Why small businessmen in Gujarat are quitting industry and turning to financial speculation

Two major trends are playing out in Gujarat’s economy.

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.

Data for the last five years shows the state’s people are investing more in fixed deposits, mutual funds and small savings accounts.

Businessmen in the state say the two trends are related – an industrial slowdown is leading to a rise in financial investments.

Two months in, How is GST affecting Surat’s textile hub?

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.

Two months on, where do things stand? What do these early days of the new tax system tell us about which scenario is playing out? Are businesses formalising? Or are they heading into trouble?

Beyond Surat’s GST strike: New technologies, Chinese imports are causing a churn in textile sector

At one time, the neighbourhood around Surat’s textile markets was noisy.

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.

In Surat’s textile hub, small businesses are afraid of GST – but big companies are not

Rajesh Mehra is desolate.

A big-boned man in his mid-fifties, he is a trader in women’s blouses.

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.

In response, Mehra made a hard call. He left his family behind in Amritsar and moved to Surat, working on the assumption that having a perch in that city would help him sell better.

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?

Anxieties about how GST will impact their businesses have prompted textile traders to go on a nationwide strike over three days this week. But not everyone in Surat’s textile hub is worried.

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.

Saraogi, who looks far younger than his 46 years, is the managing director of Rs 450 crore Laxmipati Saris.

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.

When it comes to GST, he is relatively unconcerned. It will be good for businesses like ours, he said.

The contrasting responses of Mehra and Saraogi offer a picture of how GST will affect people and companies in India’s manufacturing economy.