"If the BJP comes to power, it will provide one crore jobs. With 65 per cent of the Indian population below the age of 35, the youth, struggling with unemployment, can be galvanised into a force for developing the country" Narendra Modi, at a November 2013 election rally in Agra.
In June 2016, Modi took the initial steps towards fulfilling his promise of creating mass jobs for the young, close to two years after taking over as prime minister. The Union Cabinet, under him, cleared a package for the textile and apparel, or T&A, sector, the second-biggest employer in the country after agriculture. The incentives were for the garment manufacturing segment, the biggest job creator in the textile value chain. The cost - Rs 6,000 crore over three years.
Will the initiative be able to create the jobs Modi had promised during his 'achhe din' election campaign, jobs that are a must if India is to avoid the demographic disaster of a huge unemployed population and the resulting social unrest? In 2011/12, close to 10.8 million Indians were unemployed. By 2025, India is estimated to have the largest number of people, over 832 million, in the working age group (18-59) compared to 658 million-plus today. The garments sector seems to be its biggest hope for generating jobs. According to data from the office of the Textile Commissioner, readymade garments is the biggest employer in the value chain; in 2011, it employed 11.22 million people out of the 45.19 million working in the textile sector. The number of people working in the apparel segment is expected to grow to 12.9 million by 2017.
While designing the package, Modi was being backed by his experience with the textile sector in Gujarat and hard numbers. He had realised the sector's potential when he was the chief minister of Gujarat, one of India's largest textile centres (textiles contribute more than 23 per cent to the state's gross domestic product). The state's 2012 textile policy gave incentives to both cotton growers and textile mills, including exemptions from value-added tax. It also proposed the setting up of 12 textile parks and financial support for technology upgrades with special focus on the garment segment, which it said was "the driving force behind the textile value chain".
Many believe Modi is taking the lessons from Gujarat forward. The industry is all for it. Binoy Job, Secretary General, Confederation of Indian Textile Industry, says Modi understands the textile industry well. "He has worked out the policy is such a way that it makes an inclusive impact by creating jobs, increasing production and pushing up demand and exports," he says.
Industry All Set
It's lunch hour. The scene outside Shahi Exports in Faridabad's Sector 28 is not very different from that at most units in this industrial town in Haryana. Except for an eye-catching banner: 'More than 1 lakh employees; 70,000 factory workers, more than 65 per cent women'. Harish Ahuja, the Managing Director, owns 43 manufacturing facilities and is one of India's biggest apparel exporters.
"This is the beginning. The government has, for the first time, understood the potential of the sector as a job creator. The package will create conditions for mass employment of unskilled, less educated, rural and migrant population. Those who can't be employed by information technology (IT), services and manufacturing sectors can get jobs here with a 60-day training," he says.
Ahuja and other apparel manufacturers say India is at the cusp of a historic opportunity and the government has finally understood what garments can do for the country. Sudhir Dhingra, Chairman and Managing Director of Orient Craft, an apparel exporter, says all developing countries have been focusing on labour-intensive sectors. "Till last year, India did not have any focus on labour-intensive businesses, as these were considered small. Its thrust was on big manufacturing industries and IT. Countries such as China that have had a huge population indentified the sector's job-creating potential five decades ago and made manufacturing and exports competitive through incentives and policies." Dhingra cites numbers to explain the job-creating potential of apparels. "Orient Craft, with a turnover of Rs 1,600 crore, employs 32,000 people, while Maruti Suzuki India, with a turnover of Rs 48,000 crore, employs just 19,000."
"There is no doubt that we are working with a handicap of 9.6 per cent duty, whereas other competing countries, such as Bangladesh, are exporting at zero duty. We have urged the Ministry of Commerce to expedite the process for signing the FTA and entering into a special agreement with the UK after Brexit"
China, say observers, gave its apparel sector subsidies of as much as 17 per cent. It invited the who's who of labour-intensive segments and gave them cheap land, good infrastructure and other incentives. Garments were followed by shoes, toys and accessories. "A company could set up operations on the basis of employment generation and get subsidies. As a result, a $10 garment could be sold for $6. The idea was to capture market share and create jobs. Earning more dollars was not the sole reason," says Dhingra. The results are clear. "Apparel industry exports from China are eight times India's. It also employs eight times more people than India's apparel industry."
