Money Woes

While the organised players are largely unaffected, unorganised industry hubs are facing a massive disruption in business due to demonetisation.
By PB Jayakumar   New Delhi     Print Edition: February 12, 2017
Money Woes

Manish Paniwal, a 32-year-old unskilled worker employed in a ship-breaking yard at Alang in Gujarat for the past four months, is completely at sea. In the first two months of arriving from Kharagpur, he managed to earn a decent sum of Rs 25,000, of which he sent Rs 22,000 to his family through friends who were going home for Diwali. However, after demonetisation, things changed dramatically. For November, he was paid Rs 12,500 in old notes, of which he sent Rs 10,000 home. Till January 12, when we met him, he had not got his salary for December. He has no money. All the people from his village working in Alang have returned home. His employer is ready to help him open a salary account but his only identity proof - the voter Id card - has been damaged by rats in his shanty in Sosiya village. He is surviving on food bought on credit from the local provision store; the debt is now over Rs 1,200. "I don't know what will happen if he stops giving me things on credit. I have become a beggar," he says.

More than two months after the Central government withdrew Rs 500 and Rs 1,000 currency notes to control the generation of black money, disrupting economic activity across sectors, things are yet to return to normal for lakhs of people working in big industrial clusters in places as far apart as Firozabad in Uttar Pradesh and big industrial towns in Maharashtra and South Gujarat. The reason: their employers, especially those that operate in unorganised and cash-dependent sectors such as textiles, retail, diamond processing and ship recycling, are finding it difficult to cope with the shortage of cash. Only organised industry hubs for chemicals, pharmaceutical and engineering, such as Ankleswar, Vapi, Boisar and Valsad, are relatively unaffected.

As a result, most of these hubs have seen production cuts due to dwindling demand, flight of labourers to their home states and friction between managements and workers. So, while production has fallen 50 per cent in textile hubs Surat and Bhiwandi, business in diamond cutting and polishing units in Surat and Navsari is down by 40 per cent, say the businessmen. At Alang, the business is down by 20 per cent, while Firozabad, a glass ware hub, has seen production cuts of close to 40 per cent.

Though there is also hope that demonetisation and digitisation will usher in a new future for these sectors by phasing out the practice of fake invoicing and parallel registers that allowed entrepreneurs to set up several small units with less than Rs 1 crore turnover and fewer than 20 employees (to avoid giving them provident fund, or PF, and other benefits), the gains, if at all, are too far into the future to matter. For now, it's mostly doom and gloom.

Sheen-less diamonds

Surat and Navsari account for 90 per cent global diamond cutting and polishing work. The business, worth nearly Rs 2 lakh crore, accounts for 14 per cent of the country's foreign exchange earnings. The industry has about 4,500 units that support over 8.5 lakh people. It is an open secret that all deals, except for purchase of rough diamonds and sale of finished diamonds, are settled in cash.

"It is estimated that except for the top 25-30 exporters, all the units have been paralysed by the cash crunch," says Nainesh Pachchigar, Chairman of the Gems and Jewellery Committee of the Southern Gujarat Chamber of Commerce and Industry (SGCCI) and Co-chairman of Sparkle International. He says more than half the units have stopped functioning as international buyers have become cautious and are postponing orders.

"It is not easy for a fully cash-dependent business to migrate to digital all of a sudden. It may take time to return to normalcy," says P.M. Shah, Vice President, SGCCI.

Most employees are migrants from Uttar Pradesh, Bihar, Orissa and West Bengal. Close to half have gone to their villages or industries where there is work.

Man-made Troubles

If cash shortage is the biggest issue for the diamond industry, fall in orders and labour problems are troubling the silk businesses in Surat. The city, and its nearby textile hubs, supply 60 per cent man-made fibre and filament fabric (polyester) consumed in the country. The city produces 30 million metres cloth a day, ranging from Rs 100 polyester sarees to several low-cost fabrics, that clothe a big chunk of rural India. The city has 75,000 textile shops, one lakh embroidery machines, six lakh looms and 450 processing houses, all of which employ 1.5 million people directly.

The latest season started with record sales in recent years. "Normally, the industries are shut for ten days during navratras, but this year we had to work round the clock to meet the demand from North India," says Navinbhai Patel, the owner of Tejas Fabrics. Patel has four other such units.

"Demonetisation was a tsunami. Out of my 350 workers, more than 150 left. Now, I am working with unskilled labourers, who may damage the fabric," says Dharmesh C. Kachiwala, owner of JP Kachiwala Textiles. The industry estimates that four lakh workers have left.

Several factory owners are finding it tough to get cash. Workers are reluctant to accept cheque as that may mean standing in a bank queue and loss of a day's salary. Employers, too, want to pay in cash as they do not want to give employees PF and ESIC benefits.

