Beyond Surat’s GST strike: New technologies, Chinese imports are causing a churn in textile sector

At one time, the neighbourhood around Surat’s textile markets was noisy.

The street resounded with the clacketing of powerlooms – five or six machines in dark, poorly ventilated rooms with split levels. Most of these were family-run businesses. The looms were on the groundfloor with families working by day and sleeping upstairs at night.

Now, the inner city is more quiet. There are still powerlooms aplenty in the industrial clusters around the town. But within the town, they increasingly show up in junkyards and the shops of scrap merchants. The premises that used to house them now lie empty or have been repurposed. Some are used by people in the embroidery trade. Others serve as parking spaces for two wheelers.

The castes that traditionally operated these looms – Khatris and Ghanchis – have left the trade as well. Some have entered new businesses. This reporter met some driving rickshaws. Others have given out their premises on rent and live off that income.

This silence – and the departure of weavers from their traditional trade – reflects something important. Surat’s small and medium businesses were struggling even before the government announced that it would implement the Goods and Services Tax from July 1, subsuming all indirect taxes, from octroi to service tax, into one rate that would be consistent nation-wide. This reflects the situation Scroll’s Ear To The Ground project found in the other states we reported from as well. There too, small and medium enterprises were in trouble.

It’s a worrying trend. small and medium enterprises are the biggest employers in India’s manufacturing sector. We know what went wrong in Ludhiana, Tirupur, Coimbatore and Rourkela. What is happening in Surat?

Three horsemen of the apocalypse

This goes beyond usual suspects like demonetisation and the rising cost of doing business.

About ten years ago, businessmen from Gujarat’s Saurashtra region began setting up textile businesses in Surat in southern Gujarat. Their entry, triggered by ebbing prospects in their traditional businesses like diamonds and farming, changed production economics in the cluster. At that time, most weaving units in Surat were small – the smallest ones had no more than five or six powerlooms. By contrast, said Mahendra Kajiwala, a manufacturer and trader of polyester, viscose and embroidery fabrics, “the newcomers from Saurashtra, who had a lot of money, set up 100 looms or more at a time.” They did not enter just weaving. Take Dinesh Jogadiya. Hailing from Kathiawad, he used to work as a diamond polisher. Ten years ago, after diamond polishing machines entered the industry – and the demand for polishers like him decreased – he moved to Surat where he started a business that sticks small diamonds to garments.

Around the same time, customers’ tastes began changing more quickly. Till the 1980s, said Sanjay Saraogi, the managing director of Laxmipati Sarees, “saris were mostly ang dakhne ke liye [to cover the body]. Women did not see them as fashion and, in any case, had a limited budget.” Sales of a new design, he said, would grow for the first four years and then slowly start to drop. Things began to change after liberalisation.

On the morning this reporter met him, Saraogi spoke about this shift at length. Around 1995, he was just a trader – not a manufacturer. He sold the products made by looms and mills. At this time, he began seeing something odd. Even as Surat’s output stayed the same, customer preferences seemed to be changing. New products – like saris that were half a metre longer than the standard 5 metre one – were selling surprising well. “The longer the sari, the more the pleats,” he explained. In addition, more expensive saris were selling better than before.

It was partly due to a jump in purchasing power, the spread of mass-media-driven aspirations and, he said, a large shift in who was buying the saris. “Before the 1990s, aadmi sari khareedkey le jaatey they. Original customer jisko pehanna tha jab woh nikalne lagi tab market mein choice bhi aaya.” Before the 1990s, men used to buy saris for women. It is when the women started stepping out to buy them that the demand for choice grew as well.

In more recent years, technology has played a role too. As shuttle-less looms became more common, they changed customers’ expectations on quality and design. Said Saraogi, “New technology like digital printers are replacing the existing flatbed printers. Customer expectations will only rise. Change in the next ten years will be even faster than what we see now.”

Third, Chinese fabric began to be imported. Said Sri Narain Aggarwal, who heads Prafful Sarees and is a member of the Synthetic & Rayon Textiles Export Promotion Council, “Last year, India got about Rs 5,000 crore worth of Chinese manmade fabric.” This fabric is far cheaper than what India makes. “What they sell here is at the cost of the yarn. What we sell for Rs 100 a metre, they sell for Rs 50 a metre.”

