Time to head south

Twin Impacts as Elsewhere

Only in the middle of July came disconcerting reports that the knitwear hub of Tiruppur in Tamil Nadu is going through a crisis with a precipitous decline in exports and job losses. Innumerable small and micro industries are reported to have shut down in Tamil Nadu. The hub's exports have been dropping, and apparel exporters are struggling against low-priced goods from China, Vietnam, Bangladesh, and others.

In many ways, the ground truth that sureshot emerges from Tiruppur and other textiles hubs and clusters in South India are uncannily similar to what we found in Surat and wrote about in our last issue.

The grievances and misgivings of members of industry are not undifferentiated from those in Surat: the after-effects of the November 2016 demonetisation and the rollout of the goods and services tax (GST) in July 2017, particularly the subsequent cash crunch that left many still licking their wounds; the constantly-declining exports; uncertainty on the global trade front; and what have you. But that's where similarities with Surat end, for each area here has its own set of unique problems and singularities.

N Viveknanthan, president of the South India Imported Machine Knitters Association (SIIMKA), offers one point of view, "Before GST there were mainly two types of indirect taxes-excise duty and service tax. Service tax was not levied on textiles earlier since it came under goods. Now, the job-work of textile knitting is levied 5 per cent; the sector has been severely affected. Apparel exports have fallen due to the lowering of drawback rates. While knitting units that produce yarn to-fabric have to pay 5 per cent as tax, they recover that only in 45-60 days from exporters. This locks up working capital. Many owners of job-work units lack formal education, and so have to employ someone for filing their returns online. The industry associations in Tiruppur recently held a meeting with bankers to sort matters out."

Also, facilities for training fresh manpower as well as technicians/foremen may be established."

DAT is planning to establish a research and training centre at Tiruppur. "This centre will help us to do research on dyeing processes and treatment of effluents at a lesser cost than now. Strengthening the dyeing industry is inevitable since it is the backbone of garment manufacturing. Yes, training is very important in the dyeing industry since there is an acute shortage of trained workers. We need trained and skilled workers so as to maintain quality in dyeing."

The question of staff shortage as well as skilled resources keeps cropping up. But, what's the way out? Viveknanthan contends, "The Tiruppur cluster that has an annual business of ₹40,000 crore directly employs over 5 lakh people. There is a constant demand for workers here. The demand for migrant labourers has risen nationwide, resulting in high attrition in local factories. Consequently, the knitters are finding it hard to source, mobilise, recruit and retain the migrant workforce. So, SIIMKA initiated direct recruitment on its official placement cell for the members by conducting job fairs in various districts in Tamil Nadu. Moreover, the association had also contacted the labour and employment departments of several other states to source human resources from there. We have already signed an MoU (memorandum of understanding) with NIFT-TEA and for training for workers."

On this count, says Rangarajan, "The industry as a whole is suffering because of a severe shortage of skilled manpower. Though the Central and state governments have come up with schemes to encourage skill development, the small units are practically not able to train their workforce under the scheme due to certain practical difficulties. The textile institutes too have to change their curriculum in such a way that the students passing out of these institutes should be employable with minimum training."

A broader point of view comes from Prakash: "In the manufacturing sector, every industry is facing a human resources crunch. This problem is mainly because of the attitude of the young generation of today who are mostly attracted to the services sector like IT & ITES and/or hospitality sectors. The education system in the country plays a major role in changing this attitude and the curriculum should be changed in such a way that children are taught self-sustaining and other job skills in high school."

The hub of Tiruppur has often in the past been in the news over the environmental damage caused by textile units in the area. In this backdrop, the view of S Nagarajan, president of the Dyers Association of Tirupur (DAT) assumes significance, particularly because there is a GST dimension to it now. Nagarajan explains, "The textiles industry, in general, has been affected due to the reduction of incentives like duty drawback. As far as the dyeing industry is concerned, the GST has had its own impact on dyeing units rather than CETPs (common effluent treatment plants). The reason is that CETPs come under the 12 per cent GST slab for their services of effluent treatment. The member units of CETPs have to pay 12 per cent GST for treatment of their own effluents at CETPs where all member dyeing units themselves are the shareholders. In fact, CETPs had been exempted from payment of service tax till the implementation of GST (in July 2017). The service tax exemption had been granted considering the important roles played by CETPs in protection of the environment, by preventing water pollution and at the same time preserving water by implementation of ZLD (zero liquid discharge) system in all 18 CETPs at Tiruppur.

"While implementing the GST, CETPs were brought under the 18 per cent slab that was subsequently reduced to 12 per cent at the request of our association. But our demand is 5 per cent. On the other hand, the individual effluent treatment plants (IETPs) need not pay 12 per cent for treatment of their effluents. This disparity (in taxes) has spoiled the level-playing field within the Tiruppur cluster."

Nagarajan continues, "The provision for refund of excess ITC (input tax credit) available due to the inverted duty structure has not yielded any benefits to dyeing units. This is because they are paying 18 per cent for raw materials like dyes and chemicals and 12 per cent to CETPs for effluent treatment. The member dyeing units of CETPs can get a smaller amount as refund.

"At the same time, they cannot get refund of ITC accumulated on account of purchase of capital goods and availing services from operators. As the investment in capital goods in the dyeing industry is heavy, the government must review the existing GST rules and bring in necessary amendments. Roughly, 1.8 per cent to 2.5 per cent on the turnover of a member dyeing unit is simply locked away under the GST regime due to the CETP billing of 12 per cent. If CETPs' GST rate is reduced to 5 per cent as requested by us, it will give some relief to the small players. All this have landed dyeing units in great (financial) trouble. They have been unable to bring in more working capital. Had the refund rules been effectively implemented from the beginning, the financial crunch could have been avoided."

Not too far away, in Salem, the secretary of the Salem District Yarn Merchants' Association (SDYMA), RM Palaniappan, talks more about yarn: "The GST has affected those in the textiles business. Clothes are subjected to 5 per cent GST but were never taxed in the past. Viscose filament yarn and polyester now attract 12 per cent GST, and cotton yarn 5 per cent. So, after GST, the industry is not better placed."

In Telangana, A Prakash, the president of the Telangana State Federation of Textile Associations (TSFTA), believes, "The imposition of 5 per cent GST on textiles and 12 per cent GST on readymades of more than ₹1,000 value is hindering the growth of the industry." Farouk Ahmed, president of the Tamilnadu Textile Merchants Association Ltd (TTMA), argues, "It (the GST) is in fact very good for the country, but was very badly implemented initially. Small-timers have been badly hit. Even officials at the commercial tax department were not properly trained in the beginning." Prabhu Dhamodharan, secretary of the Coimbatore-based Indian Texpreneurs Federation (ITF), contends on the aftermath, "Being 5 per cent for the entire value chain, the cotton textiles sector has recovered quickly. In the MMF (man-made fibre) segment, due to the different tax rates, the sector is not growing to its true potential."

Dhamodharan does feel that the GST would be beneficial in the long run, as does Viveknanthan, "I feel the GST (as also demonetisation) will help the economy become more formal and stable in the long run. If more tax compliance happens, the rate of tax will come down, thereby benefitting all. With the GST firmly in place, many MSMEs (micro, small and medium enterprises) have struggled to shift to the new tax regime in the country. But this is not an hour of crisis; rather it is a moment of opportunity for the forward-looking and committed entrepreneurs. Those entrepreneurs, who take this challenge head-on, are likely to see their growth multiply many times in the coming years." For a way out to alleviate the post-GST pangs, Ahmed suggests that small traders, for the time being, should be given an opportunity to do things manually and file returns as during the (earlier) value added tax (VAT) regime.

But then, Prakash too feels that the industry is not better placed. "In fact, we have to compete with Bangladesh, China and other Asian countries that are fast-growing in textiles exports, and the imposition of 5 per cent and 12 per cent GST is putting India at a disadvantageous position in the global market."

This factor is also pointed out by Viveknanthan. "The knitwear production has come down by 20 per cent due to twin financial changes. Growth has slowed down since demonetisation. In 2004, India was a global leader in knitwear, next only to China. With the growing global market influence of Bangladesh, Cambodia, Vietnam, Sri Lanka, Myanmar and Ethiopia, we are no longer in the top position, and it is very difficult to sustain matters if there is no policy intervention from the government. Our competitors in markets like the United States and the European Union had gained by 10-11 per cent in this period."

While Nagarajan has not seen any negative impact due to demonetisation in his area, Ahmed thinks it had a lingering adverse impact on trade and industry for quite some time. "It is slowly recovering now." Prakash adds, "Demonetisation definitely impacted small traders negatively, as their transactions are mostly cash-based." Palaniappan is in agreement on this, "Demonetisation largely affected the field of small weavers, small cloth buyers, and the workers therein."

The state of the state

The side-effects or the after-effects of the GST and demonetisation may not go away any time soon. That said, the next thing to look at would be how manufacturers and others now are otherwise placed.

