Manufacturing and trading at the textiles city of Surat had immeasurably suffered following the demonetisation of November 2016 and the rollout of the goods and services tax (GST) a year back. Subir Ghosh takes a sweeping look at the ground situation.
Ayear-and-half after demonetisation and twelve months after the rollout of the goods and services tax (GST), it is a nebulous state of affairs in the bustling textiles hub of Surat. Precise and reliable numbers are hard to come by, but those that are being bandied around are bleary indicators in themselves. All that one is left to go by are estimates (some random, some well-calculated), and these estimates vary widely depending on who one is talking to. In many ways, it resembles a conflict situation. There are truths, half-truths, and different versions of the same truth.
What few would dispute is that manufacturing and trading activity in cash-driven Surat had plummeted after the demonetisation of November 2016, and the GST implementation some six months down the line had brought transactional activities almost to a grinding halt. Street protests and bandh calls became the order of the day, and the city remained in the headlines.
It was as if Surat's textiles industry would have to start from scratch all over again. A year since we took stock of the ground realities, things have considerably improved. Yet, that would only be a relative term. Things have certainly improved-for many (depending on the nature of their business); but they are far from being "normal." On the other hand, what most disagree about is the extent to which business has been since brought back on track. In fact, there is a sizeable number of industry insiders who are convinced that matters are far worse than they were a year back.
Manoj Agarwal, president of the Federation of Surat Textile Traders Association (FOSTTA), contends, "After the rollout of the GST on textiles, the industry (in Surat) has lost its business significantly- ranging from 40 per cent to 50 per cent. Thousands of loom machines have turned into scrap in the last one year. Many small businessmen have either left the industry altogether in search of better avenues or have permanently returned to their respective hometowns. Consequently, lakhs of skilled and semi-skilled workers are wandering around here and there without work. The Surat textiles market is unorganised, consisting of very small to big players; hence, any comparable data is not available with us." Jitendra Vakhariya, president of the South Gujarat Textile Processors Association (SGTPA), agrees on the numbers, "Almost 50 per cent of the business was down after GST."
That is possibly where much of the problem lies-the lack of credible data. But for an association that comprises some 180-odd textile markets and more than 60,000 trading firms operating out of those multi-storied buildings, FOSTTA's numbers-howsoever indicative-need to be taken seriously by the government. Vakhariya's understanding of the situation is similar; "We do not have exact data, but it (business) has recovered up to 70 per cent of what existed before GST."
To feel the pulse of Surat, one needs to pay heed to Agarwal's assessment of the affairs at small business set-ups: "As a matter of fact, the law has not changed for the Surat textiles/cloth market, but any tax on cloth has been imposed for the first time after Independence. Therefore, our members and businessmen find it very difficult to comply with provisions and procedures of the GST. However, we are helping-especially the textiles traders if they face any specific problems in business, with GST department, with transporters, etc, according to our (limited) capabilities."
The GST did affect a lot of small-time businesses and traders across the country. But since Surat has a considerable number of such set-ups, the question has remained the same over the last one year: how can they cope with the way laws and procedures have changed? And, there is only so much that industry associations can do. Says Vakhariya, "Definitely, the procedure has changed for compliances like e-way bill, submitting returns for GST, etc. Government officers have conducted a number of seminars and training sessions. Also, private professionals have come to the rescue (of traders) and have shared lots of knowledge and information related to the GST. Since the GST is mandatory and implemented by the government, we as an organisation cannot interfere in such work."
Gagan Gulati, director of PG Silk Mills Private Limited, puts it across threadbare: "Hit by recession, businessmen in Surat have urged the Union textiles minister to review the situation in the aftermath of demonetisation and the rollout of GST and intervene so as to turn around the situation. They claim that the production of fabrics has dropped from about 4 crore metres per day (before demonetisation) to about 2.5 crore metres per day; the number of working embroidery machines has fallen; and the demand for new shops has also dropped. FOSTTA claimed that the sales of local textile traders have dropped by about 30-40 per cent and payments have been delayed. Falling earnings have resulted in traders shifting to low-rent shops and the demand for new shops has dropped. Those who had availed of loans are finding it difficult to honour their EMIs.
"In one of the notes, FOSTTA said the number of embroidery machines had dropped by 1.25 lakh, 89,000-odd powerlooms have been sold at the price of scrap; exports are on a continuous decline; and women working in embroidery units have become jobless."
One of the effects has been on costs. In May, close on the heels of the rise in prices of raw materials, the SGTPA announced a price hike on job charges on grey cloth. Vakhariya told a daily, "The dyes and chemicals companies raised their prices up to 20 per cent from April 1 as a result of which, the cost of printing and dyeing goes up to 50 paisa per metre and the mill owner had to bear the loss. Apart from this, the labour salaries have also been hiked. Even the prices of coal used in the mills to generate steam have also gone up to ?1,000 to ?1,500. Due to the price rise in all the sectors, we have also finally decided to hike the job charges of printing and dyeing on grey cloth."
These problems have been compounded by the prices of polyester yarn that have increased by about 12-15 per cent in the last four months. Yarn prices jumped by 6-8 per cent in April. As a result, a meeting of powerloom cooperatives decided that the number of daily operating shifts be reduced from three to two. This will lead to a fall in production by one-third. Since synthetic fabric attracts 5 per cent GST and yarn 12 per cent GST, powerlooms have been unable to claim full GST credits for yarn when selling fabrics in turn. Unclaimed tax therefore remains in the books.
A matter of assessment
The mainstay of Surat's textiles industry is the assortment of countless small-time businesses, particularly in the markets. It is also varied. Hence, the demonetisation/GST impact too is as varied. For instance, Vyom International Pvt Ltd is a leading manufacturer and exporter of high-quality fancy fabrics. It recently ventured into retail with the opening of its first outlet called the Fabric Studio in Mumbai. Its CEO, Abhishek Dhanuka, thinks aloud about the ramifications: "It (Surat) is still getting over the impact of demonetisation and GST. There has still been a lot of cash crunch and payment problems in the market over the last few months. People don't have an idea about the stability of market and about the upcoming fashion trends so as to decide what to manufacture."
This point of view is shared by Yash Jain, head of international marketing at Divyam Export, "I wouldn't say it has recovered completely. It had affected the local market a lot. It completely disturbed the buying pattern of the traders/wholesalers/retailers, etc. Payments have also been deferred for a long time which causes inconvenience and blocks capital." Adds Ashish M Amin, chief executive of Premier Looms Manufacturers Pvt Ltd, "Weaving units and traders seem to have been affected the most." And, Radhey Weaves managing director Deepprakash Agrawal, contextualises, "This varies from person to person. We were not affected by GST."
Gulati narrows it down: "It's not a particular section that we can say had been affected; it's the whole vertical chain of textiles that felt the brunt of the tax. Maybe, the GST might help in the future; but it's making a big impact on our present by eroding capital, which will affect our future."
Another interesting perspective comes from Umang Banthia of SL Banthia Textiles Pvt Ltd: "Companies which are dealing only in textiles or ones related to the fashion industry have been affected the most. Surat has not yet recovered from GST and demonetisation, as it was into overproducing goods and supplying goods at competitive prices. All verticals of the fashion industry such as weaving, dyeing, trading, etc, were affected as the overall money circulation in the market was hit due to overproduction and lowering of prices due to overstocking."
A possible positive outcome was shared by Southern Gujarat Chamber of Commerce and Industry's (SGCCI) textile committee chairman Devkishan Manghani with a newspaper in late March, "Post-GST, the fly-by-night operators have literally packed their bags. Because, you can't do business with those who are not registered under GST. Earlier, anyone was doing business with everyone. Now, the business is restricted to those who are registered players."
Shamal and Shamal owner Sham Shah delves slightly deeper in explaining the financial context for most traders and manufacturers, "For a businessman operating on low margins, the cost of compliance that includes hiring an accountant and tax consultant is a pain. This is one reason we are seeing a resistance against GST. Other GST contours that resulted in problems are the inverted duty structure and interpretation on where certain fabrics can be placed. This was the issue that created outrage among textile manufacturers and attracted national attention."
