Led by Prime Minister Narendra Modi’s ruling Hindu nationalist Bharatiya Janata Party (BJP), a wave of new cow protection laws are threatening to stifle India’s domestic hide supply. In BJP-ruled states, new laws mean those found guilty of slaughtering old or unproductive cattle can expect the harshest penalties, which will include life imprisonment in Modi’s home state of Gujarat.

In May 2017, the government moved to create a national order making it illegal to buy or sell any bovines for the express purpose of slaughter.

While the ruling was defeated by the Supreme Court in response to a series of legal challenges, the mood of volatility it has created doesn’t look set to dissipate any time soon.

While several states have banned the slaughter of productive cattle since the 1950s, New Dehli had, up until recently, allowed the killing of aged cows, in order to give life and greater flexibility to rural markets. Often cows are sold over the border in Bangladesh – a key trading point for farmers.

Notably, the government decree issued last summer included buffalo, which are not sacred to Hindus, and had previously supplied a loophole for leather and meat production. In leather hubs such as Kanpur – where yearly exports exceed $1 billion – tanners, which once worked only with water buffalo hide, are being forced to explore their options. Under the pretext of government orders, the clampdown on cattle slaughter has also given rise to ‘cow vigilantism’ in the face of roving gangs enforcing mob justice on those suspected of involvement in cattle slaughter. The aforementioned India- Bangladesh trading corridor has seen a notable spike in violence in recent months.

Imported problems

This has been especially felt in the northern state of Uttar Pradesh, which is one of India’s most established leather hubs and a BJP stronghold.

As M Rafeeque Ahmed, former chairman of the Council for Leather Exports (CLE), told the Financial Times in November, the targeting of the mostly Muslim transporters of cattle has created an environment of fear that, in turn, has created an erratic hide supply chain.

“People are afraid to move the hides because the vigilantes can stop the leather movement on the ground,” said Ahmed. “[Domestic hide supply] is on and off. It’s okay for a while, until something happens, then it gets disturbed for a few weeks.

“Then it gets back to normal. But factories cannot function like that. We should have assured supply all the time.”

As a result, some local leather goods producers have started importing hides from outside India. “People that have been using Indian leather want to be sure that their factories run, so they are importing more,” said Ahmed.

Bottlenecked supply has also created the problem of higher prices for raw materials, which has been compounded by the prices for chemicals also having shot up.

Make in India

The Indian leather industry is currently valued at around $17 billion, which Modi’s government is hoping to increase to $27 billion by 2020, as part of the ‘Make in India’ initiative launched soon after the BJP came into power in 2014.

But does the elevation of the status of cows to sacred national symbol directly jeopardise this target? According to Gilles Verniers, a political science professor at New Delhi’s Ashoka University, such is the importance of Hindu nationalism to Modi – it was the fundamental plank of his election campaign four years ago – cultural agenda eclipses even the worth of multibillion-dollar industries.

Domestic hide supply is on and off. It’s okay for a while, until something happens, then it gets disturbed for a few weeks. Then it gets back to normal. But factories cannot function like that.
– M Rafeeque Ahmed, former chairman of the Council for Leather Exports

“Cow protection has been a core issue that has defined the Hindu nationalist movement since its inception,” he told the Financial Times. “It’s not something that can be ditched easily for the sake of an economic argument. They are ready to bear the cost. And politically, they think it’s more rewarding; the gains outweigh the cost.”

Another concern of late for those within the Indian leather industry has been the impact of the new Goods and Services Tax (GST), introduced by the government last year. Classified as luxury items, the tax rate for leather products was raised to 28% – almost double the 13.5% it was up until 30 June 2017. GST has had a particularly devastating impact on smaller leather retailers, with some claiming business to have fallen away by as much as 75%. What has made the hike in tax rates so devastating is that it followed hot on the heels of last year’s government-imposed demonetisation of Rs500 and 1,000 banknotes – roughly 86% of the nation’s currency.

The decision, made in November 2016, was designed to purge the national economy of ‘black money’ and create a switch to a more transparent and traceable digital payments system. It has proved to be a polarising move. Government supporters claim it will create a vital boost in income tax payments – a long-standing issue in India, while critics see it putting the squeeze on smaller businesses.

Closing fast

Over the past year, India’s GDB has sunk by a tenth to 6.1%, costing an estimated 1.5 million jobs. In Uttar Pradesh’s Kanpur- Unnao industrial cluster, around half of its 402 registered leather businesses – making up roughly a third of India’s leather exports – have closed over the past year, Mukhtarul Amin, CLE chairman, told Bloomberg in December.

Another huge part of the problem for leather exporters as far as GST is concerned is that there has been a delay in refunds on taxes already paid on imports, leaving them out of pocket with little working capital.

While the government has reduced GST rates on some products to give businesses some breathing space – as well as deadline extensions for returns – many companies have complained of discrepancies between taxes on raw materials and finished products. Others are struggling to make the leap to digital through a lack of technological wherewithal.

Yet, Harpreet Singh, a partner at KPMG India, believes GST will create an increase in leather revenues in the long run. “The Rebate of Central Excise, a tax on manufacture of goods in India, was allowed in case of exports,” he says. “However, it was the time to process the claim that concerned the India leather industry. With the onset of GST and automation of the refund filing and disbursement processes, barring rootlevel issues, the industry has an optimistic outlook.

“The provisions mandate the authorities to ensure a timely payout of refund claims and the infrastructure appears to be reassuring.

The scheme would lead to development of infrastructure for the leather sector.
– Indian Government

“Moreover, the amount of increased cost of capital blockage on account of GST charged in case of imports is anticipated to be set-off against a timely payout of refund.”

In the meantime, such forecasts will do little to assuage the fear that foreign buyers might take their business elsewhere. According to the CLE, shipments for leather items could fall by more than 10% to $5 billion in the current financial year, with Vietnam, Bangladesh and China – where leather is cheaper – all pinching Indian business.

That’s some deficit in contrast to the $6.58-billion worth of leather goods shipped out in 2014–15.

Shipments volumes to the EU, a key destination, have also taken a hit post- Brexit, with the rupee strengthening against a depleted British pound.

It’s not all bad news. For all its recent turbulence, India remains the globe’s second biggest supplier of shoes and leather garments after China.

Job creation is vital to all of this, with the leather industry having been identified in the 2016–17 Economic Survey as one able to create maximum employment opportunities.

New opportunities

In December, the government greenlit a $404.7-million stimulus package, ‘Indian Footwear, Leather & Accessories Development Programme’, which was designed to create 320,000 new jobs in the leather and footwear sectors over the next three years.

“The scheme would lead to development of infrastructure for the leather sector, address environmental concerns specific to the leather sector, and facilitate additional investments, job creation and production,” read a government statement.

What’s more, the authorities are purportedly weighing up introducing new tax incentives to attract bigger investments into the sector. Labour laws reforms are also said to be on the horizon, but further details are yet to emerge.

Last year, Arvind Subramanian, chief economic adviser to the Indian Government, claimed that nearly every economic growth spurt felt in East Asia since the end of the Second World War had been directly linked to clothing and footwear exports.

Domestic demand is also a key element of the mix, with the government recently pledging to create a domestic industry worth $18 billion by 2020.

Such declarations indicate an industry in growth mode, making Prime Minister Modi’s draconian cattle policy – together with GST – all the more confusing.

Namely, how can demand be successfully met when local supply chains remain in such a fragile and squeezed state?