11 key issues that are holding back Apparel Manufacturing in India

0 594
8 min read

If we talk about textile and apparel industry in India, it needs to be mentioned here that this sector alone is the second highest employment generator for the country, employing 51 million people directly and 68 million indirectly, in 2015-16. Textile and apparel industry is a major contributor to India’s GDP and a key investment destination under India’s “Make in India” program.

(Image Source: www.ibef.org)

This sector accounts for 10% of the country’s manufacturing production, 5% of GDP, and 13% of its export earnings. No wonder the current government’s strong focus on pushing this sector to further growth through their policy initiatives can be evidently seen. Policies like minimum support price to the cotton farmers, technology up gradation efforts in the handloom sector, Merchandise Exports from India Scheme (MEIS), centers of trade facilitation, Interest Equalization Scheme, financial assistance (up to 50%) for technology up gradation, 100% FDI under the automatic route, etc. are some of the steps government has taken to make India’s apparel sector more dominant globally.

The apparel and textile sector of India has attracted an FDI inflow of USD 428 million in 2104-16, with a 41% growth from 2012-14.

(Image Source: www.ibef.org)

Apparel alone has contributed the highest, i.e. 48% to the textile and apparel export basket of the country during 2016-17.

(Image Source: www.ibef.org)


But, are these figures enough to summarize the current scenario of the sector? There is a second face to the coin.

Now, let’s take a look at some of the issues that are holding the Indian apparel industry back:

1. Export Growth Performance

 The nature of the global production system shapes the participation of the third world countries like India into the international economy. Textile and apparel sector has a declining status in developed economies. This poses a huge opportunity for India’s apparel industry to grow, but the slowdown in the import growth of the country’s major apparel markets like the US and the EU is slowing down India’s export growth.

The picture above shows India’s declining apparel export from the year 2015 to 2017.

Image Source: UN Comtrade


2. The Multi-Fibre Arrangement (MFA)

The MFA has long governed the global textile and apparel industry from 1974 to 2004. Under MFA, quotas were imposed on the developing countries, to limit their exports to developed countries, to protect the local farmers and suppliers of the developed countries from market shifts. To prevent this agreement from negatively affecting developing countries, some players got undue advantage. For instance, the EU imposed no restrictions on emerging economies like Bangladesh, which not only led to massive expansion of apparel industry in these countries but also made them much stronger competitors for Indian apparel industry. Elimination of quotas also posed the risk of protectionist measures by industrialized countries, like antidumping laws, countervailing duties, environmental and labor issues, etc. for the protection of the domestic industry.

3. Buyer-Driven Commodity Chains

Industries with large retailers, big brand marketers, and trading companies develop decentralized production networks, mostly located in third world countries like India. So the main leverage here lies with the retailers and brand merchandisers at the marketing or retail end of the supply chain. Indian apparel industry is dominated by manufacturers who act as package suppliers for the foreign buyers. This lowers the bargaining power that Indian apparel sector has on global cues in the industry, thus preventing its unrestricted growth.

4. Infrastructure

Apparel Industry has been hugely affected by both industrialization (economic activity beyond borders) and globalization (integration of supply chain activities). This calls for an urgent need for investments in infrastructure development and process standardization. An OECD study has actually concluded that a 10% growth in logistics performance, results in 70% increase in bilateral imports. With globalization at play, logistical performance and the simplification and standardization of processes like customs is required to further strengthen India on the global apparel trade map.

5. High Costs of Capital

Compared to its competitors, India has one of the highest costs of capital, which directly affects India’s cost of production, and hence the country’s competitiveness in the global market. The current lending rate in India is between 11 to 12.5%, while China, Vietnam, and Turkey, offer capital at a rate of 5 to 7% only. To add to this equation, the high-power costs in the country further push India back.

6. Lack of Fiber neutrality

Manmade textiles in apparel industry have a substantially big demand, worldwide. Despite being the second largest textile exporter in the world, India lags far behind in this category, due to limited availability of manmade fibers at competitive prices. The textile value chain in the country also bears a differential tax treatment. Hence, India’s competitors like Pakistan, Sri Lanka, China, Thailand and Indonesia who follow fiber neutral policy are much more aligned to the global apparel consumption patterns.

7. Limited FTAs

Bangladesh, Cambodia, Pakistan, Turkey, etc. enjoy duty-free access to all the major textile markets of the US and the EU. India still lacks FTA advantages to major markets making Indian produce much more expensive compared to that of its competitors. Indian government’s current foreign policy is expected to bring in more trade agreements and trading partners for the country, but its direct impact on apparel trade will be seen only after the test of time.

8. Factor Costs

the labor cost in India is higher than that of Bangladesh and marginally lower that China and Vietnam. China however compensated for this disadvantage through its training infrastructure. Although the Integrated Skill Development Scheme (ISDS) of the government is focused on growing the pool of skilled labor in the country, the growing labor costs are stealing away India’s competitive advantage in the apparel industry.

9. Goods & Services Tax (GST)

GST is a multi-stage tax levied on every value addition. By design, it was meant to transform the previous indirect tax system of the country from the origin-based model to a consumption-based model. But, GST has created distortions in the Textile and Apparel sector in India, impeding its competitiveness. The man-made fiber yarn is now taxed at 18%, while the fabric is taxed at 5%. The small businesses which buy yarn and produce fabric are directly impacted by this imbalance, affecting their sustainability. Apart from the policy limitations, system errors, delay in reimbursement of input credit, untimely implementation (while the industry was still feeling demonetization blues) and limited knowledge of GST has hugely impacted the sector in the country. Although in the long-term GST is set to affect the apparel and textile sector of India positively, the short-term impact has brought many small-scale businesses to a complete halt.

10. Duty Drawback Rates

The Govt. reduced the duty drawback rates on garment exports, effective from October 1, 2017. Duty drawback is the duty refund that a business gets against what it paid for importing the raw material. The sudden fall in the duty drawback rates impacted the Indian textile and apparel exports’ price competitiveness. It caused a setback to garment exports as the exporters factor-in the drawback in their pricing. The biggest challenge that the sector faced was the lack of transition period, leading to cost elevation of Indian products, job losses, working capital crunch, and uncertainty to deal with standing commitments, followed by the GST uncertainties.

11. Lower Efficiency

With the increasing global competition, one of the main factors affecting the growth of garment industry in India is the lower productivity level. India’s apparel factory productivity levels are relatively low compared to countries like Turkey, China and Bangladesh.
The picture below shows the comparison of the above-mentioned countries in terms of efficiency.

Source: Confederation of Indian Industry

To improve this condition, the garment sector needs to be supported with latest technologies and processes that are more efficient as compared to the traditional ones.

As we saw, there are evidently many policy initiatives that the government of India is taking along with its foreign policy and focus on “Make in India” campaign that is going to boost the Indian apparel industry’s competitiveness in the global apparel market. But we are still faced with a multitude of factors that not only hinder the sector’s growth but also affect the strategic sustainability of small players in the apparel business in the country. The need of the hour to take one challenge at a time, and work towards minimizing it to bring the glory Indian apparel sector deserves.

You might also like More from author

Leave a Reply

%d bloggers like this: