The sector needs radical restructuring to survive

Every Indian city has one or several colourful, buzzing roadside or footpath markets. These have stalls festooned with trendy-looking clothes, often sporting surprisingly familiar global labels. India’s ‘export surplus’ markets — or, to be more accurate, ‘export reject’ markets — have been ensuring that youngsters (as well as the hard-working poor and the ever-thrifty middle class) can actually buy fashionable clothes at pocket-friendly prices.

But these markets are only a side note to the real story. India’s huge $100 billion-plus textiles and apparels industry, which employs more than 45 million people, accounts for almost 14% of exports and over a quarter of foreign exchange earnings. It is the second-largest employment sector after agriculture. Of this, the apparel sector alone accounts for more than 12 million jobs and a chunk of the exports.

Alarming data

However, all that may soon become a thing of the past. Not that India’s apparel sector is going away or anything — a nation of 1.3 billion people needs a lot of clothes — but India is quickly losing its place at the top of the table of apparel-exporting nations.

Last week, some alarming confirmation of this came by way of official export data, which went by somewhat unnoticed amidst the incidents of rape and a widespread shortage of cash which sparked nightmare flashbacks of demonetisation and sent people scurrying to ATMs to hoard more cash and worsen the situation.

Apparel exports in February (the latest month for which data are available) stood at $1.44 billion, a decline of 10.25% compared to the year before. In fiscal 2017-18 (April to February), overall apparel production declined 10.4% , while garment exports fell 4%. Worse, the trend is clearly downwards. Garment exports have fallen for six months in a row now and, except for a spike in a couple of months, have been mostly negative.

There are no signs of any immediate turnaround. The sector got hit with a double whammy: demonetisation and the goods and services tax (GST). Meanwhile, the rupee has also been appreciating, gaining 6.4% against the dollar through 2017. This means that an exporter who quoted, say, ₹100 per piece last April and quotes the same rate this April is already 6% more expensive to his buyer.

And the industry simply does not have the margin to take this 6% hit and still stay competitive with countries like Bangladesh and Vietnam which are eyeing India’s already shrinking share of the pie. Apparel exports from Bangladesh crossed India’s in 2003, while Vietnam passed India in 2011. Both nations enjoy the same advantage that India does — an abundance of cheap, skilled labour. In addition, they also enjoy favoured access through treaties to major markets like the U.S. and the European Union, while India is under intense pressure from the World Trade Organisation to phase out subsidies and incentives given to the textiles sector as the sector has already achieved ‘export competitiveness’.

The trouble is that while India’s garments sector is large in the aggregate, it is comprised mostly of tiny units. Almost 90% of India’s garment manufacturing units are in the unregistered sector. About 78% of the firms employ less than 50 workers and only 10% more than 500 workers. This means that individual entrepreneurs have severe limitations on the kind of capital they can invest in capacity and technology. So, most Indian garment exporters tend to compete at the bottom end of the market where competition is toughest.

Other challenges

With margins already wafer-thin, exporters also have to struggle with other challenges of doing business in India. For example, the Economic Survey 2016-17 made a strong case for focusing on the textiles and apparels sector as a job creator. Apparels are 80 times more labour-intensive than automobiles and create 240-fold more jobs than steel, the Survey pointed out. The Chief Economic Adviser’s team also highlighted the key issues: “Logistics, labour regulations, and tax and tariff policy, and disadvantages emanating from the international trading environment compared to competitor countries.” In other words, trade treaties.

Logistics costs are also high: around $7/km by road transport, while it is just $2.5/km in China and $3/km in Sri Lanka. Add onerous tax issues and huge difficulties in even claiming one’s legitimate dues. The biggest impact of GST has been that refunds due to exporters have been stuck for months, leading to locking up of working capital.

What this needs is a holistic policy response rather than temporary band-aids and piecemeal incentives. The tax policy needs to be aligned with global trends, while the scale problem needs to be met through aggregation of individual units in large clusters, preferably with quick access to export points, thus curbing logistics costs. Technology upgradation needs serious funding, while trade treaties need to be reviewed to ensure that India gets access for its competitive products in major markets. Above all, Indian entrepreneurs need to also focus on creating their own global brands rather than simply producing for other labels.