Ahmedabad Textile: The business clock has stopped

Businessmen here say that the traditional textile business was predominantly in cash and based on trust and informal dealing. The effort to formalize trade, although advisable prima facie, has actually derailed the trade, say businessmen. The sector is suffering from lack of demand from end users. Processors say they are also hit by rising prices of raw materials, which has squeezed their margins. Their eyes are all on Diwali to lift the sentiments.

The Background

Textile trading business has traditionally been in credit and dependent of rapport between large and small traders. Orders are on credit and payment in cash as per the business cycle of three months. It was in June last year that it was announced that fabrics will be covered under GST, catching the traders on wrong foot. Businessmen had initially opposed the introduction of GST on fabric and also participated in various calls for bandh given by their counterparts in Surat. However, the intensity of protests was not so strong as in Surat.

Teething Troubles

There were issues right from the outset, with organizations like Maskati Market Kapad Mahajan had to organize special camps to get the traders registered under GST. Businessmen, both in trading and processing sector now complain that sales are down by about 35-50%. However, they are not blaming GST only for the mess.

"It was a well known fact that this business was predominantly unorganized and informal. The sudden shift to formal economy meant that there was shortage of money that can be used for transactions. Demonetization had already slowed down the economy. Later on GST slowed it further," explained Gaurang Bhagat, president of Maskati Market Kapad Mahajan. He is also the president of New Cloth Market. It is a very rare occasion that both the leading trade body for textiles are led by a single person.

Chain Reaction

The lack of demand on the side of end consumers affected the sales of retail and wholesale traders. Textile processors from whom, these traders make purchases, were consequently hit. "Our sales are down by 50-60%. Units are facing trouble. We have started offering compulsory holidays, sometimes even two or three per week," said Naresh Sharma, vice president of Ahmedabad Textile Processors Association.

It was a double whammy for theme as raw material prices have risen by about 40%. Caught between devil and the deep sea, they are now looking for demand to revive. Sharma, however, said that 5% GST is not much of an issue. Initially, they were not entitled for refunds. Now they are eligible. Sharma said that many of the units have got refunds in past two months.

Refunds still an issue

Prior to introduction of GST, importers of textile machinery got exemption on customs duty paid on imported machinery. With the role out of GST, it was replaced by Integrated GST. However, IGST refund was denied initially. On October 13, the government ordered hat IGST refund could be availed. Those importing after October 13 are getting the refund but for those who had imported between July 1 and October 13 are yet to get refunds.

Wider Damage

Bhagat said that the lack of demand is because of a drop in purchasing power of masses. "Rise in prices of essential items and slowing incomes has altered expenditure pattern of masses. People are now giving priority to basic needs like food and fuel and curbing discretionary expenditure. The resultant impact is that business in all sectors have been hit and textile is not an exception," said Bhagat. He advised government to bring in experts to revive the economy or else the situation will worsen.

WHAT INDUSTRY PLAYERS SAY

We welcome GST a move towards formalization of economy. But the resultant liquidity crisis has blocked all the parallel currency, which should be somehow brought back into circulation. Government can once again bring amnesty scheme like VDIS and should also reduce Income Tax rates so that there is no tax evasion. The resultant infusion of money into the system will not only accelerate the economy but also bring more revenue in government treasury.
— Gaurang Bhagat, president of Maskati Market Kapad Mahajan.

It is not GST per say that is causing the problems. We are now in 5% tax bracket with a provision of Input Tax Credit. We have started getting tax refunds. Actually other factors like rise in prices of raw material is a major problem. On the other hand, there is no demand from the consumers. So we are squeezed from both the sides. Our margins have been squeezed. We now hope that Diwali should change our fortunes and bring turnaround in the market.
— Naresh Sharma, vice president, Ahmedabad Textile Processors Association

HOW BUSINESS GOT HIT

• Shortage of working capital leads to liquidity crisis
• Raw material price hike has shrunk business margins
• Consumers are rationalizing and prioritizing expenses
• Tax refund of machinery importers still pending
• Bizmen say govt should bring tax amensty scheme again
• 35-50% of business down as demand shrinks