How making in India is becoming unviable for Tiruppur’s garment industry

Faced with one disruption after another, what was once touted as the ‘Manchester of South India’ is struggling to survive.

Delve Economy

Men and women are lined up across long tables at CBC Fashions’ workshop at Tiruppur in Tamil Nadu. Some of them are cutting pieces of fabric, some stitching and others sorting them into lots. With no one even looking up from their spots and working continuously, almost like machines, you can tell that it is a busy time at India’s largest garment exporting hub.

As the global festive season approaches, there is a ray of hope in the town, which has just witnessed one of its worst years yet. Starting with demonetisation, and later with the implementation of Goods and Services Tax (GST) system, a year of disruptions pushed growth into the negative at India’s largest knitwear and readymade garments cluster. Demonetisation was a big blow to the garment industry, having sucked out liquidity from the market. But just as the sector was struggling to get back on its feet, GST was rolled out, bringing the garments industry to the brink of death.

At his office in Tiruppur, Ashok Raja M Shanmugam of garment exports company Warsaw International explains that structural challenges have been faced by the industry even before the series of policy disasters. “India is one of the top cotton-growing countries and has the strength of a growing, young workforce. We also have raw material strength. Despite being abundantly blessed with important factors that other garment exporting countries don’t, India lags behind. We don’t have the required infrastructure strength. It’s like we are self-defeated,” says Shanmugam, who is also the President of the Tiruppur Exporters’ Association.

While China is the world’s largest garment exporter, Bangladesh, Vietnam and Indonesia are other major garment exporting hubs of the world, and have significant advantages over India. Bangladesh pays no duty while exporting to Europe, while India and Vietnam pay 13-15% in import duties. However, efficiency level in Vietnam, at 90%, is much higher than India, which stands at 50%. Labour too, is cheaper in Bangladesh and Vietnam when compared to India. How productive labour is, how modern the equipment is and how well resources are used define the efficiency of a sector. Better efficiency leads to more production, which directly improves the bottom line.

“Real competition comes only if there is level-playing field. This industry has differential terrain competition – we have no level-playing field with any of the large garment exporting companies. China is a giant, we can’t compete with them, but other countries are much smaller compared to India but have overtaken us many-fold in terms of volume,” Shanmugam says.

As a result, we are the fourth choice for any importer, standing after China, Bangladesh and Vietnam, says TR Vijaya Kumar, managing director of CBC Fashions, which makes and exports garments to UK. “Bangladesh has 15% cost advantage against India. But before coming to India, they go to Vietnam because of efficiency. Only way we are preferred is because we do smaller order, unlike the others,” Kumar adds. And in such a competitive market, demonetisation and GST were a double whammy.

Two steps ahead, 10% behind

As a cluster, Tiruppur’s garment industry, which has around 3500 small, medium and large garment manufacturers, clocks roughly around Rs 45,000 crore every year and employs nearly 7 lakh people directly. And until last year, it had been growing at a rate of 20% year-on-year. But last year, Tiruppur witnessed negative growth for the first time in nearly a decade.

“GST was implemented in June 2017, and from October 1st we were brought under GST. Since then, nearly 5.4% of the total drawbacks and incentives we enjoyed were taken away,” says Kumar.

During the VAT era, garment exporters were enjoying around 13% of total ‘duty drawback’.

Businesses often import raw materials to manufacture the products they eventually export. A drawback is a rebate or a refund on the custom and excise duty on those imports. Duty drawbacks are provided by the government to encourage exports from the country as they ensure that more working capital is available for the companies.

Of the 13.1% drawbacks that garment exporters enjoyed, 5.5% came from excise, 2% from customs, 2% from Merchandise Exports from India Scheme (introduced by the government in 2015 in order to promote exports) and 3.6% from Rebate of State Levies (an incentive in the form of a refund for state taxes).

After GST was implemented, the 5.5% excise rebate was included in GST. After the exporters made strong representations to the government, the commerce ministry increased MEIS from 2% to 4%, but also reduced ROSL from 3.6 to 1.7%. So, after all the adjustments, exporters were enjoying only a 7.7% of drawbacks, which meant they lost more than 5% of what they earlier received as rebates.

Why does this matter? After all, this was tax money, right? Yes, but the reduction in drawback has other impacts. For a company that had a revenue of, say, Rs 100 crore, losing this incentive meant shortage of revenue by Rs 5.5 crore, which would affect its working capital cycle, which has further cost implications. In the case of CBC Fashions, Kumar explains, “My payment cycle was previously 60 days. But now I’m unable to pay in 60 days and am paying every 120 days. Because I pay late, the price of supplies goes up. The suppliers were giving me yarn at Rs 200 when I paid every 60 days, now they charge me Rs 20 more. They don’t stop the supply, but cost increases again by 5-10%.”

