A spanner in the works

Hit hard by demonetisation and GST, micro, small and medium enterprises in Vadodara and Surat, the industrial hubs of Gujarat, are striving to make a comeback.

Geeta Puanikar, who earns Rs.50 for every 100 boxes she makes at a textile market in Surat. She makes 1,000 boxes on an average. “Last year was difficult. We saw some improvement this year. Owing to demonetisation I opened an account. But my earnings have reduced.”

IN OCTOBER this year, Gujarat Chief Minister Vijay Rupani announced that the Gujarat Industrial Development Corporation (GIDC) would set up 16 additional industrial estates to attract Micro, Small and Medium Enterprises (MSME). Rupani said the government planned to invest Rs.19,650 crore in the hope of encouraging enterprise as well as generating large-scale employment.

With 202 industrial estates, Gujarat has been at the forefront of encouraging small to medium businesses. After the demonetisation debacle, which affected this sector severely, the State has gone into overdrive to prop up an area that has been a significant contributor not just to the State exchequer but to the country. The announcement came a few months after the government gave away Rs.730 crore as incentives to 16,000 MSME units wanting to expand or set up new units in the State. “These companies play a significant role in our economy and in employment, we have to assist in their growth,” Rupani said at a public event.

Are these announcements part of wooing the large base of businessmen and traders in Gujarat in an election year? The 3,76,357 registered MSMEs in Gujarat are critical to the State’s growth. According to the Gujarat Industries Commissionerate, the MSMEs employ close to 26 lakh people.

In the initial weeks of demonetisation, the MSMEs were obviously hit hard, largely because of their dependence on cash. Gujarat, with its vast number of enterprises, secondary businesses and trading hubs such as Surat for textiles and Bhavnagar for diamonds, was initially gripped by paralysis. But no sooner had they recovered from it than GST was slapped on them.

Frontline spoke to several businessmen and traders in Vadodara and Surat about the initial impact of demonetisation as well as the situation a year since. Businessmen in Vadodara said it had been a rough year. However, they hope the slew of measures announced by the State government will help them tide over the rough patch.

“We did operate a considerable amount in cash, so post-demonetisation, the lack of liquidity in the system affected us. That took a toll on revenues as no one had money to purchase and the supply chain that worked on cash was affected. Just as that was settling, GST hit us, and putting that process in place set us back again,” says Nilesh Shah, who runs a steel-cutting tool unit at the Makarpura GIDC in Vadodara. He says his business has come down by 30 per cent following the introduction of the two economic policies.

“What has this all been for? Why did we have to go through all that pain when things are back to where they were? The money is back in the system and we have gone back to dealing in cash again. Demonetisation seems like a terrible nightmare,” says Shah.

With demonetisation, MSMEs were unsure of getting the payments due to them from customers in time. That meant less production and further slowdown for the people who provide them with raw materials, and shortage of supply, leading to inflation on what is available, says an analyst.

“Between demonetisation and GST our order book has gone down by 15 to 20 per cent. You will notice that there is hardly any activity in the area. We could hear the noise till quite late at night. Some factories would work two shifts. It’s very quiet now after 6 p.m.,” says Ahmed Memon, who runs a small machine tool industry. “There is a reduction in work and we do not need so much labour. As a result, people have lost jobs or get reduced daily wages.”

Memon’s words are not far from the truth. It is eerily quiet while walking around the Makarpura GIDC estate. The shutters of most factories are open, but there are fewer workers.

Once a significant princely state, Vadodara, also known as Baroda, developed into a major industrial hub with chemical, oil, engineering, plastics and pharmaceutical companies. Thanks to these large industries, the ancillary sector too evolved and thrived. GIDC estates mushroomed as the State recognised the value of these companies. There are now 13 GIDCs in Vadodara district alone.

“Our businesses run on small margins, a large part on cash and in many ways using traditional methods of entrepreneurship. Demonetisation and GST forced us to change this and modernise,” says Memon. “However, it is a capitalist approach and a pro-big industry move. They need to realise that in India we are the backbone, we grease the economy and generate employment.”

