State of the Economy 2018

Only a Handful

The transition from a predominantly cash economy is shifting the balance towards large players, as small players struggle to survive in the post-GST regime

The speaker system is blaring Laila O Laila, an earworm from a bygone decade but Kamal is oblivious to its tantalising beats. He gives us a nervous look and barely manages half a smile as our photographer goes about clicking pictures of the polishing unit where he works. “Most of the other workers have been fired, I do not know how long I will be here,” he says, glancing around. Like him, a significant chunk of the labourers in Surat are migrants from West Bengal, Uttar Pradesh and Bihar. 

This is in the thick of Surat’s diamond district, where the game is slowly shifting into the hands of the big boys. The implementation of Goods and Services Tax (GST) has played havoc with small and marginal players, especially in diamonds and textiles industries that drive Surat’s economy. The transition to supposedly a more transparent way of working from one that was dominated by cash has hit them hard. “You ask me about my investment for next year. I am not sure if I will be in the business that long,” says Jignesh Mangukiya, partner, Moradia Brothers, a diamond unit that had a turnover of Rs.1 crore last year. “We will be lucky if we get halfway there this year,” he grimaces. Work has come to a standstill and keeping his workforce of 20 gainfully employed is a task. This is down from 35 last year and more could be shown the door. 

It is no different at Rakesh Vavdiya’s unit Maharani Gumming that manufactures gumming stickers, a product with adhesive on one side and a printed logo or text on the other, that is supplied to the textile industry. Last April, he placed an order for two machines costing Rs.120,000. “They have hardly been used and I am stuck with them,” he says. His staff of 10 is having an extended lunch break and working no more than 3-4 hours a day. Reluctantly, Surat’s smaller units are realising that they necessarily have to work with proper billing documentation henceforth or face the prospect of shutting down their business. 

Bigger the better
Surat’s diamond industry which employs 600,000 workers is a clear example of disproportionate concentration. There are at least 5,000 units that gross a total turnover of an estimated Rs.100,000 crore. Of this, the top 100 account for 60% and have over 4,000 workers each on their rolls. In comparison, the smaller units employ anywhere between 2-40 employees and clock a turnover of less than Rs.5 crore. 

This lopsided equation is what hurts Vipul Moradya, partner, Mahit Enterprises. He is a bit player and those like him have been hit the hardest. “In 2015, we employed 65 people with ambitious plans to expand. Today, I am struggling to pay salaries to the 40 that I employ,” he says. Production, which was 1,000 pieces a day, is down to 400 and Moradya worries that he will be in the red this year. The smaller units make, at best, 1,500 pieces a day, while the medium-sized units clock anywhere between 1,500 to 4,000 pieces. 

It was in mid-July, a fortnight after the implementation of GST, that a large part of the diamond and textiles industry was up in arms. The protests continued foralmost three weeks and it was reported that losses incurred because of business coming to a standstill was Rs.4,500 crore for the textile industry and almost Rs.700 crore for the diamond industry. 

Moradya explains the genesis of the discontent from the diamond industry’s perspective. “We import rough diamonds from Belgium and Kenya. That is a transaction in white, for which GST is paid and a bill is given. Earlier, that whole process was by cash,” he says. After units like his polish the diamond and have it ready for sale, the buyer creates a problem. “Some of the traders still wants to trade in cash and don’t want to pay through bills. So, business gets disrupted.” There are approximately 6,000 traders in Surat and more than 20% of them are still trading in cash. The GST for polished diamonds is 18%, which largely explains the reluctance to fall in line.

Chirag Virani, director and a diamond trader at B Virani & Co, which does a turnover of Rs.35 crore, thinks the new system meant too much was taking place too quickly, especially for the smaller players. “We look at it as a transparent way of doing business and definitely a more effective one. Those who were dealing in cash caused unfair competition,” he says bluntly. Virani is optimistic and says he will open another production line that will increase his workforce by 20% from the current 400. And he has no qualms about losing business over GST compliance. “Today, if someone wants to buy our finished product, we first ask for their GST number. If he does not have one, we are happy to not do business with that person.” 

