Sharmistha Mukherjee Should Note the Real Health of Khadi Before Predicting its Doom

The Deccan Chronicle opinion piece “Khadi faces dark days: Handloom’s GST blow”, published October 11, 2017, and written by Sharmistha Mukherjee of the Congress, talks about Khadi and the handloom sector allegedly facing “dark days” after the implementation of GST. The writer claims that because the sector has traditionally been in the informal economy, it should be exempted from GST. Let us take a closer look at the reality.

The History

Mukherjee says that for the first time in independent India, Khadi has been taxed under GST. Surely, there may be a time for everything? GST has brought most goods under the taxable regime. The entire Khadi & Village Industries (KVI) sector had been enjoying the benefit of tax exemption even in the pre-Independence era. The sector has been state-supported for many years. It may have needed to transition to a taxable regime. But that does not logically translate into the sector being pushed towards a bleak future as the writer claims.

Moreover, the writer herself mentions how Khadi and other Indian handloom products are highly sought-after products worldwide as well as in the domestic market. A lot of revenue is generated by the industry. (We will explore shortly just how well the Khadi has actually been doing and what volume of revenue it has been earning.) Therefore, it may seem only befitting the sector that it be regularised and a tax be put on these products. This could actually provide a level playing field to other players in the garments and clothing industry.

The Health of Khadi

Against Mukherjee’s claims of unfairness and prediction of doom, let us look at hard facts – the data on the performance of the Khadi sector.

Figure 1

As we can see from Figure 1, both production and sales of Khadi have gone steadily up in the last three years. Sales were at Rs 1,170 crore in 2014-15 and in the last fiscal, they stood at Rs 2,005 crore approximately. Clearly, this health and growth of the sector is unlikely to disappear because of reported issues related to what is most likely the teething phase of the newly implemented GST regime.

To get the full picture, let us look at historical data from the Khadi sector.

Figure 2

As we can see in Figure 2, Khadi sales have risen from Rs 617 crore (approximately) in 2004-05 to Rs 2,005 crore (approximately) in 2016-17. If we look at the decade-long tenure of the last administration, which was run by Mukherjee’s own Congress, Khadi sales grew approximately 75% in 10 years. In contrast, in the three years of the present administration (shaded in dark blue), Khadi sales have grown from approximately Rs 1081 crore  in 2013-14 to approximately Rs 2,005 crore in 2016-17. In other words, Khadi sales have witnessed almost 86% growth in just three years since the change in administration.

Thus, it may be a bit premature forecasting on the part of Mukherjee to say there are dark days ahead for Khadi.

Financial Literacy & Input Tax Credit

The writer raises concerns about the financial literacy of those in the informal market. This premise has been cited for a long time by businessmen and others with likely political agendas to argue against or even evade taxes. Taxes, however, are the most important source of state revenue. If those outside are being brought into the taxation system, provided of course there is economic merit in doing so, it may only help to formalise the economy and make it more transparent. And we have already seen above how well Khadi sales have been growing and how much revenue the industry is earning. Now, if people gain financial knowledge in the process of complying with GST, can that really be a bad thing?

Moreover, GST provides the benefit of the input credit system, where the manufacturer has to effectively pay for the output. This is meant to bring down prices of products for consumers in the longer run.

Benefit Extended to MSMEs

In the recent GST Council meeting, a lot of decisions were taken to provide relief to the micro, small and medium enterprises (MSMEs) in the new GST regime. The composite scheme for SMEs, which was applicable for a turnover of up to Rs 75 lakh, has now been raised for a gross turnover of up to Rs 100 lakh. Moreover, businesses with a turnover of up to Rs 150 lakh will now be allowed to file their GST returns on a quarterly basis, instead of a monthly basis. This is looked upon as relief to most small and medium-scale businesses.