Economic Stimulus: Repacking Wont Do

Source: The Stitch Times: February 2009

THERE IS NO STIMULUS IN REPACKAGING

The International Monetary Fund (IMF) has recently issued aworld forecast of a declined growth of 2.2% for 2009, which has climbed downfrom 3.7% in 2008 and 5% in 2007. The current projection has every chance ofbeing further revised downward as the year marches forward. All the major worldmarkets are in the loop of negative growth. The US growth has been projected at-0.3% in 2009 against 1.4% in 2008. Europe will grow by -0.7% in 2009 asagainst 1.4% growth in 2008. Japan is expected to register a growth of -0.2% in2009 as against 0.5% in 2008. All these projections are likely to be reviseddownwards, if the recent experience is any guide.

The Indian Scenario

Recent data released by Apparel Export Promotion Council(AEPC) shows that apparel exports plunged 11.29% in November, 2008 to $621million dollars, compared to $700 million during the same period in 2007. Thiswould aggravate during current fiscal, when the apparel exports are likely tofall 24% short of $11.62 billion target and may end up at $8.78 billion. Thisneeds to be compared with garment export worth $9.69 billion during 07-08.Rakesh Vaid, Chairman, AEPC said, "India is clearly losing its edgein global markets. The Government and the industry must gear up to retainexisting buying nations and explore fresh markets." Recent surveysconducted by AEPC in export hubs of Gurgaon and Okhla towards December-endshowed 84% manufacturing units registered fall in export orders and employmentin the range of 20 to 80%" Says A. Sakthivel, President, FIEO, "Exportersare now facing challenges due to present financial crisis. Fresh orders aredrying up due to lower demands and buyers are canceling the earlier orders orre-scheduling the shipments. Buyers are asking to reduce prices even foralready executed contracts and are asking exporters to match "China Prices".Buyers are also demanding longer period of credit to tide over the presentfinancial crunch. The financial credibility of the buyers as well as of theirbanks is under question."

India's Declining Share in World Apparel Exports

At the first look, the decline in Indian exports seemsunderstandable with the general contraction of demand the world over. But onlyif one were to compare the performance of our competitors, we realize that theyare still expanding their exports to the world markets. While India's exports tothe US declined 11% in Rupee terms during October to December last year, butthe exports by Vietnam to the US soared 35% in dollar terms while those fromIndonesia were up by 8.44%. Even Bangladesh registered increase in its exportsto the US by 6.6%. Similarly, India's exports to the EU during January toAugust stagnated while those of China increased by 8.19%, Vietnam by 9.85% andBangladesh by 3.1%.

Is the Government really concerned over this?

To my mind, a big NO. It is evident from the Governmentreflexes that it has no concern at all about this sector, which has asignificant contribution to the GDP, employment and export earnings and what iseven more important is that this sector can make more significant contributionin all these respects, only if it is provided with a level playing field vis--visits competitors. Not only the Government has failed to consider the consistentdemands by all stakeholders for providing them with the opportunity for a faircompetition with their competitors, but the Government, in fact, has gone tothe extent of DISHONOURING their own declared policies. For example, CommerceMinister Kamal Nath is on record of having repeated at least 20 times that theGovernment is committed to "non-export of taxes", but yet the Governmentcontinues consistently to deny exemption of taxes, both at Central and Statelevels, which the exporters are being subjected to.

The Government Packages

Once we started feeling the heat of global recession and all economic indicators pointed to a grim picture in terms of sharp decline in demand, the downward trend in production and growing unemployment reflected in layoff, the Government woke up to the need of taking "appropriate monetary measures" like fiddling with the Repo Rate, Reverse Repo Rate, Cash Reserve Ratio - all with the hope, even confidence, that these would provide the required liquidity to the economy to call a halt to the process of slowdown. But unfortunately, the downward march of economy as a whole and exports in particular had already set in, in our economy. Though the statistics take time to flow in, we were already in a serious slowdown in the month of October when, for the first time in 15 years, our industrial production recorded a negative growth of -0.6 per cent. This stood exacerbated by a fall in absolute value of exports, which, once again, happened after so many years. Our employment figures started showing alarming trends and the textile and garment sector, according to the acknowledgement of the Government itself, had lost out some 700,000 jobs with a projected loss of 100,000 jobs every month for the remaining 3 months of the current fiscal.

Package Highlights

Though the two packages covered a number of areas of assistance quite a few of them do not merit to be even mentioned in a business publication like The Stitch Times - save three favours that too non-sector-specific that have mercifully been granted to our area of interest i.e. garments and textile sector. These were:

1. Non-sector-specific across the board cut of 4% in the ad valorem Central Value-added tax (Cenvat)
2. Non-sector-specific interest subvention of 2% on export credit for labour intensive sectors
3. Additional allocations for export incentive schemes (including those non-sector-specific)

Let us, as down-to-earth people, who dissect and analyse each of the three favours granted by our new, but part-time Finance Minister (I am referring to our Hon'ble Prime Minister, who could not sadly find any single individual to hold the Finance fort) to Indian trade and sector, which includes textiles and garment sectors.