Even though India’s synthetic fabric market is far bigger – valued at about Rs 100,000 crore – the entry of the Chinese has added pressure on margins, he said. What complicated matters here is that India has an anti-dumping duty for polyester chips and yarn – but not for finished polyester fabric. For this reason, companies operating in segments where Chinese fabrics are being used are caught in a vise. Even as domestic raw material costs rise, Chinese imports are pushing the sale price lower.

Market segments – like saris, where the Chinese do not operate – are aware of their good fortune. India exports garments like lehngas to countries like Pakistan and Bangladesh. Given the high domestic cost of raw material (and not being able to buy cheaper chips or yarn from international markets), “We are lucky we operate in market segments where there is very little competition,” said Sanjay Saraogi, the managing director of Laxmipati Sarees. “If it was any other market, the business would have collapsed by now.”

No country for small companies

Each of these changes tilted the competitive advantage towards larger companies.

As customer tastes changed, in part due to exposure to the fabrics made by shuttleless looms, powerlooms used by the smaller players turned obsolete. Both Chinese imports and the new factories set up by newcomers from Saurashtra and elsewhere pushed down market prices.

It was a world where the old technology of powerlooms was redundant. As Dhirubhai Shah, the managing director of Shahlon Group, a company in real estate and yarn manufacture, said: “Powerlooms, despite being fully depreciated, are unable to compete. They are more labour intensive. Each worker can only work on six-12 looms at a time. In contrast, shuttleless looms need lesser labour, yield better quality and higher production.” Take waterjet looms. They offer four or five times the production of powerlooms, need less space, and a single worker can supervise eight-12 looms. At the same time, as Gautam Shah, a salesman at VK Tex, a small weaving firm in Pandesara, said: “Weaving ke andar design element daalna asan hain.” It is easier to bring design elements into these.

To respond, companies in Surat had two options. They could scale up to drive down their manufacturing costs lower and compete better. Another option is to try to protect margins by creating more innovative products. Neither of these is easy for a small company.

Take capacity addition. Right now, Surat is seeing a spike in companies investing in newer technology – water jets, air jets and rapiers. The rapidity with which projections on minimum viable scale are changing is astounding. As Dhirubhai Shah wryly noted, “At one time, 12 powerlooms made for a viable business. Then, a business with five-six waterjets was considered viable. Right now, units with eight-12 waterjets are viable. The new scale of viability will be minimum 12-36 looms.” This might move higher yet. China has just banned the use of waterjets. Extremely water-intensive, a waterjet uses as much as 10,000 litres of water a day. There is a real risk, said Sanjay Saraogi, the managing director of Laxmipati Sarees, that these factories might relocate to India. In which case, the industry will see both a level of scale – and water consumption – it has not seen till now.

As the minimum scale needed for viability rises, more and more businesses will drop out. As Gautam Shah of VK Tex said, “While a powerloom costs anywhere between Rs 70,000 to Rs 100,000, a waterjet comes for Rs 5 lakh-Rs 20 lakh.” That is not the only cost. Units also need to invest in ancillary equipment – like the ones which feed yarn into the modern looms. Those cost another Rs 50 lakh, said Shah.

Another way smaller companies can protect their margins is tapping into rising customer demand for innovation. As Gautam Shah said, “Companies are now trying to protect margins by coming out with novel designs.” These, he said, boost margins by as much as 25 paise or 50 paise, which is considerable, given that the weaving industry makes a net margin of no more than Re 1-Rs 2 per metre. But these are shortlived gains. Rivals copy these designs quickly.

But, even here, the dice are loaded in favour of scale. Larger companies can create mechanisms for spotting market trends faster – and more consistently. Take Saraogi. As the previous article in this series said, he moved his trading company into production when he found his suppliers were not spotting market trends fast enough. Since then, he has placed no less than 450 salesmen in the stores of his biggest wholesalers across India.

