Indian traders choking on Modi’s economic medicine
Ludhiana, India - Tax overhauls and black market clampdowns have been touted as radical medicine to modernise India’s economy, but for small traders like Swarn Singh Darera, ‘ Modinomics’ has been a bitter pill to swallow.
At his factory in the northern Punjab city of Ludhiana, Sikh businessman Darera is keeping staff on for 12-hour shifts but only has enough work coming in to justify a third of that time.
He blames one man for his predicament: Prime Minister Narendra Modi.
“The government finished us,” he said angrily. “These people sitting in their air-conditioned offices have no idea what’s happening on the ground.”
Over the past year Modi has rolled out controversial, but many argue much-needed, flagship reforms - often dubbed ‘Modinomics’ - designed to streamline Asia’s third-largest economy and root out corruption.
In November his government cancelled more than 80 per cent of the rupee banknotes in circulation in a bid to clampdown on the black market.
Eight months later it followed up with a massive sales tax overhaul - replacing more than a dozen state and national levies with four different rates of between five and 28 per cent.
Economists had long argued such steps were vital if the country of 1.3bn people is to continue creating jobs for its ever-growing population.
But small traders - who account for a third of the US$2tn economy - have been hit particularly hard.
In Darera’s shop, a box of axles worth R500,000 (US$7,500) spent weeks on the shop floor when the buyer initially balked because the sales tax for the equipment leapt from two to 12 per cent when the July reforms came in.
Delayed benefits
“What are these crazy people doing?” Darera said of the government’s tax reforms.
The rupee note withdrawal had already wiped out most of his cash reserves, he said, adding that he was keeping staff on because he didn’t want to lose skilled workers.
The government says the initial pain of its economic reforms will bear fruit down the line.
But analysts warn it could take months for the benefits to show, a potential headache for Modi, who faces a national election in less than two years and key state elections sooner.
“The economy is not doing well at all,” Credit Suisse managing director Neelkanth Mishra said.
“We are in a period of deep uncertainty. It’s like playing cricket on a bad pitch. You can’t plan it.”
India’s economic growth slowed to a three-year low of 5.7 per cent in the first quarter. The Asian Development Bank has lowered its 2017 growth forecast to seven per cent from 7.4 per cent in July.
In an admission that its policies might be hurting India’s influential traders, the government on Friday announced a series of changes to the tax law designed to ease the burden on small and medium businesses.
But in Ludhiana - home to thousands of small factories making cycles and parts, shawls, textiles and sewing machines - companies say they are hurting.
“We’re feeling very insecure,” Arun Aggarwal, a leader of Ludhiana’s knitwear association, said. “It’s about the business environment. You’re threatening traders, calling them thieves, there’s a constant threat of prosecution for any perceived digression,” he added.
Silent sewing machines
The nearby Thapar Hosiery Mills is battling with the introduction of taxes - five or 12 per cent - on textiles for the first time and well as new compliance burdens.
There have been lower sales and higher job losses while manipulation is creeping in as buyers insist that companies bill their products at a lower tax rate. Thapar has laid off 75 of its 100 workers with rows of sewing machines now silent. A handful of men were at work, sewing red and blue sweatshirts for Zara Man. “Our system of work is more than 100 years old,” said managing director Vinod Thapar. “At least come here and try and understand how our business works before declaring us all thieves trying to evade taxes,” was his message to the government.
Pappu Kumar, a Thapar employee, has seen his monthly salary halved to R7,000. He has halted English classes for his six year old daughter and cut back on expensive foods like paneer cheese.“Everything is dependent on my salary,” Kumar said. “So if that is half, we have to cut back on everything else to survive.”
Independent embroidery worker Mohammad Arshi said he had to send his family back to their village in Bihar state in August. After the July tax reforms, embroidery was taxed at 18 per cent, pricing him out of several contracts.
The new measures announced on Friday reduced that rate to five per cent but Arshi said it was too little too late for this year.