Consultancy firm Technopak's Textile & Apparel Compendium 2015 says the global T&A trade was worth $773 billion in 2013. It is expected to grow at a compounded annual growth rate, or CAGR, of 5 per cent over the next decade, with growth of the apparel trade (6 per cent) expected to outpace that of fabric trade (4 per cent). In 2013, global fabric trade was worth $137 billion while global apparel trade was worth $428 billion. Even though China has the largest share of the global apparel trade at 39 per cent (Bangladesh's share is 6 per cent, India's is 4 per cent and Turkey's is 3 per cent), experts say things may change soon. A recent World Bank report, Stitches to Riches?, says that as China develops, it is likely to make more higher-value goods such as electronics and computers or see production of textiles shift to other countries in response to wage differences.
Wages in China are close to $314 a month, compared to $145 in Vietnam, $120 in India and $68 in Bangladesh. Wages can account for up to 30 per cent cost of a garment. "As wages rise and yuan gains strength, the apparel industry is shifting base from China, creating a potential $280 billion-plus market for other countries," says Ratika Jain, Executive Director - Manufacturing, Confederation of Indian Industry or CII.
The trend has already started playing out. The share of apparel in China's exports fell from 15.6 per cent in 1990 to 7.1 per cent in 2012. The World Bank report cites a 2013 survey of leading buyers in the US and the EU - the world's largest apparel markets - in which 72 per cent respondents said they planned to reduce sourcing from China.
As per the World Bank estimates, a 10 per cent increase in apparel prices in China will result in a 13-25 per cent rise in South Asian countries' apparel exports. For India, it could translate into 14.6 per cent rise in exports to the US and 18.95 per cent to the EU. A 10 per cent rise in Chinese apparel prices will increase apparel employment in India by 3.32 per cent for males and by 2.51 per cent for females, says the report.
Can India Cash In?
India is uniquely positioned to take advantage of the changing market conditions. India, China and Turkey are the only three nations that have achieved full vertical integration in the textile value chain - from farm to fashion. Also, global buyers are increasingly looking at fewer countries and companies for sourcing apparel. However, India faces many drawbacks such as high labour cost/excise duties and lack of bilateral trade agreements that make it uncompetitive in a highly price-sensitive market. In 2015, Bangladesh, one of India's biggest competitors, with very little fabric of its own, exported apparel worth $27 billion compared to India's $17 billion, on the back of cheap labour and Free Trade Agreement, or FTA, with the EU. The FTA enables importing countries to pay zero duty on apparel from Bangladesh. In 2012, apparel accounted for 83 per cent of our eastern neighbour's exports.
Like Bangladesh, many countries such as Cambodia, Bahrain, Egypt and Mexico have signed preferential bilateral/multilateral trade agreements with the EU and the US. These means their exports enjoy zero import duty. In contrast, Indian garment exports to the US attract import duties ranging from 10.83 per cent to 29 per cent. The figure for the EU is 9.6 per cent.
That is why, says Gautam Nair, Managing Partner, Matrix Clothing, India has not gained from the fall in Chinese T&A exports from $173 billion in 2014 to $162 in 2015. "The business is going to countries such as Bangladesh, Vietnam, Cambodia and Indonesia." He says India will also face a big threat from Vietnam. "Vietnam has a good labour force, good quality of needle. It rides piggyback on China's infrastructure. In anticipation of the Trans-Pacific Partnership, signed in February 2016, which will give it duty-free access to the US, millions of dollars have already started pouring into Vietnam," he says.
Nair says India continues to dominate in garments that require a high degree of creativity, but Bangladesh churns out mass-produced garments such as basic T-shirts and inner wear at prices it cannot match. "Labour accounts for 25-30 per cent cost of a garment. Labour in Bangladesh is 40 per cent cheaper than in India. Hence, Bangladesh gets a 10 per cent price advantage just here. If you add the 9.6 per cent duty, its advantage is 20 per cent. Why should India lose out on this mass business? That is where the big numbers and jobs are."
The Indian government recognises these disadvantages. "There is no doubt that we are working with a handicap of 9.6 per cent duty. We have urged the Ministry of Commerce to expedite the process for signing an FTA and a special agreement with the UK after Brexit. Some earlier preferential trade agreements also need to be revived. The ministry is giving this top priority. Bilaterals with Turkey and Russia are also being worked out," says Textile Secretary Rashmi Verma. She says the June package is aimed at countering these disadvantages.
The talks for the India-EU FTA had started in 2007.
The industry says the new set of incentives will make Indian apparels competitive. Ahuja of Shahi Exports says the enhanced duty drawback coverage under which state levies will be refunded will lower garment prices by 5-6 per cent. The increase in the additional incentive for the garment sector under the Amended-TUFS from 15 per cent to 25 per cent is expected to encourage investments. TUFS is Textile Upgradation Fund Scheme. But the biggest departure from the past are the new labour rules. Given the seasonal nature of the industry, fixed-term employment has been introduced for garment units.