These salesmen sell only Laxmipati’s saris to the retailers who come to the wholesaler’s shop – and Whatsapp realtime information on market preferences back to the head office. “I get updates from them saying this design is working well,” Saraogi said. We have used that information to slow production of some designs and accelerate elsewhere.” He gestures at a brochure of bridal gowns in front of him. “Red chod di aur black ka supply bada diya.” We stopped producing the red and began producing more of the black.

This is the sort of thing smaller players cannot do.

It will be a mistake to dismiss this – as some businessmen in Surat did – as creative destruction or market forces at play. That is too simplistic an analysis.

Endgame

Something else is at work. Consider the decision of Surat textile units to go on strike this week.

GST was half the reason. The other half is this: in India’s political economy, clusters of small industry, even those as large as Surat’s, have far less clout than larger businesses. “We do not have a way to reach the policy-makers in Delhi,” admitted a senior official in the Surat Chambers of Commerce.

This lack of clout shows in several ways. Representations by the Surat industry association to the central government pointing out the cost disadvantage the current GST leaves smaller units with have gone nowhere. Or take the industry’s letters to the government asking it to impose anti-dumping duties on chinese fabric imports. “We have asked thrice in the last two years but the applications have been rejected,” said Shah.

In marked contrast, however, India has imposed anti-dumping duties on the import of polyester chips and yarn. As journalist Paranjoy Guha Thakurta wrote in an article titled: “Polyester Prince Revisited,” in the Economic and Political Weekly, “In the teeth of opposition from the polyester using industry in India, the central government on 25 July (2014) imposed an anti-dumping duty on imports of purified terephthalic acid (PTA), a critical intermediate that is used in the production of various polyester products. This decision will almost entirely benefit only one corporate entity, that is, RIL [Reliance India Ltd].” An email sent to the company seeking its comments did not get a response.

An anti-dumping duty is hardly unique to the textile industry. India had similarly imposed an anti-dumping duty on Chinese steel, which helped steel producers but hit all the downstream engineering companies exporting finished products. Agreed Abhijit Sen, a former member of the erstwhile Planning Commission, “What you are talking about is a national problem. India is protecting input suppliers but not anyone else.”

Each of these decisions undermines India’s manufacturing competitiveness. This sits oddly with the government’s Make In India and StartUp India missions. And they show that, no matter which government comes to power, talk about making the country’s small and medium enteprises competitive is just a hologram. GST too, as the previous article in this series showed, tilts this landscape in favour of a few larger companies.

Given that backdrop, the strike was a last-ditch effort to be taken seriously.

This is a problem. After agriculture, India’s textile industry is the biggest employer. Within it, the largest chunk of employment is provided by the small and medium enterprises. Surat itself is one of the biggest employers for migrant labour. This is true for all of India. Most employment, outside agriculture and construction, is generated by India’s small and medium enterprises.

This apathy towards the small and medium enterprises, as the formal sector tries to grow by cannibalising the informal sector, needs a policy response. As Abhijit Sen, a former member of the erstwhile Planning Commission, said, “If an industry becomes efficient – but at the cost of smaller enterprises and labour – can the rest of the economy absorb these people?”

It’s hard to see that happening in Surat. Some of the weavers, as Saraogi said, will get hired by units like his that need trained hands to manage the new equipment he is buying. But it is not clear if everyone laid off will find a new job. And if they do, it isn’t certain whether that job will pay them as much as before. This is one reason why Rajesh Mehra, the blouse trader from Amritsar, was in despair. He used to make around Rs 32,000 a month – if he traded 100,000 metres of fabric. “Rs 10,000 of that went for my expenses in Surat,” he said. “Rs 10,000 went to my family in Amritsar. And Rs 10,000 back to my village.”

On the day this reporter met him, he was sitting in his shop, surrounded by unsold stock worth Rs 3 lakh-Rs 4 lakh, wondering what to do. “I cannot go back. I have a family to maintain. I will have to look for a job here.” At one point in the chat, he looked distracted for a moment. He asked if it is easy to learn English. Then a gallows humour asserted itself. He said ruefully, “Or I can go back home and we can all eat [a free meal] at the gurudwara’s langar.”

Read the previous story in this series here.

The other articles in the Ear to the Ground series can be read here.