Ten months after the government demonetised 86% of India’s currency, there is clear evidence showing the move came with few benefits and severe costs. On August 30, the Reserve Bank of India released a report which said 99% of the currency notes invalidated on November 8 had returned to the banks, defeating the government’s stated aim of eliminating black money reserves. Data for the first quarter of 2017 showed a continuing slowdown in economic growth, which analysts partly attributed to the lingering effects of demonetisation. Last week, in his newly released book, Raghuram Rajan, who was the RBI governor until September 2016, revealed that the government had not consulted the bank about the move during his term.
But, outside the narrow circles where the evidence circulates, what do the poor who were most affected by demonetisation think about it? Have businesses recovered and jobs returned? Do people continue to support the government’s move?
Scroll.in revisited some of the places that it had covered in the aftermath of demonetisation. The first report in the series is from the garment factories of Ludhiana, Punjab.
Ten months after demonetisation, the most conspicuous change in some of Ludhiana’s garment factories is the absence of women workers from the shop floor. Factory owners said the sector had barely recovered from the shock of demonetisation when chaos struck in July in the form of the introduction of the Goods and Services Tax. Buyers scaled down their orders from smaller units that were not registered on the GST network, while simultaneously cutting back on delivery timelines because demand had turned erratic. Under pressure to work faster, some of the factories decided to employ more men.
Small-scale enterprises in the garment sector usually prefer women workers because of the lower wage rate – women are paid at least 20 to 30% less than men for the same hours of work. But male workers produce more pieces an hour. “This is why you see only men working now,” said Om Prakash, a supervisor at a medium sized garment unit. The unit had to forego a part of its profit margin to pay higher wages to men, but completing orders on time during a business lull was considered a priority.
In November, days after the government announced its decision to invalidate high-value currency notes, Scroll.in had visited this unit, one of the four units owned by Vinod Thapar, president of the knitwear club in Ludhiana. Its shop floor, which had about 150 workers in November, was dominated by women. Today, less than 70 workers, all men, were peddling away on the sewing machines.
Across the garment hub, women formed a large chunk of the estimated 3,50,000-strong workforce employed by over 11,000 units. In November, the women workers, many of whom were from Uttar Pradesh and Bihar, were preparing to leave the city. Demonetisation had caused a financial shock to the garment sector. The cash crunch had shrunk the purchasing power of customers in the retail market. As orders began to dry, the factories started to scale down. Eventually, unable to pay salaries to workers, many units shut down production and asked the workers to leave.
For Samreet Kaur, this was a big setback. “It is only in this season that we could work more and save,” she said. But she expressed support for demonetisation. “Modi has done good. The rich too are standing in the queue with us outside banks.”
In April, when the cash supply stabilised, some of women returned to work, said Prakash, the supervisor. But with GST causing a dip in production again, they were the first to feel the brunt.
Now, the shop floor of the factory is abuzz – even though it is producing just 30% of its earlier capacity. But women workers are no longer around. Among the male workers, the support for demonetisation is largely intact. Few have heard that 99% of the demonetised currency had returned to the banks – as announced by the Reserve Bank of India on August 30 – which arguably defeated the government’s stated aim of eliminating reserves of black money.
Many workers across the factories continue to believe Prime Minister Narendra Modi demonetised the high-value currency notes with the country’s best interests in mind. “He has promised to get back all the black money. Let’s wait and see,” said Jagdish Kumar, a worker in the cloth-cutting section of a garment unit.
The first setback: demonetisation
Demonetisation could not have been timed worse for Ludhiana’s garment sector. November is the peak wedding season. The industry makes a large part of its revenues and profits by producing the flamboyant clothes and decorations that are the hallmark of Punjabi weddings. November is also when purchases of winter clothing picks up – Ludhiana produces about 80% of India’s machine-made woolen hosiery, according to several trade associations. Both wedding and winter purchases were crippled by demonetisation.
Within days of the announcement of demonetisation, Sohail Akram’s embroidery business, which employs over 40,000 workers, had come to a complete standstill. “Our orders dried up,” he recalled. It took close to five months for the business, which conducts most of its transactions in cash, to get back to shape. Akram said he had to borrow heavily to keep the family going.
The owners of factories producing woollen garments narrate similar tales. Vinod Thapar said the winter season of 2016 was completely wiped out due to demonetisation. “Close to 60% of our business is in woolen garments. We literally bled till February,” he said. In 2016-’17, his turnover was down by over 30%. “At the peak of the crisis, my unit was producing not more than 400 pieces of clothing a day, down from 3,000 pieces I used to do usually in winter,” he said.