Overall, the balance sheet of every garment exporter is seeing drop by around 10% - 5% from loss of drawback and 5% from cost hike. This has been the case since September 2017.

But the GST woes don’t end there. GST offers a refund of 5-7% unlike VAT, which was at 1.5%. While this should come as a boon to exporters, it is anything but an advantage in practice. Thanks to the hasty implementation of GST, the refund process has become a slow and delayed one.

“For Rs 100 we used to have an outstanding of Rs 1.5, but now I have an outstanding of Rs 6. And while VAT refund came in 3 months earlier, GST refund is taking anywhere between 3-6 months. So far, I have only received refunds of up to April 2018. I'm still waiting for May to September refunds and that is 4-fold of what it was before GST. So, my working capital is blocked again,” Kumar adds.

While the government is trying to hasten the refund process, GST offices continue to be understaffed. In Tiruppur, which has 1100 registered companies, there are only 10 officers processing refunds.

“We have given representation to the government, they are trying hard and working longer hours, but clearances are still not fast enough. As a result, we are still struggling,” he adds.

Exploring newer markets

The bleak outlook at Tiruppur’s garment exports market has forced many to look for other avenues of growth to keep their businesses going. Ethiopia is one such ray of hope. As ‘Make in India’ becomes unviable, this African country is offering several incentives to garment exporters in a bid to become the next Bangladesh.

Betting on the prospects of Ethiopia, SCM Garments from Tiruppur has set up a 500-machine unit in the country. The biggest advantage here, according to M Ashok, chief marketing officer of SCM Garments, is duty-free entry into both the European Union and India. Apart from that, labour too is cheap and abundant. It is currently producing garments for French company Decathlon from this facility.

“The government of Ethiopia has been aggressively marketing itself as a production base. Right now, coffee is their main source of income and they want to grow with textile. Its building plug-and-play garment facilities and are promising to take care of infrastructure provisions such as road and water as well,” Ashok says.

However, according to Kumar, the efficiency levels in Ethiopia are low, given the raw and untrained labour. And this takes away most of the benefit of lower costs, at least for now. The labour too, he says, isn’t reliable. “With low efficiency, the cost of production goes up automatically. A few companies which set up operations there are slowly feeling the heat now. They aren’t able to improve efficiency levels and work culture isn’t good enough,” he says. Ashok agrees. He says that production in Ethiopia can now only cater to basic styles. Any new style will require at least a few months of training.

“Even in terms of what was promised by their government, they are taking their own time in delivering. Connectivity in terms of mobile networks is very poor, workers are very raw. It’s like starting from scratch each time,” Ashok adds.

But Ashok is hopeful about a future in Ethiopia. “They are calling themselves the next Bangladesh. It will be a slow process before we can begin reaping benefits,” he says.

Another revenue stream that several garment exporters in Tiruppur have been turning to is the domestic market. The apparel market in India is growing at nearly 10% every year. Fall in exports led to a huge number of exporters, especially the smaller ones, shifting to the domestic market to cater to companies such as Reliance, Big Bazaar, Pantaloons and Arvind Mills.

“As the purchasing power of Indians are increasing, an enormous appetite is being created. Given our population, the market is massive. And to solve for that, many are eyeing the Indian market, which is very promising,” Shanmugam says. Shanmugam’s company Warsaw International makes garments for Puma, and is now manufacturing and selling to Puma for its Indian customers.

Falling rupee helps

“The falling rupee saved us in a way,” Kumar says. For exporters, a falling rupee is advantageous since it gives them a better value for their goods against the Euro and Dollar.

“If the rupee didn’t fall, exports from Tiruppur would have been nearly nil. We wouldn’t be able to survive the other headwinds. Since July, the currency has helped us. Right now, it has increased by around 10-15%. Last month, we finally saw a positive balance sheet after a year. Bookings are finally beginning to look good till January,” he adds.

However, importers have also been watching the Indian rupee lose value. Knowing exporters have an advantage, importers too, Kumar says, want them to pass on at least 10% of the advantage to them. Given the competitive scenario globally, Tiruppur exporters are being forced to pass on the advantage to their customers.

Exporters expect the Rupee to fall further. And that is giving them hope. “I expect the rupee to fall to about Rs 80 against the dollar, at least till elections. If that happens, business will be good, even if it is not for the country. Because right now, Rupee fall is the only reason for things to look up,” Kumar says.

However, with general elections coming up next year, exporters are hoping that the situation may improve on the back on stronger policies. “If the Rupee starts gaining ground after election, we don’t know what will happen. Anticipating that, we are requesting the government to announce schemes in budget to benefit us,” he adds.

Shanmugam adds, “If policymakers want to grow the industry, they have to incorporate both domestic and international factors and formulate policy. There have been several disruptions since the new government came in place. But our hope is that the changes remain, and there are no further disruptions. That would mean death for us.”