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BW Businessworld

Can The Emperor Wear Clothes?

A look at what the new Rs 6,000-crore package means for the apparel sector and how has the apparel sector in the country responded to this latest package

Photo Credit : Umesh Goswami

There is no dearth of embarrassing failures in India. But one that looks truly inexplicable and embarrassing must be the trajectory of garment and textile exports from the country. According to the latest available data, a tiny country like Vietnam has surged ahead of India in garment exports. Neighbouring country Bangladesh has since long beaten India at the game.

About a decade ago, garment exports from India were twice that of Bangladesh. In the current year, Bangladesh is set to cross $30 billion while India would struggle to reach even $20 billion. This is inexplicable, apart from being embarrassing because the textile and garments sector holds the most promise for employment generation; not to speak of the success of the Make in India campaign. The brutal fact is that not a single major global textile or garment brand has a large manufacturing base in the country.

Perhaps conscious of this embarrassing reality, the government under Narendra Modi recently announced a Rs 6,000-crore package to kick-start export growth in the textile and garments sector. Soon after the new policy package was announced, this is what chief economic advisor Arvind Subramanian and textiles secretary Rashmi Verma wrote in a guest column for The Indian Express: “Given their high labour intensity — the highest in any manufacturing sector — apparel also have the greatest potential for employment growth. For example, every unit of investment in clothing generates 12 times as many jobs as that in autos and nearly 30 times that in steel. Drawing upon the World Bank employment elasticities, we estimate that rapid export growth could generate about half a million additional direct jobs every year.” For a country in dire and desperate need of creating close to 10 million jobs a year, that would be relief indeed.

Though this significant policy move was buried by an avalanche of other news related to new foreign direct investment (FDI) norms, the NSG standoff between India and China, the seeming war between Subramaniam Swamy and finance minister Arun Jaitley, Rexit (Raghuram Rajan exit), Brexit (Britain exit) and the Seventh Pay Commission hikes, it has nevertheless generated some hope and excitement in the sector. If you believe the government claims, the Rs 6,000-crore package offers help by way of financial incentives and more flexible labour laws. It hopes the package will create one crore new jobs in three years, attract Rs 74,000 crore in investment and generate $30 billion in exports earnings. “The package will help in realising the true potential of employment generation in the textile and apparel sector,” Jaitley suggested during a press briefing soon after the package was announced on 21 June.

How has the apparel sector in the country responded to this latest package? Cautious optimism seems to be the rule. “The policy has removed some of the major irritants that were pulling back the garment industry for long and the results of the policy measures would be seen on the export front soon,” says Rahul Mehta, president, Clothing Manufacturers Association of India (CMAI), an apex body of the garment industry.

However, he admits that there is a long way to go for India to make it to the top five exporting countries in the world. “The new garment policy is just a stepping stone, there is a long way to go, we will get into competitive pricing that will allow the foreign apparel companies to set up manufacturing units,” says Mehta. According to him, the new policy have unshackled garment industry and the results will be evident not only by way of additional employment generation, hiked exports and the investments envisaged in the announcement are achievable.

Echoing the same sentiments, Shakti Sinha, head, marketing of Gurgaon-based and BSE-listed Pearl Global Industries said there are two effective proposition on building economies of scale and employment generation. “This will give a big push to the government initiatives such as Make in India, Skill India, and ease of doing business in India, the multi-national companies will however wait and watch for the few more years before setting up manufacturing units that will cater to the global market,” says Sinha.

Two words used by two industry veterans: stepping stone, and wait and watch reflect the mood of the industry. After years of policy drift and somnolence, it looks like the government is at least admitting there is a serious problem and making an effort. In the meanwhile, Indian entrepreneurs in the sector have voted with their feet thanks to status quo in the country. Till recently, Pearl Global has been considering setting more manufacturing facilities in countries like Bangladesh. It first started operating from Bangladesh back in 2004. Since then, Pearl has 4,000 machines across four factories in the neighbouring country. It is seriously considering expanding to 8,000 machines before 2020. Pearl is not alone. Chennai-based Ambattur Clothing operates two factories in Bangladesh, which employ 8,000 people who process orders from global heavyweights like Zara, GAP and Taylor. At the moment, the Chennai unit of Ambattur accounts for just 15 of the revenue, while Bangladesh accounts for more than 60 per cent. There are reports that Orient Craft — a large garment exporter based out of Gurgaon is considering a strategic move to Bangladesh.

If large and successful garment exporters keep shifting strategically to Bangladesh, is it any wonder that India has been left far behind in the race? The fact is that India had repeatedly missed the bus in the apparel since 1991, when liberal economic policies and reforms started unshackling the Indian economy. In the 20th century global trade regime, textile and garments exports were regulated through a “quota” system whereby a country was allocated a fixed quota for apparel exports. Not much could be done in that era. But after the arrival of the World Trade Organisation, the quota system was virtually abolished even though developed nations de facto retained the rights to impose tariffs in a selective manner. Countries like Bangladesh and Vietnam started planning for a post quota trade regime even before it was in place. It is a result of the foresight and strategic thinking of policy makers in these countries that they now have bigger shares than India in apparel exports at the global level. Of course, there is another reality that can’t be ignored. Both Bangladesh and Vietnam enjoy better access to developed country markets because of benign tariff regimes as compared to India. The average tariffs faced by India and its competitors in the US and EU. In the EU, Bangladesh’s exports enter mostly duty free while Indian exports face an average tariff of 9.2 per cent. If the EU-Vietnam deal goes through, a similar disadvantage will arise for India vis-à-vis Vietnam. In the US, when Trans-Pacific Partnership goes through, Vietnam will enjoy duty-free access and India will be disadvantaged in that market too.

The challenges are formidable. But the opportunities are exciting. By 2020, the global apparel market is projected to generate $ 5 trillion in revenues. Despite slowing down considerably, developed country markets will account for two thirds of this; a lot of it coming as exports from emerging economies. In theory,mint should not be difficult for India to generate $100 billion a year through apparel exports in the next decade. But given the fact that exports are struggling to cross even $20 billion, it will need audacity in both policy making and implementation to achieve that.

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