note demonetisation

How demonetisation made this small business owner a Modi supporter, but not for long

The policy has sucked the lifeblood out of companies that play by the rule book, he says.

He studied in a residential public school, graduated from Delhi University, and joined the family business of manufacturing electric fans, then on a downward curve. He restructured and revived the business, which falls in the category of small-scale, that is to say, its investment in the plant and machinery is anywhere between Rs 25 lakhs and Rs 5 crores.

Today, his enterprise doesn’t just manufacture the fans it sells under its brand name, but also those of manufacturers whose scale of operation is smaller than his. A part of the organised or formal sector, it employs 45 employees, adheres to laws on provident fund, gratuity, insurance, working conditions and retrenchment of workers. Its legal personality is separate from that of the owner, who is its managing director. And it receives and makes payments through cheques or electronic transfers and, obviously, files tax returns.

Now in his 40s and living in a Tier 2 city in North India, this businessman gave Scroll.in an account of the emotions he has been through since the demonetisation announcement on November 8. From being effervescent and optimistic about the future, his mood has darkened and turned pessimistic about his business. Worse, he pointed to the unintended irony of demonetisation – that it has penalised the honest businessman and given a leg-up to those who possess black money and conceal their income from the government.

His narrative has been written as a diary, in the first-person and present tense, and read and cleared by him to ensure accuracy and to protect his identity, for which purpose some details, minor in nature, have been altered.

Delighted at the unexpected

It is the evening of November 8 and I am thrilled at Prime Minister Narendra Modi’s decision to invalidate high-denomination notes of Rs 1,000 and Rs 500. Mind you, I didn’t vote for his party in the 2014 Lok Sabha elections. But now, I robustly applaud him, I am the new Modi bhakt.

I’m not worried because my enterprise receives and makes payments through cheques or electronic transfers. I don’t fudge books, I pay my taxes, I don’t show I have nine employees working for me when there are 45 on the rolls. I consequently don’t have stacks of Rs 500 or Rs 1,000 concealed in a worn-out suitcase in the loft.

But it isn’t just about deriving sadistic pleasure at the thought of the illegally accumulated wealth of others turning into ash. I am thrilled because the demonetisation policy has conveyed an unequivocal message – it pays to be honest, that every businessman whose black wealth has been rendered useless will have learnt his lessons and strive to turn his business operations legit.

All this means I will now have a level-playing field. In the business of manufacturing electric fans, there are concerns that are not registered, don’t pay taxes or adhere to labour laws. It allows them to quote prices nearly 28%-30% lower than mine for the same product. And now that Modi has driven fear into those who don’t play by the rule book, I feel they will adopt the business practices I follow.

Visions of registering a higher turnover flash before me.

I don’t go to office on November 9, and on subsequent days as well. There is no point, really. Just about everyone in India, including my employees, suppliers and distributors, or their factotums, are in queues outside banks, keen to convert their old currency notes into new. Or they are desperate to withdraw from their accounts the sanctioned weekly amount of Rs 20,000. I don’t have such worries as I have enough in the kitty to meet the household expenses. I can delay going to the bank.

Five days later, I see the outline of a problem looming ahead. My firm pays salaries on November 8-November 9. Given the paucity of cash, and my accounting staff’s inability to access the company’s account, I propose to pay salaries in instalments. My employees agree. After all, they have been with me for years. And anyway, we are in it together – for the nation, for the larger public good.

But I also make a mental note to return to the cycle of business as was before November 8.

Intimations of disruption

My firm combines two types of activities. One, I manufacture or, rather, assemble electric fans. Their components come from entities we call suppliers. There are also those who manufacture and supply fans to us. After rigorous testing, these are packaged and sold under our brand name. There is little cash transaction between them and us. I pay them in cheque.

Our suppliers and subsidiary manufacturers receive components from vendors in the unorganised sector. These vendors are mostly in the category of cottage industry. Their transactions are mostly in cash, they don’t reveal their income, not least because the margins are small in the highly competitive industry. My suppliers, typically, withdraw money from banks and parcel it out in small amounts of cash to those in the unorganised sector.

In the second week too, production is at a standstill. Everyone is too busy converting their old currency notes into new.

But there is another pertinent reason for the freeze in the economic activity – they aren’t too sure what the thinking in the government is. Rules for withdrawals are changing constantly. It isn’t known to what extent the government will target the businesses dependent on cash. Not willing to risk their enterprise, they decide to shut down their units, sack workers or send them back to their home states, promising to call them back once production begins.

In other words, my concern can neither access finished products – fans in my case – nor their components in a sufficient quantity that can be assembled in my unit on an economically viable scale.

It is already the second week, and I have promises to keep.

Money dries up

My firm’s products are sent to distributors. They, in turn, transfer money to me electronically or through cheques. The distributor passes electric fans to dealers who hawk them. Their dealings are largely in cash. Both the distributor and the dealer sit on large cash reserves. It is to them I can turn to for overcoming the cash crunch my firm is encountering.

There is a seasonal cycle to the production and sale of electric fans. Typically, fans are sold between March and June. But to have adequate stocks to meet the peak-season demand, the distributors place their orders in November-December and also send advances. Their payments lubricate the production of electric fans.

