Illegitimate recycling of jute bags is just one of the several malpractices that mill owners resort to for better margins.
Kolkata: On a Monday morning, while others are just about settling in, deputy jute commissioner Dipankar Mahto is fighting an unequal battle from his office in Kolkata’s Salt Lake CGO complex. His immediate adversary is a senior lawyer in Hyderabad, who declines to appear for the jute commissioner’s office unless a part of his fee is paid in advance.
Mahto tries to explain to the lawyer over the phone that he must first raise a bill, and that at any government office, it normally takes a few days to “process” a payment, but the lawyer will have none of it.
It’s only going to take two-three days, and the jute commissioner’s office is to pay his fees in full at one go, Mahto says, but the lawyer refuses to budge.
At stake is a truck full of evidence carrying an innocuous cargo of 30,000 empty jute bags. Its invoiced worth is onlyRs.6 lakh, but in Mahto’s war against jute mill owners, it is a potential game changer.
At the instruction of the jute commissioner, the truck had been detained a few days earlier by the police in Adilabad in Telangana, but the local administration is “only too keen” to release it, Mahto says. The only way to restrain them is by obtaining a court order, and though Mahto has a strong case, the order isn’t easily coming by.
After several impassioned attempts to convince the lawyer about the importance of the detained truck in the ongoing crackdown against corruption, Mahto surrenders to the cliché: “you should never take your job too seriously”.
After all, for all stakeholders here except the jute commissioner’s office, the incentives for having the truck released are far greater than can be matched by paying only legitimate legal fees, Mahto says in disgust.
Spearheaded by Mahto, the jute commissioner’s office has over the past few months launched a crackdown on one of the industry’s worst-kept secrets: the illegitimate recycling of used jute bags. It shortchanges the government, tens of thousands of workers and farmers, and even “compliant” producers.
Intensive policing by the jute commissioner’s office has revealed that a section of mill owners routinely recycle used jute bags and sell them under the government’s procurement programme, which has an annual outlay ofRs.4,500-5,000 crore.
But that’s just one of the several malpractices that mill owners resort to for better margins.
The malaise
Under the procurement programme, aimed at protecting the livelihoods of some 250,000-300,000 jute mill workers and an estimated 3.5-4 million jute farmers against the rapid onslaught of plastic bags, only new jute bags of 665gm each could until now be bought to pack 50kg of foodgrains.
There’s an elaborate process to ensure compliance with the mandated standards, but recent investigations have revealed that there are gaping holes in the supply chain through which new bags leak out and are replaced with used ones.
The new ones that leak out—such as those said to be laden in the truck detained at Adilabad— return to the mills and are sold again.
To be sure, jute bags are sturdy and recyclable—according to some lifecycle studies, for up to seven times—but with every use, their quality diminishes. Considering the not-so-tender handling, only new bags are suitable for packing foodgrains.
Because they are able to sell the same bag over and over again, a section of mill owners falsify production figures. They take advantage of the government’s procurement programme, but produce much less than what they officially claim in their books.
It has a cascading effect, says jute commissioner Subrata Gupta—Mahto’s boss. Because this “game of recycling” hasn’t been firmly dealt with until now, several mills have surreptitiously scaled back production, which, in turn, has impacted employment as well as the farmers further up in the supply chain, according to Gupta.
“In the jute sector, if you measure efficiency by the conventional yardsticks, the most efficient mills are the ones that are low on production,” says Gupta.
Compounding the problem of illegitimate recycling, cheaper bags and sacking fabric (from which bags are made) are being dumped into India by Bangladeshi and Nepalese manufacturers. These aren’t inferior in quality, but buying them doesn’t protect the jobs of Indian workers and farmers, says Gupta.
Use of imported fabric or sale of bags made abroad under government procurement is banned, but curbing supplies from Bangladesh and Nepal is a big challenge, admits the jute commissioner. Bangladesh even officially supports exports by offering mills a 7.5-10% subsidy on the value of jute goods that are sold abroad.
But in his drive to end these malpractices, Mahto is quite a lone ranger.
Firstly, he is up against evolved malpractices—ones that have been tweaked over and over again to scrape through routine systemic checks. Plus, the supply chain is circuitous with many agencies—both private and state-owned—involved in the delivery of bags from mills to state-owned foodgrain procurers. And not everyone in the supply chain falls within the remit of the jute commissioner’s office.
Mahto can’t fix everything, so his plan appears to be to make delinquency more expensive than compliance—that’s what bureaucrats typically do when trying to clean up corruption of this magnitude. But policing alone may not be adequate deterrent.
Systemic reforms are required, and the industry is about to witness some sweeping changes, but we will come to them presently.
The economics
To understand the motivation of the mill owners to cut corners, one must closely examine the economics of jute bag manufacturing. Annual jute goods production in India is estimated at 1.6 million tonnes (mt) by the jute commissioner’s office. Of this, production of jute bags is estimated at 1.2 mt, or a whopping 75%.
The government procures about 800,000-900,000 tonnes of jute bags every year, paying a price determined every month on the basis of a so called “cost-plus” formula. It means the price paid by the government is a function of factor costs such as raw jute, labour and power, and normative efficiency in production.