"I tried to convince them about the benefits of PF but they said deposit it over and above the wages. If I do not pay a worker in cash, he will switch to a company that does so," says Mayank Vakharia, Director, Suje Tex, a textile company.

After demonetisation, orders from other states have also dried up as people are postponing purchases. "The business has gone down by half. Our season started with Diwali. After that, there has been a big drop in orders. Entrepreneurs are worried about paying EMIs on loans taken to buy machinery," says Prabhulchandra Shah, Director of the Surat Art Silk Cloth Manufacturers Association and past president of the SGCCI. Entrepreneurs in Surat and nearby industrial centres have invested more than Rs 3,000 crore in the past three years to modernise looms and machinery by taking loans under the Technology Upgradation Fund Scheme.

The situation is similar in Bhiwandi, Maharashtra's powerloom hub that has over eight lakh power looms, which knit grey cotton fabrics, mainly for the domestic market.

Ship troubles

Alang, the world's largest ship recycling hub that directly employs over one lakh workers and generates revenues of close to Rs 8,000 crore every year, has only one State Bank of India branch with three employees, one ATM, and extension counters of two other banks. At present, over 110 yards are operational, with close to 90 ships ready to be broken down. But after demonetisation, a number of workers who used to cut the ships have left Alang; less than 20,000-25,000 are left, say industry executives.

"I paid them by cheque this month. Now, nearly 90 per cent workers have bank accounts. The workers normally send cash to their homes through other workers. They are reluctant to deposit money in the bank as bank branches in their native villages are far from their homes," says Komalkant Sharma, Managing Director of Leela Group in Bhavnagar, one of the largest ship recyclers.

Ramesh Agarwal, Secretary of the Ship Recycling Industries Association, says consumption of TMT steel has fallen steeply, resulting in low off-take of steel scrap. "Our business has gone down by 20 per cent at a time we were looking forward to a good year for ship breaking," he says.

The 600-odd shops in Alang that sell items from ships, from cabinets and fridges to washing machines, wear a deserted look. "We used to get 20-30 customers a day. In the past two months, I have got less than 20 customers," says a shop owner.

The Bhavnagar district collector had called a meeting of ship recyclers, banks and the Gujarat Maritime Board (GMB), which runs Alang, in the first week of January, to solve the crisis. "We are trying to open bank accounts of all workers but banks are not co-operating. We are demanding that workers without ID cards be allowed to open accounts by producing GMB training certificates," says Haresh Parmar, Joint Secretary of the Ship Recycling Industries Association. Over 40 per cent migrant workers in Alang do not have proper ID proofs.

Down South

At Tirupur, from where knitwear garments worth close to Rs 35,000 crore are exported every year, things were disrupted but are now back to normal. That is mainly because of relatively thinner presence of migrant labourers from North and North East. Tirupur recruits mainly from South Tamil Nadu and Kerala.

"Ancillary industries such as bleaching/ dyeing and their supply chains faced problems in November as workers did not have bank accounts. We helped them open the accounts," says A. Sakthivel, former Chairman of the Apparel Export Promotion Council and former President of the Tirupur Exporters Association.

The marine sector has also been affected due to demonetisation, according to a survey by the Central Marine Fisheries Research Institute, Kochi. The survey found that consumption of fish in the domestic market has fallen by 30-40 per cent. However, as the use of old notes to buy fuel was allowed, production/exports were not much affected. The middlemen also helped fishermen so that there is no major disruption in the business.

Battle Firozabad

In Firozabad - a hub for manufacturing glass bangles, glass ware and glass bottles - confusion prevails. The cluster has 100-odd glass bangle, 40 glass ware and around 13 bottle units. Apart from this, 200-odd units are engaged in packaging and distribution work. The industry employs close to 2.5 lakh people. On the one hand, the manufacturers have seen a sharp decline in orders, while on the other hand they are clueless about how to pay labourers.

Gaurav Singhal, Managing Director, Uma Glass Works, says the business is down at least 40 per cent. "Our domestic business ran entirely on cash. Cheque payments were done only for big orders, which accounted for just 20 per cent of the domestic business."

Singhal says while this is peak season for sales, there is no buzz in the market: "We can't shut the units. We are keeping the production on in hope that the orders will pick up."

Zuber Beig, a labour consultant, says one must understand the peculiar situation of these labourers, who are highly skilled but keep changing contractors. Since it is fleeting labour, they want to get paid in cash right after the shift is over. Sometimes, they want to be paid before the shift begins. They are not bound to a single unit, contractor or factory. "Cheque payments are fine but we are unsure about how to go about it. The very nature of the ecosystem is such that to get the entire cluster to adapt (to banking channels) will be a mammoth task. Everybody is on a wait and watch mode. While we support bank payments to labourers, the labourers are reluctant," says Beig.

With inputs from Sarika Malhotra. ~

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