SMEs in Surat are coming to terms with the new market reality and if the trend continues, both diamonds and textiles could soon be dominated by large players. “While there are key advantages like cheap labour, which no market overseas can match, investing in technology will be the differentiator in the future,” says Babubhai Gujarati, president, Surat Diamond Association. The era of using hands, he says, instead of machines is over. “Those having problems today have not realised technology will get the better of them. In the times to come, there will be a limited number of strong players,” he predicts.

In fact for the larger players, the focus is no longer on GST but on expanding the business. Take the case of Mayur Lakhani of Elvee Jewels who employs 200 people at his 8,000 square feet unit. He plans to open one more unit in the vicinity. “There are the usual issues to contend with such as rising labour costs but nothing that is out of control. There continues to be demand for Surat’s diamonds across the world,” he says firmly.

However, the struggle continues for the smaller players who entered the diamond industry after the 2008 meltdown when the textiles business tanked. They moved to the diamond industry since it was not as badly affected. But while they were able to survive in the cash economy clinching small trades that came their way, Virani says many of these small players now would be better off looking at other avenues for growth. 

Weaving it in
In dusty Sachin, an industrial town that is an hour’s drive from Surat, work goes on but not uninterrupted. Like the diamond industry, smaller players in textiles are also having a hard time dealing with the new reality. Surat is home to over 60,000 textile traders and seven lakh power looms that notch a collective turnover of  Rs.60,000-Rs.70,000 crore. Vishaal Thakur runs Dropadi Apparels, a company that manufactures womenswear for large brands such as Max, Arvind and Future Group. The spunky 29-year old, a NIFT graduate, fumbles when you ask him about business growth. From a turnover of Rs.9 crore last year, he expects to close this year at around Rs.7 crore and that may not be enough to take care of his 125 strong workforce. In volume terms, he sold 275,000 pieces last year, which he expects to drop to 225,000 this year. No wonder that his expansion plan is on hold. “We have 125 sewing machines and the plan was to add 100 more, at an investment of Rs.25-30 lakh. That has been put on hold,” he says mutedly.  

For now, only large players are looking to invest in the business. Take the case of Ghanshyam Ghoghari, proprietor, Kimora Fashion, a player in ethnic wear with a turnover of around Rs.100 crore. Starting off as a vendor, he now sells his own brand Kimora through a network of 40 distributors. “The plan is to get into western wear next year and I am committed to investing Rs.25 crore on machinery. While there was an initial impact on sales due to GST, my business will not grow if I stop investing,” he explains.  

But the uncertainty is gruelling for a small player like Vavdiya who has seen his gumming stickers output drop from 30,000 metres daily to half. “Most of my business comes from smaller units, who have a turnover of Rs.50 lakh each. Orders from some of them have virtually dried up,” he says. It is hard to miss the unopened plastic cans of Bondex gumming sticker material at the entrance of his small unit. “I am waiting to put them to use,” he says hopefully. According to Devkishan Manghani, chairman, Textile Trade Committee, Southern Gujarat Chamber of Commerce (SGCC), the smaller players have found the situation very stressful. “Even today, after seven months of GST, at least 35% of the capacity is lying unused. There are too many compliance issues to deal with for units of this size. Are they supposed to do business or spend time on GST related issues?” he asks. 

According to Manghani, the big challenge has been Form ITC-04 which pertains to job work done on textiles and has to be filed every three months. For example, work done on a saree, be it a cut and paste or a block print,  now every job in the process will need to be billed for GST. “This involves a lot of time and effort. Smaller units are just not equipped to handle this,” he says. To elaborate, each of these units will need to invest in a computer and pay a fee to an accountant. “If a person makes a turnover of Rs.80 lakh and has a gross margin of just 5-6%, this additional time and cost will leave them with nothing,” he laments. Earlier, it was only the income tax filed at the end of the year and now GST means filings have to be done at the end of every quarter. So while the larger players have had an easier transition to GST, the smaller players are still grappling with the change. For some of them, the next couple of years could well be the period of reckoning. Not for growth but merely for survival.