Apparel Exports Need Fresh Lease Of Life… But How???? A Report..
Perfect Sourcing|September 2019
Last few months have been catastrophic for apparel exports industry of India. One after the other the industry was struggling with one or the other challenge. While global competition is one aspect of the challenges within the country at the moment is being regarded as the biggest deterrent to the slow situation of the industry. Burdened with higher tariffs than their competitors, the exporters need more incentives and protection to stay afloat. India’s foreign trade policy pundits need to renegotiate tariffs on apparel exports with the EU and the US to tackle the emergent economic slowdown in the country. The apparel industry is the country’s largest low technology employer after agriculture, with 45 million workers, contributing two percent of GDP and 15 percent of export earnings.

Today, Indian apparel exports are burdened with 9-32 percent duty in the EU and US markets which blunts its competitive edge. Now that Vietnam has signed a Free Trade Agreement with the EU, which enables apparel exports at zero duty, Indian exports to these markets will be impacted adversely.

India’s two major competitors, Vietnam and Bangladesh, export apparels to the tune of $27 billion and $33 billion, respectively. India’s exports are at $17 billion. Vietnam has taken advantage of its bilateral trade agreements, while Bangladesh has benefited from its Least Developed Country status. They have not only tapped opportunities with the declining market share of China but have also eaten into India’s market share.

Over the years, Indian apparel exports have been in distress and survived largely due to export incentives. While these incentives have proved partially useful, they have not helped Indian apparel manufacturers compete on price with their competitors. To that extent, the flawed foreign trade policy does not augur well for apparel exports.

The situation is further complicated by the flip-flop on incentive schemes. For example, the government decided to introduce the Rebate of Central Taxes and Levies (RoSCTL) in March 2019. While the apparel industry welcomed the announcement, its optimism was dampened with news from North Block that Merchandise Export Incentive Scheme (MEIS) meant to offset infrastructural inefficiencies will be retrospectively withdrawn.

This incentive is calculated as a percentage of export (freight on board) value and given in the form of tradable scrips which can be used as currency to pay Customs duty or sold to other importers.

The reality is that several of these are actually not incentives. The RoSCTL reimburses the sector for the embedded State and Central taxes that cannot be claimed as input tax credits under GST. These should perhaps be called “equalization schemes”, where the sector is left no better, or worse, than before GST.

Therefore, to introduce an equalization scheme, and then withdraw the MEIS incentive which was meant to help level the playfield with competitors, was retrograde.

Reducing Export Incentives, Competitive Imports

Garment export sops have reduced tremendously in the past and going by the current policy directions, they stand a further chance of reduction. Simultaneously, the garment imports into the country is increasing at a break-neck speed.

On one hand, exporters will have to compensate internally for a reduction in export incentives while on the other hand, domestic manufacturers will have to compete with their more efficient counterparts in countries like Bangladesh, Vietnam, etc. The most effective strategy to tackle both scenarios is to improve the man and machine productivity through the implementation of operational excellence techniques.

We need to have a systemic and sustainable improvement in productivity, from a combination of bringing in automation as well as increasing labor-efficiency. The National Skill Development, for instance, we need to focus on these issues, rather than just churning out people with basic skill-sets...we need to have teachers in these Skill Development Centres who are aware of the best practices and global standards! Some industry experts point out that it is far better for Indian apparel makers to expand or perhaps shift their existing manufacturing to Vietnam and Bangladesh to benefit from tariff arbitrage, labour laws, low wages, conducive business environment and, hence, better return on capital employed.

While China was able to cope with the loss of apparel industry jobs, due to its manufacturing prowess in other areas, it is not the same for India. For instance, the man-machine ratio in apparels is far better than the farmers to cultivable land ratio, which has fallen significantly over the years. In the automobile sector too, for every crore revenue earned; Maruti Suzuki generates 0.45 jobs, while for an apparel manufacturer like Orient Craft, a crore earned in revenue creates 18.5 jobs. This stark comparison sums up the employment generation capability of the sector.

Clearly, the policy environment for the apparel industry is not conducive in a competitive international political economy. The government, therefore, not only needs to protect but also provide the necessary support to the apparel sector which would positively impact the economy.

There is no better stimulus package than regular monthly wages in the hands of the poor.

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