Jute mill owners say for “compliant” producers, the margin from sale under government procurement is 3-4%. According to the jute commissioner’s own calculations, it should be several percentage points more, but no one in the industry agrees with him.
That margin for some producers isn’t adequate remuneration; however, there are others who say the volume and the short working capital cycle make up for the thin margin.
Still, there are ways to cut corners staying within the law, says a leading mill owner, asking not to be identified. “You could tweak the fabric, supply bags that are sturdy enough but slightly lighter (than 665gm) to add another 3-4 percentage points to your margin,” he says. “We have done these things for ages, but to supply used bags is completely unacceptable.”
Government procurement only provides for “sustainability”, according to the manager of another mill, who, too, asked not to be named. For the industry, the “real profits” traditionally came from so-called private sales. “That market has crashed—selling in the open market, you cannot even recover costs these days,” this person says.
The contrabands that leak out from government procurement are partly responsible for the poor prices in the private market. They are normally sold in the private market at a deep discount to the fair price.
Dharam Chand Baheti, managing director of Gloster Ltd, which has one of the most advanced production facilities, has a more theoretical take on the malaise in the jute industry.
Entrepreneurs from the Birla, Goenka and Bangur families were forced to exit or scale down their interest in the jute industry decades ago. A huge majority of mills have since been taken over by erstwhile traders or bargain hunters looking to make a fast buck, says Baheti, adding that these people have not ploughed back profits into the plants to diversify their product range.
As a result, they remain fully dependent on the “crutch” called government procurement, whereas advanced mills such as Gloster earn substantially from exports. Gloster, for instance, receives at least one-third of its Rs.330 crore annual revenue from far more profitable exports, according to Baheti. But then, there are only a handful of such mills.
So has Mahto been able to make any inroad at all?
Compliance has lately improved, claims Raghavendra Gupta, a leading mill owner and chairman of the Indian Jute Mills Association—or Ijma, a lobby group. “There are going to be delinquents at all times, but the industry has pretty much fallen in line,” says Gupta, who runs the Hooghly Group of jute mills.
But still, he says, at least 30 of the 93 jute mills in India are in losses, and 15-20 more are operating on a profit margin of 3-4%, not to speak of the dozen that are closed.
That means Mahto may have tamed some for now, but the motivation and opportunity for corruption have not been eliminated.
Road ahead
While Mahto steps up policing in more ways than the industry had anticipated, the jute commissioner is about to introduce some new standards.
Soon, jute bags procured by the government are to weigh 580gm, reduced from 665gm. The move has driven a wedge through the industry, though Ijma officially supports it.
That apart, output of jute mills could from now on be audited by electricity consumption, and not by stated figures of employment and raw jute consumption.
These will have far-reaching implications in curbing rampant and intractable malpractices. But for jute mill owners, its immediate impacts are reduction in profit volumes and in tapering of opportunity to improve margins by cutting corners.
Bags weighing 580gm have been tested to be sturdy enough to pack 50kg of foodgrains, says Gupta. Even previously, bags weighing up to 580gm were accepted for government procurement. But even one found to weigh less than that resulted in the cancellation of the entire consignment.
That means the tolerance limit under the new regime will be much tighter, and hence less opportunity for mill owners to puff up margins by tweaking fabric quality and bag weight—inferior bags will simply burst open under weight.
Reduction in weight will pare production cost by 9-10%, and the government’s procurement price will be commensurately adjusted, says Mahto. That means the government will save Rs.450-500 crore (if it doesn’t step up procurement by volume), whereas for mill owners’ profits will plummet.
The industry had asked the jute commissioner to create incentives for mill owners as well, but the government doesn’t want to share the money it is going to save, says Baheti.
That apart, the jute commissioner’s office has lately started measuring production by power consumption. Jute mills typically consume 428 units (or kilowatt-hour) of electricity for every tonne of jute bags produced.
“When we started to audit output by this yardstick, we found several mills that had consumed less than 400 units for every tonne they claimed to have produced,” says Gupta. One mill was found to have consumed as little as 246 units per tonne of bags produced. “Such astounding efficiency calls for some amount of explaining, doesn’t it?” he asks.
Industry veterans had seen most of these initiatives coming from a distance, but some such as production audit by power consumption was entirely unanticipated.
Not surprisingly, a section of the industry is not taking kindly to these changes. Sanjay Kajaria, a former Ijma chairman and joint managing director of Muralidhar Ratanlal Exports Ltd, says any kind of compliance audit is welcome, but switching to new standards without conducting enough field trials isn’t advisable.
He, as well as a substantial section of the industry, isn’t convinced that lighter bags would be sturdy enough. He is apprehensive that the government may have to switch back to the previous standards, whereas by implementing the new ones now, mill owners will be forced to spend Rs.5-10 crore each on their production lines.
“Why not instead level the playing field by creating tariff barrier on imports and bring about stability in raw jute prices by eliminating hoarding?” Kajaria asks.
While the debate over the new standards gets more nuanced, the truck at Adilabad remains detained.