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<b>Janmejaya Sinha & Rohit Vohra:</b> Welcome push for textile sector

The new textile policy addresses many important issues, but there is more to do. The government has to expedite its efforts in getting free trade agreements with major markets

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Janmejaya SinhaRohit Vohra
Last Updated : Jul 04 2016 | 9:57 PM IST
Amidst all the noise around Brexit, the new policy for encouraging growth in the apparel and textile industry, cleared by the Union cabinet, did not receive the attention it deserved. The importance of the textile industry (from fibre to fabric, garments to made-ups) for India cannot be understated. The industry is the second largest employer providing jobs directly or indirectly to 45 million people, a significant proportion of who are women. The industry provides quick employability as it is easy to skill up a person and provides a better livelihood than some other service jobs that are mushrooming. It has revenues of $100 billion and generates over $35 billion of export earnings. Though the industry has the potential to double its employment to 100 million jobs in 10 years, it is currently contributing nine per cent of the stressed assets of the banking industry. Since the disbanding of the US quota regime in 2004, it has performed very poorly against other countries, especially China. India's share of global exports has stagnated at under five per cent while China's share has zoomed to over 35 per cent or about $280 billion of revenues. Even countries like Bangladesh and Vietnam have gone ahead of India in apparel exports. It is important to understand why India fell behind and what in can do to gain a disproportionate global market share today.

When the MFA (Multi-Fibre Agreement) quota regime was disbanded India failed to capture the opportunity to increase its share. India suffered on account of both external and internal reasons. Externally, in a low-margin business, it faces a 9.7 per cent tariff disadvantage against Bangladesh, Vietnam, Pakistan and Ethiopia in exporting to the European Union (EU). By 2019 our exclusion from the TPP (Trans-Pacific Partnership) with the US will disadvantage us against signatory countries like Vietnam to the tune of a 20 per cent tariff. Against China, the big winner post-2004, Indian manufacturers face substantial hidden subsidy via the duty drawback scheme that it provides to its textile industry. The net impact of taxes and duty drawback results in about a five per cent disadvantage for Indian manufacturers against their Chinese counterparts. In addition, Indian players have to deal with restrictive labour laws, high costs of working capital and major infrastructure bottlenecks at ports and in transportation.
These factors combine to create a 15 per cent cost gap for India against its key competitors like Bangladesh, Pakistan and Vietnam and a three-four week gap in terms of time to market against Vietnam and China. This is not to say that the industry has done all that it can - with poor scale leading to disadvantaged operating cost positions, fragmented clusters, uneven growth across the value chain (e.g. poor position in processing), poor brand perception and limited innovation. But even if it had, it was competing with its hands tied.

Today, rising costs in China are making manufacturers seek to set up bases elsewhere. This is creating a $280-billion prize for all to target. Bangladesh and Vietnam are moving fast to capitalise on this opportunity and are the frontrunners as far as apparel sourcing is concerned. India with its large labour force (this decade 180 million Indians will enter the workforce), strong raw material ecosystem (especially cotton) and lower wages compared to China is very well positioned for this opportunity. If India can take China's space, we estimate a 50 million job creation potential - of which 70 per cent will be women - over the next 10 years.

The new policy has come at the right time and has taken many steps in the right direction. There are ground breaking provisions in respect to labour laws that will allow more flexible work hours and fixed term employment (to manage seasonality inherent in the business). This is also going to allow more freedom for women to participate in the labour force. Concepts of direct benefit transfer to employees joining the industry afresh have been imaginatively conceived. The government has taken a welcome move to contribute 12 per cent of the salary directly into the PF accounts of new employees, encouraging job creation in a way that is simple and measurable. Export drawbacks for the first time target refunding state taxes and cesses as well, especially for garment manufacturers. This is a strong first step towards taking a unified national view of taxation and will only get better as GST (goods and services tax) gets implemented.

But big prizes don't come easy. Many important issues have been addressed but there is more to do. The government has to expedite its efforts in getting free trade agreements with major markets like the EU. This will address 25-45 per cent of all apparel and made-ups exports from India into the EU and remove an eight-nine per cent cost disadvantage that India faces. We also suggest that the capital-intensive processing sector, a key gap area for India, is provided aggressive capital subsidies under the technology upgradation funds scheme to encourage investment.

Finally, the reforms that are already underway need continued focus. Logistics infrastructure remains critical and the welcome improvements being witnessed at ports need to continue towards global benchmarks. Import facilities and clearance procedures need further streamlining. The Make in India movement that has caught the attention of many local and global organisations should be used to re-brand the industry. Entrepreneurs need to advertise the made-in-India aspect aggressively, by over-investing in quality and making their products worthy of "Proudly Indian" labels. State governments will do well to notify locations and provide infrastructure in terms of plug and play facilities at competitive rates in textile parks. The industry needs to scale up rapidly, creating jobs and making India more attractive for global buyers. If we are playing for leadership, then India needs to create its own "Silicon Valleys" for technical textiles and new-age fabrics, with a full ecosystem of investors, start-ups, production facilities and ultra-fast clearances. This can truly make us a hub of innovation.

There is always more to do, but the textile policy announcement is very welcome. It allows India to make a play for leadership in a market where the established structure is under challenge. The next five years will determine the winners and the stakes are very high. Moving an entire industry and creating millions of jobs is not easy. But it can be done with bold ambition, will and perseverance. Important steps have been taken but let us ensure there is no let-up. Fifty million jobs are at stake.
Sinha is chairman, Asia Pacific, The Boston Consulting Group (BCG), and Vohra is partner and director, BCG. Views are personal

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Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

First Published: Jul 04 2016 | 9:47 PM IST

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