Asia Economy

Voters in a crucial Indian state give mixed reviews for Modi's big economic policies

Key Points
  • West Bengal is one of the major states in India that sends 42 elected representatives to the lower house of Parliament.
  • Prime Minister Narendra Modi and his Bharatiya Janata Party have stepped up efforts to sway voters in the state to try and win some of those seats in order to offset expected losses elsewhere.
  • Owners of small and medium-sized business in Kolkata acknowledged the difficulties they faced during Modi's demonetization and the early days of the Modi-backed Goods and Services Tax — but some pointed to new benefits they've enjoyed.
An Indian commuter and yellow taxi crossed behind the wall graffiti displaying in a alley in support of Trinamool Congress (TMC) and Communist Party of India-Marxist (CPI-M) candidate for the upcoming general election, in Kolkata, India on Thursday, 9th May , 2019.
Sonali Pal | NurPhoto | Getty Images

KOLKATA — The eastern border state of West Bengal is an important battleground in the 2019 Indian parliamentary election in which Prime Minister Narendra Modi is fighting to return to power. But for many small and medium-sized businesses in the state capital of Kolkata, the last five years under Modi's leadership have been tough.

West Bengal, with a population of close to 100 million people, is one of the major states in India that sends 42 elected representatives to the lower house of Parliament. In the last election, Modi's Bharatiya Janata Party had won just two seats in the state, where the local government is dominated by a regional party, All India Trinamool Congress, and its leader, Mamata Banerjee — who is also the state's chief minister.

In the ongoing election, West Bengal is one of several states to hold polls in all seven phases. The capital city, Kolkata, is set to vote on May 19. Analysts say West Bengal has become a key battleground in the 2019 parliamentary election for Modi, who held multiple campaign rallies in the state.

"West Bengal is very important," Akhil Bery, an analyst at political consultancy Eurasia Group, told CNBC. The BJP is focused on making inroads there, as well as in the neighboring state of Odisha, to try and make up for some of the seats it is expected to lose in Uttar Pradesh, India's most populous and politically important state, according to Bery.

"Looking at the campaign rallies and the message — it's very much fit into the Hindu nationalist tone that the campaign has turned towards," Bery said. "The BJP is attempting to latch onto Hindu discontent in the state and emphasizing that the BJP will stand for Hindu rights while trying to portray Mamata Banerjee as only being sympathetic to Muslim voter concerns."

For her part, Banerjee had been vocal with her criticisms of Modi's landmark policy reforms overhauling India's tax system and legal tenders. Earlier this year, she said if a non-BJP alliance came into power following the elections, she would launch an investigation into demonetization and review the Modi-backed Goods and Services Tax.

Demonetization and GST

Sentiment on the ground toward Modi's policy reforms appeared mixed.

In late 2016, Modi's government unexpectedly withdrew all 500 and 1,000-rupee banknotes from circulation and issued new 500 and 2,000-rupee denomination notes. The aim was to tackle the country's massive shadow economy, Modi had argued. But the sudden move left scores of people with serious cash shortages and millions lined up outside banks for hours to exchange or deposit their old notes.

"November 8, I still remember that day," Akash Basu Roy, a restaurant owner, told CNBC. He said his fiancee had called him that night to warn about the move, which was just being announced. "She called me up and she said, 'You know what? Don't take 500 and 1,000 (rupee) notes. It's getting shut down today.'"

He hung up on her multiple times in disbelief, he said, "She called me again."

Earlier that day at around 3 p.m. local time, Roy said he sold his car. The transaction, of about 300,000 rupees (around $4,290), was done entirely in cash — specifically in 500 and 1,000-rupee notes — that he had been planning to bring and deposit into his bank account the next day. As a result of demonetization, India limited the total sum of old notes people could deposit or exchange at banks everyday to just 4,000 rupees initially. That amount was then raised to 4,500 rupees and then reduced to 2,000 per person.

