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T. S. Viswanathan

There is no level-playing field between the big consumer and the small consumer, and the government appears to support the former with its sales tax structure.

A WEIRD equation now exists between the paper trade and paper manufacturers that defies all economic theory. Probably, it can be termed "Paperadox".

All `A' grade manufacturers, such as Ballarpur Paper, JK Paper, West Coast Paper, Sirpur Paper, Seshasayee Paper, Tamil Nadu Newsprint, ITC Bhadrachalam and Andhra Paper, are reporting huge profits, whereas the dealers are faring poorly.

The margins of the dealers are paper thin — only 1-2 per cent on the sales invoices. Apart from this, the dealers have to extend credit to the buyers, but make immediate payments to suppliers as they face interest penalties of 24-30 per cent per annum. Conversely, the paper mills, especially the `A' grade ones, are increasing their prices without any problem.

On November 1, JK Paper Mills announced a price rise of Rs 750 pmt on its maplitho varieties. Other `A' grade paper mills are supplying only higher end paper, such as superprinting, high-end maplitho paper and so on, and refusing to supply the common variety of creamwove, writing and printing paper of good quality which the common man needs.

Therefore, the paper traders are not able to obtain the 5-7.5 per cent profits that the wholesale trade needs. Compounding the problems is a peculiar sales tax situation, especially in Tamil Nadu which has imposed a huge entry tax of 10 per cent and a local tax of 10 per cent. Also, traders buying goods from outside Tamil Nadu cannot afford to pay the CST tax of 4 per cent plus the TNGST tax of 10 per cent. So, they accepts orders from the customer first and then transfer the goods coming from other States on the E-1 transaction basis by endorsing the documents in favour of the customer to escape the TNGST tax of 10 per cent.

In this situation, there is an anomaly for the trade, trader and the customer. First, only the bulk buyers purchase on E1 basis to avoid the local sales tax, and perchance if the bulk buyers refuse to take the goods after ordering the trader is helpless, as on clearance of goods he has to incur a local sales tax of 10 per cent. Second, the benefit of E1 purchase is not available to the small consumers who constitute about 70 per cent of the total demand in volume, and nearly 95 per cent in numbers.

In some pockets of Chennai there are more than 5,000 small binders, printers, publishers and so on. Similarly in such places as Salem mofussil, Coimbatore mofussil, Sivakasi/Sattur, Kovilpatti, Erode, Madurai and Dindigul, there are numerous small consumers who produce paper products. The small consumer in spite of his low costs on record actually incurs higher costs in paper purchase because of his inability to raise finance to buy paper on LR basis.

Thus, for the same quality paper from the same mill there is a two-tier costing. The hapless trader to serve the small consumer market may have to keep goods on ready stock and charge the local sales tax at 10 per cent, sacrifice his margin and pay interest for the same paper which otherwise is available by less than 10 per cent on E1 basis.

For the paper mills in Tamil Nadu there is a different picture in that they bill directly on the actual consumer at 3 per cent against Form XV11 and at 10.2 per cent without it.

Here too, the small consumer cannot take the advantage of form XV11 as the mills sell only a minimum of one tonne costing around Rs 45,000 pmt. Thus, the small consumer with his low costs actually incurs a higher cost of production in the first stage itself, and in practice the idea that the small consumer with low costs can deliver low-cost products is only a myth. There is no level-playing field between the big consumer and the small consumer, and the government appears to support the former with its sales tax structure.

Basing on Keynesian theory of economics, when there is strong demand for paper and paperboards from the trade which arises due to good demand and good earnings for the trader, the paper mills automatically raise prices. This is based on general law of demand and supply. However, when there is no demand from the trade, the fact that the paper mills increase their prices and show good profits is strange. It is true that big paper mills have a monthly quota system of offtake by traders or wholesalers who have to compulsorily lift certain quantities to maintain their agency. But to what extent the trader can take this compulsion of fulfilling his quota every month is the question, especially in view of the fact that the trader is not earning much.

A strange paradox was witnessed in Europe in the 1940s when prices increased and the demand fell. Economists called this stagflation. They reasoned that due to inefficient production or high cost of production the manufacturer had to increase his price.

At the same time, the consumer could not buy due to a fall in his purchasing power. But at the time when the manufacturer increased his price he was showing profits, but this eventually bottomed out when there was no demand for the goods.

The same appears to be happening in the paper trade, as the trader is not making his livelihood by selling paper selling, but the manufacturer is increasing his prices and showing profits.

(The author, a paper trader and paper product manufacturer, is the former president of the Madras Paper Merchants Association.)

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