Impact of Global Meltdown on India's Garment Exports

'Excerpts from the presentationgiven before Deputy Chairman of the Planning Commission Mr.Montek SinghAhluwalia'

Global textile & clothing industry is worth US$ 584billion where clothing share accounts for 60% of share. Global trade isexpected to grow to US$ 710 billion by 2010. Whereas, bulk of the increase isexpected to be in Clothing, projected to grow to US$ 470 billion. The US market alone accounts for US$ 84.85 billion of apparel exports.

Textile & apparel sector, alone, accounts for 14% of thetotal industrial production. This sector holds the second largest positionafter agriculture in employment generation. Apparel sector alone employs 60lakhs people directly and indirectly. Apparel exports contribute around 8% to India's overall exports and 48% to textile exports.

Indias apparel exports to top sixcountries:

Immediate Challenges and Impact of Recession:

• Nearly 5, 00,000 people have already lost jobs due to falling sales and Global Economic Recession.
• Another lot of 5, 00,000 will lose work by March 09 as per the survey in select clusters.
• In the next 2 months, the job losses will total of upto 1.5 million.
• Some exporting companies are reducing working hours, implementing 5 days a week instead of 6 days which resulted in reduced income levels of workers.
• Tirupur Exporters Association (the initiator of Knitwear technology Mission) too found out that the slowdown may lead to a decline of 30% in orders resulting in job losses.
• As per the survey done by Okhla cluster shows 84% units register fall in export orders and employment.
• The survey did during the month of November 2008 within the 50 units. The findings are as follows
1. 9084 workers employed
2. 1258 job loss
3. 13.84% extent of layoff
4. 4593582 pcs. Order booked in Nov'07 to Jan'08
5. 3464812 pcs. Order booked in Nov'08 to Jan'08
6. 25% reduction in order booked during the same period

Garment Export expanding despite global recession

Bangladesh becomes an exception that it is challenging India in apparel sector. Bangladesh's export of apparel is more than the India's export of apparel. During the period of 2007-08 Bangladesh's export accounted for US$ 10700 million.

Bangladesh's export is projected to grow during June'08 to July'09 is US$ 16.30billion. Employment increased to 2.5 million, terminal handling by customsimproved down to 3 days from 12-13 days. Also price offered by Bangladesh to buyers for T-Shirts down by 20% from US$ 1.63/pc in 2000 to US$ 1.30/pc in2007.

The reasons: Why are we losing out?

Power cost: India's tariff for power is 250% higher than Egypt. In Egypt the power tariff is 4.00 US cents per kilowatt, in Pakistan and Vietnam 6 to 7 US cent/kwh, in Indonesia 6.3 US cent/kwh, in Bangladesh 6.7 US cent/kwh, in China 8.5 US cent/kwh and in India 10 US cent/kwh.

Labour cost: The labour costs are 229% higher in India than in Bangladesh. Below the table is given for some countries

India' position in the important apparel categories

Total imports of women cotton trousers of US accounted for US$ 6291.223 million in which US$ 433.533 million imports accounted from Bangladesh and US$ 262.514 million imports from India.

In men' cotton trousers total import of US accounted for US$ 4970.652 million. In which US$ 757.201 million imports accounted from Bangladesh and US$ 210.115 million from India. Imports of Cotton sweaters of US accounted for US$ 820.82 million in which US$ 25.67 million imports accounted from Bangladesh and US$ 4.23 million imports from India.

But the growth rates indicate a gradual takeover of these categories by Bangladesh. In women' shirts India is growing at 3.4%, while Bangladesh at 11.35%. In men' knitted shirts, India recorded decline of 10%, while Bangladesh increased by 20%.

In men' cotton trousers, India recorded decline of 5%, while Bangladesh increased by 29%.

India losing out on both high and low ends items

India' cost breakdown for total fabric cost including credit is $1.89, while Bangladesh' cost breakdown is $1.86 for boy' woven bottom low-end item.

In specialty wear (high value item) India's cost break down is $6.49 while the Bangladesh's cost breakdown is $5.87.