Several economists have pointed out that the post-demonetisation reforms in MSMEs will apparently make companies comply with tax obligations, become more transparent and reduce unaccounted transactions. This would, in turn, help scale up operations and lessen corruption, leading to an overall improvement in the economy.

But there is a flip side to it. Take, for instance, a paper box-making company supplying packaging requirements of FMCG (fast-moving consumer goods) companies. The scrap that the company buys to make cardboard is paid in cash and often unaccounted. The final product that big companies buy too is paid out in cash. This helps the small businessman to distribute wages to daily wagers and others who work for him.

“The fundamental mistake they made was to treat all cash as black money. Not all cash is black,” says Memon. “The worst for us was the drying up of cash and accounting for it. But within eight to ten months it has settled. So why was it done is the main question.”

Memon gives an example of a situation which explains the problems of an MSME. An acquaintance of his bought for Rs.3 crore a machine that makes cardboard boxes. However, he needs to buy scrap paper to make cardboard. The scrap dealer wants only cash. Even if he had an account, he would not take a cheque as that money would need to be accounted for. But the MSME has GST to contend with. The machine is lying unused and the businessman is in debt.

Minimum wages for unskilled labour at a GIDC estate is Rs.380 a day and they work for 26 days a month. For skilled labour it starts at Rs.500. It is a substantial amount, says Abhay Khatri, a mechanic in a small tool-making factory. “Many unskilled workers lost jobs and went back to their villages soon after notebandi [demonetisation]. Some had to reduce jobwork, but I think we are okay now. Because of lack of cash we had problems shopping for day-to-day goods, but even that has settled.”

The lack of cash and reduction in purchasing power was probably what hit the small-scale industry the most, says Memon.

Surat still reeling Among Gujarat’s several industrial hubs, Surat is the biggest in terms of MSMEs and small traders. As Asia’s largest market for man-made fabric, the city is an economic powerhouse. Textiles and diamonds are its largest businesses. The textile trade has several industrial processes at different stages. For instance, weaving grey fabric, dyeing, printing and embroidery are part of the process that involves thousands of workshops. According to the Federation of Surat Textile Traders Association (FOSTTA), the livelihoods of almost 25 lakh people are dependent on Surat’s textile trade.

“When demonetisation hit, the first thing people did was to deposit cash and spend the surplus. Initially, traders saw very good business as women were trying to offload cash. Then it dried up. Last Deepavali we witnessed a drop of 50 per cent in sales,” says Champalal Bothra, FOSTTA president. “No one wanted to spend. It has improved, but then we got hit with GST.

“Looms that would operate for 24 hours have reduced to eight hours. Our production, which was at 4 crore metres a day, has come down to 1.5 crore metres. Close to 89,000 looms were sold in the past year. Lakhs of workers have returned to their villages. The situation is quite dire,” says Bothra. “People’s spending power has come down, the demand has come down, and Chinese imports are affecting us now,” he says.

Diamonds, textiles and dyeing are the worst affected, says Arun Mehta, vice president of the Gujarat branch of the Centre of Indian Trade Unions. “It is not a good situation as labour is leaving in thousands. Many small diamond units have shut down as there is no demand in the market.”

“More than demonetisation, it was GST that hurt us. They announce these things without having a process in place. In demonetisation, there was no cash available and in GST, few tax people even know what to do,” says Nitin Kungwani, a trader in Surat’s Millennium market. “We have had a 30 per cent drop in sales this year. But we are hopeful that after the Assembly elections, business will pick up and the government will find ways to revive us.”

Vivek Deswani was in Surat to take a consignment of sarees to Pithampur in Madhya Pradesh. He says before demonetisation he would come to Surat every 20 days. His last trip was three months ago. “People are not buying.”

Do they see the situation improving? “Now that we have GST under control, we can focus on sales. It should improve this year as there are many auspicious dates so the wedding season will help us bounce back,” he says.

The MSME sector accounts for 8 per cent of India’s GDP, 45 per cent of manufacturing output, 40 per cent of exports, and 21 per cent of employment, the second highest after agriculture. As a State with the highest number of MSMEs (according to the Vibrant Gujarat summit 2017 report), Gujarat plays a large role in this contribution. The government has perhaps realised that it would be wise to keep the incentives flowing.