris and Ghanchis – have left the trade as well. Some have entered new businesses. This reporter met some driving rickshaws. Others have given out their premises on rent and live off that income.
This silence – and the departure of weavers from their traditional trade – reflects something important. Surat’s small and medium businesses were struggling even before the government announced that it would implement the Goods and Services Tax from July 1, subsuming all indirect taxes, from octroi to service tax, into one rate that would be consistent nation-wide. This reflects the situation Scroll’s Ear To The Ground project found in the other states we reported from as well. There too, small and medium enterprises were in trouble.
The second (and concluding) part of our article on Surat’s textile cluster gets into more detail — and asks pointed questions about India’s vapid claims of manufacturing competitiveness.
Until ten years ago, Mehra used to take orders from garment wholesalers in big cities like Mumbai, Kolkata and Bengaluru, buy the cloth and thread he needed from garment clusters like Silvassa, and get the blouses stitched in Amritsar.
But this business model ran into trouble when blouse-making units came up in Surat, one of India’s biggest synthetic fabric and sari-making clusters. Enjoying advantages like proximity to cloth- and thread-makers, these units made cheaper blouses than their counterparts in Amritsar.
Now, as India readies to overhaul its tax regime for businesses, replacing a welter of sales and income taxes with a single tax called the Goods and Services Tax, Mehra has run out of ideas. “Kya hoga?” he asked. “Kaise chalega yeh sab?” What will happen? How can this business continue?
No more than 20 minutes away from Mehra’s shop in the basement of a building opposite Surat’s old Ratan Cinema, in the heart of the town’s textile market, lies the soot-blackened industrial estate of Pandesara. This is where Sanjay Saraogi works.
Described by his peers as one of the sharpest minds in the Surat textile industry, he entered the family business at 14 when his father fell very ill – he would go to school in the morning and spend the rest of the day in the shop. Over the last ten years, he has steered Laxmipati beyond trading into sari manufacturing.