How demonetization hammered a thriving traditional industry

Last year, when Prime Minister Narendra Modi went on national television to announce demonetization, few could guess the consequences of the shock to the Indian economy. A year later, as data comes in, it appears the ban on cash has dealt a hammer blow to many medium, small and traditional industries.

Lucknow’s chikankari industry, spread over 4,000 manufacturing units, is one such sector. Federal government estimates listed on the Udyog Bandhu blog in 2012 pegged annual turnover from this traditional form of embroidery at Rs 10 billion (US$150 million), with exports of around Rs 200 million. But post-demonetization, sales have plummeted and production continues to shrink, according to retailers and factory owners. The artisans, over 80% women, have been hit the hardest. Chikan factory owners blame demonetization and the government’s Goods and Services Tax (GST) for the downturn.

“This was an informal industry, which ran on cash and credits. Without cash, e-payments were difficult as the poor artisans and workers did not have access to online banking services. Business came to a halt for more than three months,” says Shalabh Rastogi from Anushma Chikan, which has interests in retail and interstate trade.

The situation got so bad that several exhibitions had to be cancelled and exports came to a halt as production came down drastically, say businessmen. “Even buyers kept away from the markets due to the cash crunch and the uncertainty on the financial sector. Things gradually improved with the cash flow in the market. But chikan sales are still 40% less compared to the days before demonetization,” Rastogi complains.

Workers hurt

Oblivious to wide-spread devastation caused by the demonetization drive, the federal government announced November 8 as ‘Anti Black Money Day.’ However, the amount of black money detected since the policy’s introduction has never been clarified, and the costs have clearly outweighed the purported gains.

The worst hit have been the workers.

Women are the dominant source of labor, working on a contractual basis. They were earning Rs300-500 a day before demonetization. “Due to the sharp drop in demand, many of them are either jobless or work at a reduced remuneration. Some have even switched to a housemaid’s job, running kitchens,” says Shamima Iqbal, a senior artisan.

Nearly 10,000 traders and 550,000 skilled and unskilled workers are involved in chikankari. Soaring costs, narrow returns and cheap Chinese products have also added to their worries.

“E-payments were difficult as the poor artisans and workers did not have access to online banking services. Business came to a halt for more than three months”

Saabit Ali, who hails from nearby Sitapur, was among the hundreds  who bore the brunt of demonetization. He used to distribute his work among 20-40 artisans before the decision. “I am almost jobless since then as the orders have dried up. The market hasn’t revived even a year later. I had no other option but to let go my fellow workers. All of them are struggling to make a living,” Ali told Asia Times, his voice choked with emotion.

And chikankari is just one industry. The famous brass industry of Moradabad and the glass manufacturers of Firozabad were also hit hard. Sunil Yadav, a spokesman for the opposition Samajwadi Party, claimed that “every businessman, trader and retailer in UP, small or big, incurred huge losses. Things are still in bad shape as scores of people were rendered jobless.”

GST delivers a double blow

The GST, introduced in July this year, dealt another blow to the chikankari industry, which had been kept out of the tax net so far. Any sale below Rs1,000 now attracts a 5% tax and sales above the limit are taxed at 12%. This is also having an impact on jobs.

Small traders, up until now, have been unlikely to have a Permanent Account Number (PAN), which is mandatory to file taxes, or Aadhaar-linked bank accounts. Traders are also upset with the complicated tax filings required by the GST. “We are up all night trying to figure out the filing of GST,” says Kartikeya.

Kumar Kartikey from Seva Chikan says: “A sudden shift to the GST regime has been extremely cumbersome. Our inter-state business, which is usually 30-40% of our trade, was nil in the month of July and August because of procedural complexities. It has been tricky to bring poor and illiterate workers and raw material suppliers on a proper bill and receipt mode. Even customers [protest] when we hand them bills with 5% or 12% taxes which were not there earlier.”

Shalabh Rastogi says: “The chikankari clothes are anyway 25-50% costlier than the other dresses. The addition of a 12% GST has made them further costlier. Sales have dipped. The worst hit are high-end clothes and sarees.”

A senior state BJP leader says the government wanted to tax chikan work in 2003 but prime minister Atal Bihari Vajpayee, whose constituency was in Lucknow, vetoed it. He reasoned that chikan work reflected the rich heritage of the Avadh region and should be kept tax free. Prime Minister Vajpayee’s successor, who hails from the nearby constituency of Varanasi, clearly has other priorities.