Textile package suffers delivery failure due to demonetisation, GST

Imaginatively designed incentives to grow jobs in the textile sector ran into the unforeseen headwinds of demonetisation and GST

More than two and half years into the government’s three-year deadline to create 10 million new jobs in the textile sector have passed but manufacturers are yet to ramp up hiring.
 

An imaginatively designed Rs 6,000-crore mega-package for the textile industry was announced in June 2016, aimed to boost exports by $30 billion, and attract investments worth Rs 74,000 crore over the next three years until 2019. At the same time, Finance Minister Arun Jaitley had said the package would lead to a flat addition of 10 million jobs across the sector.
 

So how many jobs have been created? Neither the ministry nor industry bodies have reliable data but textile ministry officials acknowledge that the job creation figure is nowhere near the target. The principal cause for this, they say, is demonetisation in November 2016.

“Textile is the most labour-intensive industry in the country and almost 65 per cent of total transactions were in physical form,” a senior official at the Handloom Commissioners office said.

The industry is the largest source of jobs in the country after agriculture, the sector contributed two per cent to GDP and seven per cent of industry output (in value terms) as of 2017-18. The textile ministry says the sector employs upwards of 45 million people, an estimate it bases on sample surveys owing to the absence of a comprehensive database of firms in the sector. 

 

This lack is in line with the general lack of systematic official employment data in the country. In-house research by industry bodies have shown that hiring at firms have picked up since September last year but this is yet to make up for the massive demonetisation-induced lay-offs in most sub-sectors, such as milling, handlooms and carpet making, a functionary of the Apparel Export Promotion Council (AEPC) points out.

What was promised: The bulk of the planned capital outlay, about Rs 5,500 crore, was earmarked for an additional five per cent duty drawback for garments, that is, a refund of duties on imported inputs used to make export goods. 

The more radical element was the increased government funding for provident funds of new employees. Those earning less than Rs 15,000 per month would be paid additional government funding for the first three years on the job. Against the earlier 8.33 per cent, the employer’s contribution was raised to 12 per cent with the government providing an additional 3.67 per cent. The total bill for this was Rs 1,170 crore. 

But as with any large new scheme, these benefits flowed in only from April 2017. “It took time for the process to be streamlined, many small and medium scale firms had to be registered for the first time and awareness was an issue,” said Siddhartha Rajagopal, executive director of The Cotton Textiles Export Promotion Council.

Most significantly, fixed-term employment for garment sector employees, a long-pending demand, was also instituted. The industry being seasonal, employees had long demanded they be considered as permanent and their working hours and wages be fixed, both of which was ordered by the government with specified overtime hours as well, in line with International Labour Organisation norms. This initiative was expanded to the made-up segment, producing goods like curtains, cushions and towels that command half the US import market. 

But these additional benefits were introduced just as the liquidity crunch from demonetisation was compounded by operational issues from the rushed implementation of the goods and services tax (GST).

“Demonetisation was a big shock. Then, the percentage of Remission of State Levies allowed to us also fell drastically, after which it has slowly been raised to 2 per cent last year. While benefits were given on one side, issues piled up on the other side. There was, therefore, no confidence in the industry to hire more,” Sanjay Jain, chairman of the Confederation of Indian Textile Industry, pointed out.

GST refunds also proved difficult to get. “Export refunds were streamlined only after a long time, but the refunds for inverted duties are still not forthcoming,” Jain added.

To this double whammy came a third: Shrinking exports. At an annual $36 billion, textiles is the country’s largest foreign exchange earner after petroleum products and gems and jewellery, accounting for 15 per cent of total exports. After contracting for two years, textile exports, especially value-added apparel, expanded only 0.75 per cent in 2017-18. 

Things are unlikely to improve anytime soon. A study by ratings agency ICRA pointed out the country was staring at a 4 per cent annual decline in its $16-billion apparel export sector alone in the current financial year, the fourth consecutive weak year for India. Apparel exports had fallen by 4 per cent in 2017-18, on the back of the industry’ struggles to turn over working capital with GST refund delayed, after modest growth rates of 3 per cent and 1 per cent in the two preceding years, respectively. As of December, apparel exports rose two per cent after returning to the growth charts in October after 18 consecutive months of contraction. 

Significantly, the ICRA study pointed out that India’s performance is contrary to the global trends with a growth forecast of 4-5 per cent in 2018. “Figures till now indicate an ongoing shrinkage in the industry, which is a cause for concern. While India is struggling with the problem of stagnation in exports, countries such as Bangladesh and Vietnam are showing growth in apparel exports,” said H K L Magu, chairman, AEPC. India’s textile sector is in danger of missing the bus owing to the government’s policy weaknesses.