Indian Prime Minister Narendra Modi , center, holds a canvas displaying a portrait of himself during his election rally in Chittorgarh, in the western state of Rajasthan, on April 21, 2019.
Himanshu Sharma | AFP | Getty Images

Roy said lines outside banks in Kolkata stretched for several miles and that the city was hit harder than others like Mumbai and New Delhi, where digital payments were more prevalent. "In Kolkata, people use a lot of cash. They were not much into online or cards or banking," he said.

Altogether, Roy said, he had liquid cash of around 500,000 rupees when demonetization happened. He used a portion of that money to pay his monthly rent well before it was due by the end of November, settled salaries of his restaurant staff, and the rest of the amount he was able to deposit into his bank account by working various contacts he had at banks. "I had contacts. I used my contacts, I took out my money. I helped a lot of people from the back end to get out their money," he said.

Just as the chaos of demonetization began to settle, India rolled out one of its most ambitious economic reform plans in 70 years to boost tax receipts and provide simplicity for businesses: the Goods and Services Tax. That levy was designed to replace a thicket of indirect central and state taxes that critics previously argued blunted India's economic competitiveness.

Last month, local media reports said gross GST revenue collected was the highest since the policy was rolled out in July 2017. Still, revenue collection in preceding months had been sluggish as businesses adjusted to the overhaul of India's tax infrastructure.

In Kolkata, among the small business owners who spoke to CNBC, the attitude toward the new tax system proved mixed. While some argued that the standardization of state and central taxes would benefit India in the long run, others pointed to the negative impact on their businesses.

Sumit Sardar works for a local agriculture product manufacturing company called Divine Trap Industries, which makes fly traps to replace the use of pesticides in farming. Because of GST, he said, the business benefited. Sardar explained that the company pays an 18% tax on a specific chemical that is processed and converted into the final product that is sold. Under the previous tax infrastructure, that product was exempted from any value-added taxes. Currently, he said, he is able to charge a 5% GST on every unit sold — and it's not hurting sales.

"We can't see any effects of demonetization or GST on the business. Our demand keeps growing," he told CNBC in Bengali.

On the other hand, Susanta Ram, who runs an electronics and information technology business called S.R. Infotech out of Kolkata, said "there was maximum effect" on his business from the new tax system.

900 million eligible voters make India's election world's largest democratic exercise
900 million eligible voters make India's election world's largest democratic exercise

Ram said most of his corporate customers do not pay up front and so it takes at least two months for him to get paid for every sale he makes. But now, the company still has to file for the GST immediately after creating an invoice. For example, if an invoice is worth 500,000 rupees, then Ram said he needs to pay 90,000 rupees in taxes before the payment deadline — or he risks being fined. That means he is investing out of his pocket first on the product, then on the GST, and then he has to pay his interest dues to the bank.

"By the time the full payment comes through, the transaction is running at a loss," he said in Bengali. On average, Ram said, he ends up paying somewhere between 400,000 to 500,000 rupees in taxes. Business is growing at only 25% of what it used to before the GST kicked in and is running at a loss, he told CNBC.

Still, cash transactions remain dominant in Kolkata. Another restaurant owner explained that many small companies declare only a certain amount of their earnings to qualify for the so-called GST Composition Scheme — the measure is available to businesses with an annual turnover of up to 15 million rupees where they pay levies at special rates that are comparatively lower than the normal tax brackets but are unable to claim a tax credit. Meanwhile, other transactions are done in cash and their records are usually not kept in the books.

Long-term impact

India's overall sentiment on the impact of demonetization and GST remains split. While some surveys have pointed to negative short-term effects, such as job losses for small and medium-sized businesses, other experts have suggested long-term benefits will outweigh any pain from those measures.

Notably, both policies have resulted in increased formalization of India's informal sectors, according to Shamika Ravi, director of research at Brookings India.

Tax compliance is increasing as a result, she told CNBC.

"There seems to be a reinforcement of rule of law," Ravi said. "For the first time, generations of micro, small, medium enterprises, are paying taxes, which are, actually, formally putting out numbers and making tax calculations."

"This transition will take time. This is just a different way of doing business," she added.