For those in Tamil Nadu, Dhamodharan notices a number of advantages. "The state is number one in terms of manufacturing efficiency. Tamil Nadu textile products are known for their quality. Besides, every 60 km, you can find a textiles cluster. The state caters to many international brands. There is a skills ecosystem, and the state has a presence in all major export markets." He also finds a few disadvantages: in recent times, there has been a continual worker shortage. "Moreover, there is a lack of focus on part of the entrepreneurs to create more brands in the textiles space."

Tamil Nadu alone represents roughly 45 per cent of India's entire spinning capability, 22 per cent of weaving and 70 per cent of the knitted apparel production capability, according to Viveknanthan. "Tiruppur has emerged a brand for knits sourcing and boasts of a turnover of ₹300 billion, derived from both exports and domestic knitwear supplies. Ludhiana comes a distant second and, perhaps, Kolkata (mainly for innerwear segment) is the third competitor, with Delhi-NCR being the fourth key hub. Tiruppur alone contributes nearly 50 per cent of India's total knitted textile and clothing exports. It has become a benchmark in India for its competitiveness and quality of knitwear exports. One of the weakest links in the knits sector, however, is the shortage of skilled manpower, seasonal availability at times, and rampant price fluctuations in the prices of cotton and yarn."

Adds Nagarajan, "Our state is in an advantageous position in having (a number of) seaports which are required for exports. Our hub as compared to others is growing fast in knitwear exports. We also have an advantage of availability of raw materials from nearby locations. But, the main (competitive) drawback would be the non-implementation of the ZLD system throughout India."

Dhamodharan quantifies matters for his state: "40 per cent of India's spindle capacity; 30 per cent of India's total cotton consumption; 50 lakh direct employers; ₹75,000 crore exports; ₹30,000 crore value-added exports; 4,000 MW of renewable energy investments."

Much of these numbers come from Tiruppur. As Viveknanthan says, "This fiscal, every second knitwear garment made in the country has come from Tiruppur. The turnover of the current financial year in exports is expected to be ₹25,000 crore. Tiruppur has supplied about ₹17,000 crore worth garments for domestic consumption, which is half of the total knitwear production in the country. The hub has about 800 garment manufacturing and exporting firms and 1,200 merchant exporters. Of them, 300 garment manufacturing firms are producing garments for the domestic market. Tiruppur is also home to 1,800 job-working garment manufacturing units, 425 dyeing units, 700 knitting units and 2,085 supporting units including for finishing, embellishment, compacting and raising."

Nagarajan narrows this down: "We are in dyeing sector which has a production capacity of 17 lakh tonnes per month. There are 500 units which are actively functioning now, and all of them are our members. Our industry offers employment opportunity for not less than 1,00,000 people. The total turnover per year would be ₹4,000 crore."

A much broader perspective comes from SK Rangarajan, president of the Coimbatore-headquartered South India Spinners Association (SISPA), who points out, "Our state is among the few in the country which has the entire value chain (in itself). We have nearly half of the country's spinning capacity and are also a dominant player in knitted apparel exports. We also have a major share in powerlooms and have a good volume of made-up exports." The major drawbacks, according to Rangarajan, are lack of policy support; shortage of skilled human resources; and infrastructural bottlenecks.

A Matter of Policy

Taken together, the South is much better placed than other regions in terms of policy support. Karnataka's textiles policy, adopted in 2013, expires this year and would soon be up for a new one. Both Telangana and Andhra Pradesh have policies that have been widely lauded by industry: the Telangana Textile and Apparel Incentive Scheme 2017 and the Textile and Apparel Policy 2015-20 respectively. Tamil Nadu is expected to announce an integrated textiles policy any time soon.

Says Dhamodharan, "We need a Tamil Nadu textiles policy with the following focus: (a) support to modernise the spinning mills; (b) cluster-based export growth plans; (c) incentivising value-added textile manufacturing; (d) branding TN textile sector both in domestic and international markets."

Viveknanthan chips in, "We had requested the state government to provide an 8 per cent interest subsidy and 10 per cent capital subsidy, under the technology upgradation fund scheme (TUFS) in the state textiles policy. Other demands include constitution of a knitwear board, incentives for setting up of technical textiles units, effluent treatment plants, dedicated power stations and power tariff subsidy.