But just when things started to look better came another severe blow. “After they introduced Goods and Services Tax in June, we are back to how we were in December,” Akram said.
The new taxation policy rattled the market, with retailers and wholesalers suspending orders as they tried to sort out their GST troubles.
The second setback: GST
The Union government introduced the Good and Services Tax regime on July 1, which came with its own complexities. After GST was launched, garment manufacturers said they had to seek innumerable clarifications from the authorities. Did GST apply to old stock already in their possession? Could they claim input credit on such stock? Input credit is the refund that a business can obtain by subtracting the tax already paid on inputs from the tax payable on the final output. The government eventually gave businesses a 90-day window to claim the input credit on old stock.
But the bigger problem for retailers and wholesalers who had registered on the GST network was that many of the small scale units from where they sourced material were yet to do so. This posed a major taxation problem. Buying from those without a GST account would mean additional tax burden on the buyer as input credit refund would not be available – a risk which many were not willing to take. Most retailers and wholesalers dealing with smaller units stopped buying from them and shifted to bigger suppliers. The transition period saw a dip in production.
Sanjay Gupta, a garment unit manager, said even well into August, his factory was running at 40% capacity as his buyers, both retailers and wholesalers, had not registered for GST.
For the smaller units, the difficulties of registering on the GST network could lead to the wipeout of another wedding season. In the famed artisan market of Sonet, most of the 200 shops specialise in embroidery. Many have not registered for the new tax regime. Primarily Muslims from Bihar and Uttar Pradesh, many of the owners have very little knowledge about taxation and are technologically challenged.
“I cannot use a computer. Whatever they [large units] are telling me is beyond my understanding,” said Shamim Khan, who has been running an embroidery shop in BRS Nagar near Sonet for 15 years. Getting on to the GST network would mean additional expenses as the business would be required to maintain proper accounts.
Since the small units haven’t registered for the GST, the large players have stopped procuring from them. “There are absolutely no orders at the moment,” said Khan. Showing his accounts book, Khan said in September 2016, he had employed as many as eight workers in his shop as retail orders were overflowing. On Monday, he had a lone worker finishing up the embroidery on a kameez. “It is as though people have stopped getting married,” he quipped with a straight face.
Next to Khan’s shop was an outlet that sells everything necessary for embroidery – from needles and glue to glittering beads of different kinds. Its owner Ishaq said he hadn’t ordered new stock for a month. “Even fevicol is not selling,” he said.
Despite the hardship, support for Modi
For workers, life has been turned upside down.
In 2016, with Punjab going into Assembly elections, the Akali Dal government had ensured steady electricity supply to the industrial area. Manufacturers raised their production levels, which meant more working hours and higher incomes for workers. But demonetisation led to a crash. Many lost jobs altogether, while for others, the working days in a month came down to just 10 or 12.
Papu Kumar, who specialises in garment stitching, said a full month of work would fetch him between Rs 15,000 to Rs 20,000, depending on the nature of the clothes stitched. Workers in the garment factories are paid on a shift basis, with one shift amounting to eight hours of work. But after demonetisation, Kumar’s income halved. Once GST was implemented in July, the quantum of work further reduced. “This factory used to do 2,000 pieces a day last year in the same month. Now, we are not even doing 450 pieces,” he said.
However, despite the hardships faced in the wake of demonetisation and GST, workers in many parts of Ludhiana felt the government’s decisions were well intended.
In December, 37-year-old Mukesh Kumar had to send back his wife and two daughters to their native village near Patna, as his dwindled income was no longer able to cover the family’s cost of living in Ludhiana. Even though his family was hit financially, Kumar, who works in the cloth cutting department of a garment unit, believes the effect of demonetisation was “felt more among the rich and the affluent”.
“Bade log bhi mere saath line me kade the,” he said. Even the rich stood along with me outside ATMs.
Jagadish Kumar, a Dalit worker from Gurdaspur in Punjab, claimed that one cannot expect immediate results from such policy decisions. He said Modi should be given more time. Though he voted for the Congress in the state assembly elections held in March, Kumar said his decision was based more on local factors in Punjab. The Akali Dal-BJP alliance had become corrupt and he wanted a change. “I thought of voting for the Aam Aadmi Party. But everyone said Congress was a better choice as Amarinder Singh is a true Punjabi,” Kumar explained.
Asked about the recent RBI report that said 99% of all demonetised money had come back into the banking system, Jagadish said he was not aware of such technicalities.
“Modi is a religious man,” he said. “He does not eat meat. We trust he will keep up his word.”
Is the worst over?