1. Non-sector Specific across the Board Cut of 4% in the Ad Valorem Cenvat

The package included an important announcement of across the board, and not sector-specific, 4% cut in Cenvat. While announcing the Package, Montek Singh Ahluwalia expressed the hope that manufacturers would use the opportunity provided by the Excise duty cut to reduce prices. He, however, failed to appreciate whether the blanket cut in Excise would bring down prices and encourage consumers to start shopping again, which, in turn, would create demand he intends to promote. Unfortunately, so quick was the retort from the industry that most of them said they would not be able to pass on the benefit of the Excise cut to their customers. This reaction was a serious dampener, nullifying the wishful hope of this measure perking up the demand of products in the market. In fact, even before this announcement the then Finance Minister, P. Chidamabram had tried in vain to nudge industry to cut prices to boost demand.

Further, assuming, but not granting that some of the manufacturers do pass on the cut in factory prices by 4%, would that get reflected at the retail price level? Perhaps not, as the retail prices are unlikely to decline since overheads and other post-production costs would not be subjected to 4 % cut.

As a matter of fact, the Government announcement of 4% cut in Cenvat is likely to cost the Government Rs.8,700 crore by way revenue foregone, but it will still not be able to force the manufacturers and retailers to pass on the cut to the consumer. This means the Government is subsidizing the manufacturers without any benefit to the ultimate consumer and hence the very purpose of prompting and promoting demand through Excise cut gets nullified. It is well known that in times of economic uncertainty, tax cuts are much less effective in stimulating activity than direct Government expenditure.

2. Interest subvention of 2% in export credit for labour intensive sectors

Even this part of the announcement has failed to enthuse the industry; this indeed disappointed them. And why not? After all, the new Fiscal Economic Stimulus Package ONLY HALF-RESTORED the subvention of 4% which was withdrawn only a few months back. If the Government, in its own wisdom, thought that restoration of half of subvention of interest should constitute an important part of much-publicized and much-awaited Package to retrieve the Indian industry and export, it is sadly mistaken. Everybody seemed to disagree with the Government calculation. R.K. Dalmia, Chairman of Confederation of Indian Textile Industry (CITI) complained that in case of export credit, subvention of 4% had been withdrawn from October, 2008, out of which only 2% has been restored now. Sajjan Jindal, President, Assocham has sought slash in interest rates to 7% and that the CRR and SLR should be reduced by 3% and 4% respectively and that RBI's reduction of Repo Rate and Reverse Repo Rate by 100 basis point is "not enough". G.K. Gupta, the then President of Federation of Indian Export Organisations (FIEO) said, "I was expecting the Government to announce subvention of interest rates for MSME segment of exports and to traditional sectors of exports, hopefully by 4%." Rakesh Vaid, President, Apparel Export Promotion Council (AEPC) said that 2% interest subvention for exporters will benefit the sector only marginally."

3. Additional allocations for export incentive schemes

For the textile sector - one of the country's largest employer and exporters - the Government has made an additional allocation of Rs.1, 100 crore. But this is only to clear backlog in the technology upgradation fund (TUF) scheme which means that the Government was only providing the committed funds to textile sector.

Packages Infructuous

At a recent joint press conference, five leading chambers of commerce and industry including CITI, AEPC, PDEXCIL, SRTEPC and TEXPROCIL joined together and termed "the two financial packages announced by the Government falling terribly short of expectation of the industry". In a hard-hitting statement, the industry representatives said the two stimulus packages were "cosmetic and superficial" and added that "whatever sops that have been extended were only restoration of facilities, which were earlier withdrawn." They pointed out that package of 7 December, 2008 only released the dues that had been withheld and even now these have only been partially restored. The package announced on 2 January 2009 essentially made only cosmetic changes in export incentives. These packages have not addressed the issues of small and medium enterprises, which are in labour intensive industries.

According to these trade bodies, the textile and garment industry is in serious crisis, which is not making of the industry. They listed the major problems like Rupee appreciation and interest escalation during 2007-08; global financial crisis and demand recession from July 2008; serious domestic impact of global crisis; price increase and then MSP escalation of 40% on cotton and inordinate delay in releasing TUF scheme funds and TED payments, which have blocked the inflow of funds leading to liquidity crisis. They added, "The collective opinion of the industry was that speculative investments in civil aviation, real estate and automobiles received sops at the cost of exporting industries like textiles and clothing." They also felt that the packages have not addressed the issues of SM Es, which are labour-intensive.