However, the chief executive of Sunrise Imports & Exports Co, Manoj Sorathiya, disagrees with this contention and instead argues that Surat has indeed recovered. His explanation: "The GST brought about a major change in the tax policy of India. People were not aware in the beginning; so, it was hard for them to follow. But it (the tax regime) will create a good environment to do business."
It's the same line of thought with Himanshu Jariwala, managing director of J Korin Spinning Pvt Ltd. He asserts: "The textiles industry has almost come out of the effects of GST and demonetisation. Both resulted in positive movement for business. The benefit of GST is now being seen, with its major impact being on small-time traders, weavers and units which were earlier tax-free."
Abhishek Pachauri, managing director of Reckon Industries, sums up, "Yes, Surat is still reeling under GST to some extent. There can never be one section of any industry that can be affected the most. All industry sectors are inter-related and so every section gets affected." Reckon Industries is into manufacturing of textile process house machines, like steaming machines/curing machines, continuous washing range, loop ager for digital printing and all types of dyeing machines.
When Fibre2Fashion had presented a bird's eye view of the city to readers two summers back, the story had been about Surat synthesising dreams-its own and also that of others. But now, not only does Surat has to recover lost ground that has been ceded on account of both demonetisation and GST, the textiles hub will also have to do a lot of rethinking on how it can compete with other hubs across the country. So, how can Surat grab the limelight from other textile hubs? Have other textile agglomerations gained an edge in the meantime? What advantages do the others have over Surat?
Agarwal has no choice but to paint a grim and dismal picture, "This question has been raised for quite some time. To be more frank and honest, we foresee Surat losing its position to other venues and centres, given the policies of the Gujarat state government. Surat may remain the epicentre of the country's textiles industry if suitably supported by the government. But unfortunately, the governments of other states are offering various (and more) incentives to entrepreneurs including those from the textiles sector. Thus, if the state government does not pay heed to the bottlenecks around Surat, we may lose our grip over the (Indian) industry in the near future."
The onus, most insist, lies with the state government. Vakhariya lends weight to the debate, "We have represented many issues to the government, and some of them have been resolved, while some others are pending. They should offer various incentives and cheap finance for the adoption of new technology. The state government should follow the textiles policy of Maharashtra wherein electricity and other facilities are made available at very affordable rates."
On the other hand, Ashish Gujarati, president of the Pandesara Weavers Cooperative Society Limited, has this to say, "Surat is the largest MMF (man-made fibre and fabric) hub of India, and yet the MMF powerlooms have been banned from ITC (input tax credit) refunds. The Surat cluster therefore has been adversely affected. The grey fabric production has come down from 40 million metres/day to 25 million metres/day. Out of four lakh powerloom workers; 40,000 workers have become unemployed. Powerloom entrepreneurs who were once job creators have now become job seekers. New capital investment in weaving industry has therefore been hampered."
To ameliorate matters, Agarwal hopes the Union government will exempt cloth from the ambit of GST in order to save both cottage industries and small businessmen, besides workers. He underlines, "The textiles industry employs more than ten crore people of the country, directly and indirectly. This has been the main reason behind exempting cloth from the tax purview since Independence. The GST should not be made applicable to the yarn stage as the people involved in the small, tiny and unorganised sections of the industry nowadays are struggling for survival." He goes on to add, "As far as the state government is concerned, it must come forward with cheap electricity that is comparable with the power tariff in other states. Further, infrastructural facilities and business-friendly labour laws are our prime concerns which must be addressed as well."
Gujarati chips in: "The ban in ITC refund for the powerloom industry should be immediately revoked by the Union government. The state government should come up with a very aggressive textiles policy in line with that of Maharashtra. Also, the power tariff for the powerloom industry being highest in the country, it should be brought to the level-playing field of Maharashtra."
The task for the textiles hub of Surat is well cut out. What is certain is that this would be a difficult one, and the Gujarat government will need to do more than its budgetary bit for that.