Demonetisation has fanned the anxieties of distributors and dealers. For one, their large cash reserves, presumably in Rs 500 and Rs 1,000 currency notes, need to be converted. They can’t deposit all their cash in banks as a large percentage of it is unaccounted for. They are just too busy converting the old notes into new at a conversion rate of 30%. They don’t have the time to listen to my woes, let alone place orders for the summer of 2017 and pay an advance.

I chew my thumb. Demonetisation seems to have sucked the lifeblood out of the economy. The carpet-bombing of black money seems to have inflicted high collateral damage.

Honest suffer, dishonest smile

In the last week of November, the virus of panic has afflicted the industry. But the virus, ironically, has debilitated those in the organised sector, that is, those who follow legitimate business practices and pay taxes. They are people like me whose business is above board.

I discern a trend – those gripped by the panic-fever in the immediate aftermath of demonetisation have been cured of their malaise. They look relieved, they have converted their old notes into new. More significantly, they have orders for the next season. How?

What distributors have done, I am told, is to parcel out their cash reserves in old currency notes to different players. So, for instance, distributor X pays Rs 1 lakh to producer Y. It is an order for electric fans totalling Rs 70,000 – the Rs 30,000 deducted as Y will have to take a 30% hair-cut for converting the old notes into new.

It is for Y to decide whether to begin production. As I pointed out earlier, he might not soon, preferring to wait to see which way the war on black money will go, whether he needs to place his business operations above board. My sense is that we have such a large unorganised sector that it is impossible for the government to go around cracking the whip all over India. Nevertheless, whatever Y’s decision, he has the orders and money to undertake production at a time of his choosing.

I barely have orders. I don’t have cash. Worse, I can withdraw from my current account just Rs 50,000 a week, peanuts for the range of my business operations. I can see the failings of demonetisation – it hasn’t flushed out black money from the economy, and the dishonest have stolen a head-start over me.

December, the cruelest month

Salary day has arrived. We generate a fair volume of scrap, which we sell every year and utilise the money for productive purposes. But not this year. The money from the sale of scrap is distributed as salary to employees. Mind you, I can’t retrench workers, not necessarily because they have been with me for years, but I would be squeezing my resources to pay them gratuity and termination benefits.

It serves no purpose to now provide a weekly account to you, because nothing has changed other than the depth of my desperation. I call our few distributors. They say they haven’t received money from dealers, who claim retailers haven’t paid them yet. Everybody has pushed their payment schedule farther into the future.

Worse, everybody has chosen to postpone expenditure. I went to a restaurant with my family and found it deserted. Better to eat dal-roti at home than splurge money on dishes you don’t cook at home. I figure out the implications for my business while tucking into kababs.

Boss, let’s face it, fans are not a necessity, you don’t die because of perspiration.

Distributors and dealers know this mundane truth. They can’t predict for how long consumers will persist with their parsimonious ways. Why should they then risk advances to order fans when they can’t predict the demand for it next March-April?

Some statistics now: I have received just 15% of orders that I had in November-December last year. The poet TS Eliot wrote, “April is the cruelest month…” In India, it is December in 2016, it will be recorded in business history, when cash simply refused to flow.

No threats, Mr Prime Minster

In December, raids to unearth undisclosed income have increased. They have been shown on TV to prove to the nation that the government intends to root out black money. The salaried class cheers Modi, as also those in the low-income category, unaware that they are next in line to be hit hard. How, you wonder.

Let me tell you straight: these raids, and the prime minister’s daily warnings that demonetisation is the first step to root out corruption, have businessmen playing statue-statue. Remember that game we played as kids. You uttered statue to someone and he was supposed to freeze, until you called out over. Modi’s threats are having the same effect on businessmen engaged in industrial production. And it will throw people out of jobs.

Don’t think I am against targeting the corrupt. But, really, it is a cruel irony to see tax authorities raiding businessmen. I mean, come on, who doesn’t know they are among the most corrupt in India – they extort money from businessmen by adopting menacing tactics, for instance, by accusing us of concealing excise or sales tax in case we refuse to grease their palms.

These tax authorities must be licking their lips in anticipation. Because of the palpable economic slowdown, the government income through taxes must have reduced drastically. Assume I had to file value-added tax in October and I didn’t. They will issue notices to me saying pay the dues.

Ordinarily, such notices have us request the authorities for an extension. The pressure on them to report higher revenue will goad them into squeezing us hard. “Please sir,” we will moan and offer them bribes. After all, I wouldn’t want to pay lakhs when the business mood is palpably downbeat. Better to pay the tax guy an infinitely smaller amount.

As December 30 draws near and all inconveniences are supposed to miraculously end by then, I am not too hopeful about the economy. I hope the limit on cash withdrawals will end. I hope I can withdraw as much as I need for my business. The pain, otherwise, will shatter our endurance. I can’t access my deposits but big corporations will take recourse to loans transferred to them digitally.

I don’t know what intentions the prime minister had, whether noble or ignoble. But, right now, all the big talk about rooting out corruption and the spectre of more raids and heightened surveillance seems to have thrown India’s economy into disarray.

Neither the Ambanis nor the Adanis would be bothered, but I and others in the small sector have started to breathe harder. It is as if the prime minister has deep hatred for all businessmen other than big corporate giants. It is as if we are being strangulated, ever so slowly, all because Modi wants to win a few of the Assembly elections.

The writer is a journalist in Delhi. His novel, The Hour Before Dawn, has as its backdrop the demolition of the Babri Masjid

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As India turns 70, London School of Economics asks some provocative questions

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