Turning Investments in NPA

This, the industry feels, has resulted in negative growth in production and exports and most of the textile and garment units are in losses and already 700,000 jobs have already been lost in this industry alone. This figure, the industry says, could reach 1,000,000 this fiscal. K.B. Modi, Chairman, CITI said that heavy investment of around Rs.1 lakh crore made over the last 3 years in textile sector could turn into NPAs because of low order position, as the textile units are already feeling the pinch of losses and this would lead to defaults in payment and therefore could turn the new investment into defaults and NPAs.

While appreciating certain welcome features of the economic stimulus package to exporters, particularly the 2 per cent interest rate subvention on export credit which has been extended up to 31^st March, 2009, G.S. Madan, President, Garment Exporters Association stressed the need to restore back higher duty drawback rates which were reduced during September, 2008. He pointed out that the garment exporters have been recommending 5 per cent hike in the duty drawback rates and increasing the scope and coverage of duty drawback scheme so as to ensure full reimbursement of excise duties, custom duties, service tax, education cess and various state level taxes.

He also reiterated GEA demand to exempt exporters from service tax on all export related services to avoid blockage of capital of exporters, as the procedure for refund is time-consuming, resulting in unnecessary delays and harassment. The Government should also restore 100% exemption to export earnings under Section 80 HHC of Income Tax Act, Madan, said.

Emerging opportunities being

The industry representatives felt that most of the textile and garment units have already been shifted out of North America, Europe and Japan to Vietnam, Cambodia, Bangladesh and Sri Lanka. They felt that since some of our competitors like China, Pakistan and Turkey are themselves in serious crisis, the relocation of plants or sourcing being done in these countries could be diverted to India. This can lead to softening of impact of global crisis in India.

The industry captains felt that the textile and garment industry has very good potential of development. If Indian players are provided with the requisite facilities, generally by way of level playing field, we can do extremely well. They estimate that the industry has the potential of adding up 5 million direct jobs and another 12 million indirect jobs, if the industry were to vibrate. Textile and garment exports can also reach $50 billion, which would be around 6% of the world trade. The industry can also see through Indian domestic market picking up from the present level of $30 billion to $60 billion. But, all these need due support from the Government. But who cares? Least of all the Government, which has all along been drumming up their support for this "vital sector" of the economy.

What else can you expect from a part-time Finance Minister, the showman Commerce and Industry Minister and a sulking Textile Minister?

I personally rue that ever since, the UPA Government has come into power and announced what our Hon'ble Commerce Minister called "First Foreign Trade Policy", the use of words "textiles" and "garments" have scrupulously and disdainfully been avoided to be used in the Budgets, year after year after year.

In the course of interaction by various organizations including CITI, AEPC, GEA, SRTEPC, TEXPROCIL, PDEXCIL and FIEO, there has been almost a unanimous opinion in favour of provision of following support.

1. All industry rate of drawback be notified at the rate of 14.65% in respect of garments with effect from September, 2008. This is what AEPC says has been based on the cost data for all industry rate of duty drawback submitted by the AEPC to the Government.
2. Exemption of fringe benefit tax as applicable to IT sector needs to be extended to apparel sector, too.
3. Income Tax benefit under Section 80 HHC as was available earlier to the exporters needs to be restored.
4. The Government should provide interest - free loans for investments in machinery along with zero duty import of capital goods scheme.
5. In order to meet the liquidity crunch, the Government should also announce moratorium of two years for repayment of principal amount against term loans.
6. Restoration of 4% subvention allowed for export credit which should be applicable from October, 2008 - the date from which it had been withdrawn earlier.
7. The refund of Service tax on foreign agent commissions should be raised to 10 percent of FOB and refund of Service tax on output services be applicable with retrospective effect rather than prospective effect.
8. Removal of minimum ceiling of 7% on export credit, in view of the fact that our competitors in South East Asia are getting credit at the rate of 5%.
9. The banks, involved in derivative products with the exporters, should be advised to help exporters in reducing their losses on "no-profit-no-Ioss basis", as the exporters, in the absence of any experience, have suffered heavy losses due to the serious fluctuation of Indian Rupee.
10. The post-shipment credit which is presently available only up to 180 days should be provided at least for a tenure of 270-365 days, keeping in view the financial crunch faced by overseas buyers, who are asking for longer credit period.
11. The Government, as a rule, should refund the dues of the exporters within one month and in the case of any delays, the exporters should be given interest for the period of delay.
12. The Market Development Assistance (MDA) scheme should be further liberalized so as to encourage exporters to participate in international trade fairs and exhibitions to beat the downturn of the exports.
13. The Government should also sell the procured cotton to the textile units at the international rates so that their competitive edge in pricing is not lost.

Hopefully, the Government should mercifully consider these suggestions earnestly and urgently, ON MERIT, and inject the much needed vitality to our textile and garment industry before its collapse beyond retrieval.

Originally published in "The Stitch Times": February 2009