"The Tamil Nadu Textiles Policy has been pending for some time, while other states like Gujarat, Maharashtra, Karnataka, Madhya Pradesh, Andhra Pradesh, Rajasthan and Odisha have announced their own policies, which have attracted many entrepreneurs/investors. It's the right time for Tamil Nadu to devise a policy specific to manufacturing competitiveness in the knitwear sector in order to compete with the kind of factories that are coming up in other states."

Continues Nagarajan, "Since MSMEs are the backbone of largescale industries, the textiles policy needs to be framed in such a manner so as to assist MSMEs financially and technologically. The policy needs to be changed to reflect the following: research institute for textile processing; training institutes; staff quarters; power supply to effluent treatment plants (ETPs) at concessional rates; financial assistance for renewable energy captive power plants, and acquisitions of new technology for dyeing, etc."

"Though being a dominant player in our country's textile sector and one of the few states which has a presence in the entire value chain," urges Rangarajan, "Tamil Nadu has not come out with a textiles policy unlike other states. The industry has been time and again reminding the state government, but so far with little success. Few meetings with the handloom secretary has been the only progress in this regard. I hope the government understands the importance of the industry and acts fast."

Prakash believes the textiles policy of the government of Telangana "is one of the best in the country which was announced in 2017-18. Hence, there is no question of updating it."

One of the critiques of many state textiles policies has been that those pack in too many schemes and incentives than come across as robust policy statements. Shouldn't those be differentiated?

Dhamodharan agrees, and goes on to assert, "It's time to change track. Government and industry should work together to identity the friction points and convert those challenges as opportunities."

Rangarajan too concurs, "Rather than giving due importance to industry-friendly policies, few state governments have announced more incentive packages to attract investments. Though such measures may help them in attracting investments initially, but in the long term they fail to promote industry. Few examples where such efforts have not yielded the desired results are Andhra Pradesh and Gujarat."

Points out Prakash, "You may be correct. But the textiles and apparel policy of Telangana (T-TAP) is not just an incentive packaged one. The policy outlined the present scenario of the industry in the state, what is ailing the industry, why, and what can be done to overcome the problems. Thus, it is a vision document on the textiles industry instead of a package of incentives to the industry."

On the other hand, says Nagarajan, "A policy document alone cannot help the development of industries. Hence, incentive packages are required to encourage entrepreneurs."

For his part, Viveknanthan delves deep: "The potential of textiles as a solution for eviving the economy can be traced back to India's Independence movement. After Independence, the Indian textiles industry rapidly grew due to various government policies and domestic factors. By employing 45 million people through direct employment and 60 million people indirectly, it is today the second-largest employment generating sector after agriculture in India. The government of India has launched a number of initiatives to strengthen textile production and encourage this industry to efficiently cater to the domestic and international markets. Traditionally, the Indian textiles sector has left its footprint on the global market, but its share has come down in the last few years.

"The core of the textiles sector is still deeply troubled. It has experienced the highest job losses as old textile mills, unable to upgrade their technology, lost out to newer and more modern manufacturers. The seasonal nature of the apparel industry has also created problems and affected employees and owners of mills. India is losing out in apparel exports to neighbouring countries such as Bangladesh which enjoy preferential tariff access to key markets such as the US and EU. Over the last decade-and-a-half, India has lost its global share to smaller countries like Bangladesh, Vietnam, etc. In this period, India has slipped to the fifth position as an apparel exporter, with both Bangladesh and Vietnam ahead of it. In the last two decades, the Indian textiles industry has been facing various issues leading to a fall in export competitiveness. So, a package of various incentives will boost the sector. These will lead to increased competitiveness of India's apparel exports and improve employment generation in the garment sector given its labour intensiveness. Then, measures like streamlining labour norms, offering tax breaks, etc, will provide a big fillip to domestic garment makers to improve their competitiveness in the global market."

Then, there is the question of state policies being in sync with the national one, even though the National Textiles Policy has been in the works for a few years now.

Says Rangarajan, "The state policy should address micro issues of the national policy with respect to the industrial climate of the respective states. For instance, our states should concentrate more on addressing the issue of labour shortage and training. Tamil Nadu has almost half the spinning capacity of the country; so, the state should concentrate more to safeguard this sector. The state policy should also encourage more cultivation of ELS cotton and facilitate the marine discharge of effluents to promote the processing industry which has been a major bottleneck for the growth of the apparel sector."

According to Dhamodharan, incentives won't help in long-term growth. "As a country, we need to focus on free trade agreements (FTAs), improving our manufacturing efficiencies, bringing in a fibre-neutral policy, using our embassies and trade offices to reach global brands, etc."