Traders choking on Modi’s economic medicine

Tax overhauls and black market clampdowns have been touted as radicalmedicine to modernise India’s economy, but for small traders like SwarnSingh Darera, “Modinomics” has been a bitter pill to swallow.At his factory in the northern Punjab city of Ludhiana, Sikh businessmanDarera is keeping staff on for 12-hour shifts but only has enough workcoming in to justify a third of that time.He blames one man for his predicament: Prime Minister Narendra Modi.“The government finished us,” he said angrily. “These people sitting intheir air-conditioned offices have no idea what’s happening on theground.”Over the past year Modi has rolled out controversial, but many arguemuch-needed, flagship reforms – often dubbed “Modinomics” – designed tostreamline Asia’s third-largest economy and root out corruption.In November his government cancelled more than 80% of the rupeebanknotes in circulation in a bid to clampdown on the black market.Eight months later it followed up with a massive sales tax overhaul –replacing more than a dozen state and national levies with fourdifferent rates of between 5% and 28%.Economists had long argued such steps were vital if the country of 1.3bnpeople is to continue creating jobs for its ever-growing population.But small traders – who account for a third of the $2tn economy – have been hit particularly hard.In Darera’s shop, a box of axles worth Rs500,000 ($7,500) spent weeks onthe shop floor when the buyer initially balked because the sales taxfor the equipment leapt from 2% to 12% when the July reforms came in.“What are these crazy people doing?” Darera said of the government’s tax reforms.The rupee note withdrawal had already wiped out most of his cashreserves, he said, adding that he was keeping staff on because he didn’twant to lose skilled workers.The government says the initial pain of its economic reforms will bear fruit down the line.But analysts warn it could take months for the benefits to show, apotential headache for Modi, who faces a national election in less thantwo years and key state elections sooner.“The economy is not doing well at all,” Credit Suisse managing directorNeelkanth Mishra said. “We are in a period of deep uncertainty. It’slike playing cricket on a bad pitch. You can’t plan it.”India’s economic growth slowed to a three-year low of 5.7% in the first quarter.The Asian Development Bank has lowered its 2017 growth forecast to 7% from 7.4% in July.In an admission that its policies might be hurting India’s influentialtraders, the government on Friday announced a series of changes to thetax law designed to ease the burden on small and medium businesses.But in Ludhiana — home to thousands of small factories making cycles andparts, shawls, textiles and sewing machines — companies say they arehurting.“We’re feeling very insecure,” Arun Aggarwal, a leader of Ludhiana’sknitwear association, said. “It’s about the business environment. You’rethreatening traders, calling them thieves, there’s a constant threat ofprosecution for any perceived digression,” he added.The nearby Thapar Hosiery Mills is battling with the introduction oftaxes — 5% or 12% — on textiles for the first time and well as newcompliance burdens.There have been lower sales and higher job losses while manipulation iscreeping in as buyers insist that companies bill their products at alower tax rate.Thapar has laid off 75 of its 100 workers with rows of sewing machines now silent.A handful of men were at work, sewing red and blue sweatshirts for Zara Man.“Our system of work is more than 100 years old,” said managing directorVinod Thapar. “At least come here and try and understand how ourbusiness works before declaring us all thieves trying to evade taxes,”was his message to the government.Pappu Kumar, a Thapar employee, has seen his monthly salary halved toRs7,000. He has halted English classes for his six-year-old daughter andcut back on expensive foods like paneer cheese.“Everything is dependent on my salary,” Kumar said. “So if that is half, we have to cut back on everything else to survive.”Independent embroidery worker Mohamed Arshi said he had to send hisfamily back to their village in Bihar state in August. After the Julytax reforms, embroidery was taxed at 18%, pricing him out of severalcontracts.The new measures announced Friday reduced that rate to 5% but Arshi said it was too little too late for this year.