Demonetisation: Indian textile industry lets 10,000 workers go

In a move that was courageous as well as historic, the Indian government, led by prime minister Narendra Modi, has started demonetising 500- and 1000-rupee notes at the beginning of last month. The sudden measure took traditionally cash-intensive sectors by surprise, among them the textile and garment industry, which has been hit hard. Ten thousand textile workers have been laid off due to the cash crunch that has reduced production capacities from seven days to three days a week in some cases. The leather industry is not faring any better, given that it consists to 90 percent of small- and medium-size enterprises.

According to the Amritsar Textile Processor Association (ATPA), production at Amritsar's 40 processing units has reduced to only 25 percent. This impacts the region's over 700 warp knitting and textile weaving units that are dependent on them. According to ATPA president Krishna Kumar Sharma, the shortage of the new currency notes, so many days after demonetisation is "a management failure on the part of the central government", as quoted by Tribune India. He therefore urges the government to ease the limitations imposed on cash withdrawals from savings and current accounts.

Businesses require more cash than the current withdrawal limits allow

"We require 10-15 lakh rupees [14,500 - 22,000 US dollars] a month in cash to pay to the employees but the banks are only allowing withdrawal of up to 20,000 rupees [close to 300 US dollars]," explains Sabu M. Jacob, chairman of Kitex Garments, the dilemma as quoted by the Business Standard.

The move by factory owners to pay their workers wages and boni in advance in cash using the old bills to get rid of their accumulated cash stock has largely backfired as absentee rates have risen: Workers now have to queue up at banks to change the old currency before the deadline of December 30 instead of going to work.

"On a daily basis, half our workers have not been reporting to duty by rotation, since they are queuing at the banks to exchange money," said Taj Alam, former head of the Uttar Pradesh Leather Industries Association, as quoted by the same source. This is impacting deadlines for export orders and will most likely lead to a loss of customers.

But those workers who get paid in old currency are still better off than workers who have not been paid at all due to the cash crunch. The exporters' association in the textile hub of Tirupur in Tamil Nadu that generally welcomes demonetisation has requested higher withdrawal limits as well to be able to take care of daily or weekly wages for Tirupur's almost 300,000 migrant workers who make up 40-50 percent of the city's 600,000 textile workers. Most do not have bank accounts and thus get paid in cash.

Banks cannot cope with the current demand

Though workers as well as employers are more than willing to open accounts - a process that usually takes anywhere from 2 weeks to 2 months - in view of the already long lines and overburdened bank employees, this is also not feasible at this point.

"Every month, we have 150-200 new employees joining; they might have to be paid in cash till they get a bank account. Even normally, it would take 15-60 days to open an account for migrant workers; now, the opening of new accounts has come to a standstill," confirms Jacob.

And these are not all the woes of the Indian textile and garment industry at the moment: With the wedding season in full swing, few traders and retailers of the largely unorganised sector see reason to smile. After all, their business thrives on cash and customer service - this is how they have managed to compete with the organised sectors, malls in particular. And without cash, the customers stay away. And “as the retailers don’t have any business, the wholesalers also don’t,” explains Ch. Raghuram, president of the Vastralatha Cloth Merchants’ Association as quoted by The Hindu.

Though demonetisation will surely have benefits in the long-run - like the long-overdue switch to online payments even in the unorganised retail and production sectors, as well as payment of provident fund and other employee benefits, which have often been "forgotten" when paying workers in cash - the Indian textile and garment industry will have to grin and bear it for a while longer until the situation has stabilised. And hope for understanding buyers, especially from abroad, who will stand by them in these trying times.

Photos: new 2000-rupee note - FashionUnited / 500-rupee notes - Satish Krishnamurthy via Flickr