The higher fabric cost is due to higher transaction and credit rates. Higher cut and make cost is due to higher labour cost and higher trim cost is due to higher duties.

Moreover Bangladesh is duty free for EU and Canada so the landed cost works out much cheaper. In the case of the high end fabrics, Bangladesh uses Chinese knit fabric which is cheaper than even our vertical set up's and Bangladesh's costing are more competitive.

Most of the Indian factories are not in EPZ's - the domestic goods fabric and trims attract an array of domestic taxes (service tax, VAT, excise etc.) - e.g. Zippers, thread etc.

Government support to countries

China has incorporated a phase wise increased refund of VAT from 11 to 17% on exports and additional 2% drawback from January 09 on manmade fibre and garments.

Pakistan has reintroduced 6% R&D assistance. Cambodia's corporate tax rate is less than a third of India's as also exemption of up to 8 years in some cases. A 12% government cash grant for wages in Singapore during 2009 valuing Singapore $4.50 billion to sustain jobs.

Indonesia announced fiscal stimulus of 72 trillion Rupiah (US$ 6.5 billion) on infrastructure projects, besides 51.3 trillion Rupiah of stimulus measures. Also introduced VAT exemption, import duty exemption and tax relief on investment.

When the policy incentives were introduced in Bangladesh, its exports have significantly increased since 2005. Also Bangladesh has some export benefits that are as follows:

1. Income tax exemption
2. Subsidy on electricity, water, gas
3. Export loan 90% amount with letter of credit
4. Exemption from insurance premium
5. Refund of VAT on services like C&F, service, telephone, telex, electricity, shipping agent commission.
6. Duty free import of machinery
7. 80% exports of production considered as export orient industry for availing all export benefits.

Also in comparison to Bangladesh, India is lacking in the procedures like

1. Shipment time less 3 day (India 10 days)
2. Easy access to bank credit (India access and procedural time a problem)
3. Excellent infrastructure support in Export processing zones

Indian textile and apparel industry

Indian textile and apparel industry accounts for US$ 58 billion with potential to grow rapidly.

Out of US$ 58 billion, India exports USD 23 billion in which USD 10 billion accounts for clothing and USD 13 billion accounts for Textile exports.

Remaining USD 35 billion market is domestic market. Out of which USD 23 billion accounts for clothing and USD 12 billion for textile.

India has strength of strong fibre base, flexibility in production of small order lots, design and development creativity, presence of integrated companies that is concept to consumer, ability to handle value additions; embellishments etc. and also has good cultural comfort with US and Europe.

Vision Document 2012

As per the vision document 2012 textile ministry:

Stitching machines required 14.15 lacs, investment required in garment making Rs.21800 crores, investment required in back value chain Rs.128800 crores and investment required for product development Rs.250 crores.

Recommendations

Immediate:

1. Immediate ad hoc increases in all industry Duty draw back rates by at least 2%.
2. 2% additional subvention in export credit
3. Exemption of fringe benefit tax as applicable to IT sector may be extended to apparel export sector
4. 80 HHC benefit should be re-introduced for at least 5 years
5. Interest free loans for investment in machinery should be introduced along with zero duty import of capital goods scheme.

Short term:

1. Moratorium of two years for repayment of principal amount against term loan
2. A part of funds under rural employment guarantee scheme be earmarked for apparel sector, since absorbs agriculture labour.

Long term:

1. Benefits available in SEZ are extended, at par to units in domestic tariff area, if exports are at least 90% manufacturing.
2. Higher allocation of funds to apparel export industry for capacity building
3. Rs.250 Crore allocations for brand building exercise.

If recommendations are accepted

• Over 71% employment generation is in garment sector
• Aims at 75% achievement in textile ministry's target for new jobs of 8 million by 2012
• Direct employment generation in garmenting will be 3.34 million
• Weaving, knitting and processing will be 1.14 million
• Spinning 0.2 million
• Indirect employment generation will be 6.05 million.

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