The industry says these are the initial steps in addressing their concerns over labour laws. CII's Jain says the largest Indian apparel and made-ups factory employs 3,000-4,000 people, while large Chinese factories employ more than 10,000, even up to 30,000 in some cases, at one place. "The unfavourable labour environment has dissuaded several enterprises from growing," she says.
The industry wants these labour reforms to be extended to the entire textile value chain. Rahul Mehta, President of the Clothing Manufacturers Association of India, stresses the need to further relax labour laws for catching up with competition. "The objective of labour laws should be to create and sustain employment rather than pamper the unionised labour aristocracy. The lack of a viable exit policy and rigidity of labour laws, some of which are of pre-Independence vintage, discourage investments in labour-intensive projects." He says the problem of fast-rising minimum wages, where states are competing with one another, is yet to be addressed.
"In many industries, including the textile value chain, automation will continue to rise. However, garments will remain the most labour-intensive sector in the world."
Matrix's Nair says state governments need to act now and reform labour laws. "More flexible labour policies will create more jobs. The biggest problem right now is availability of labour. Where we are located, there is no labour. We have to rely on migrant labourers. Migrant workers have their own set of issues." He says the garment industry has identified eight focus states - Bihar, Karnataka, Andhra Pradesh, Telangana, Madhya Pradesh, Rajasthan, Orissa and West Bengal - on the basis of labour availability, infrastructure and proximity to ports and is encouraging them to implement good policies for the industry. "The industry is ready to invest in these states but we need policies than can make us more competitive,"says Nair.
Well Begun, But Half Done
D.K. Nair, a garment industry expert, says while the new package will help, the industry will function efficiently only if the entire supply chain is re-energised. "It is important to address the issues of fabric and yarn segments for efficient functioning of the value chain, including garments and made-ups. Our spinning industry, which is world class, is facing a crisis as export demand has dried up. The withdrawal of export incentives for yarn has added to the problems in the segment. If the government can reinstate these incentives, the problems in the spinning sector, and in value-adding segments to some extent, can be remedied substantially."
"India will face a big threat from Vietnam, which will piggyback on China's infrastructure. In anticipation of the trans-pacific partnership, signed in February 2016, enabling duty-free access to the us, millions of dollars have started pouring into Vietnam"
Mehta of the Clothing Manufacturers Association agrees: "Our fabric industry is the weakest link. Weaving, knitting and processing segments are highly fragmented. The result is that the garment industry finds it difficult to source large fabric lots without shade variations. This restricts the product range."
While some issues the textile industry faces are not specific to it - problems such as poor infrastructure, high transaction/transport costs, complex processes for setting up units and rigid labour laws are faced by all manufacturing companies, Nair says a big dampener for the industry is denial of legitimate claims under TUFS. "Because of mistakes committed by banks nominated for implementing the scheme, over Rs 3,000 crore payments have been stuck for over four years."The powerloom segment is also in the dumps. "We are coming up with a subsidy scheme for upgrading powerlooms. We are also tying up with banks to resolve working capital issues. We are taking up big clusters and trying to connect weavers with the MUDRA Scheme," says the textile secretary. Under the MUDRA Scheme, small units are provided loans at concessional rates. A package for power is also in the works. "The high cost of electricity in some states adds substantially to the cost. We have asked the power ministry to advise states to supply powerloom producers electricity at concessional rates. We are also encouraging them to move towards solar power by giving subsidies for solar units." Another big problem is the poor synthetic value chain. "Lack of availability of right quality and competitively priced fabric makes us import MMF (man-made fibre) fabrics. This results in loss of drawback on export of apparel made from such fabric. Another issue is differential treatment of cotton (nil excise duty) and synthetic (12.5 per cent) products," says Jain of CII.
"As wage costs rise and yuan gains strength, the apparel industry is shifting from China, creating a potential $280 billion-plus market for other countries"
The textile secretary says the issue of quality and supply of MMF are being looked at. India's textile industry, she agrees, is cotton-driven. "We are lagging in production of MMF. The cost is high. We are not able to compete with China due to high import/excise duties on yarn. We are aware of the rising demand for MMF, rather than cotton, globally. We have to cater to the growing demand and have some kind of fibre neutrality. It is a key recommendation in our draft policy. We have to become competitive in this space."
Verma says the government is supporting weavers and the industry in their anti-dumping campaign against the Chinese cloth. She says the government is looking at the entire value chain and the issues will be addressed in the new textile policy. "The draft is with the minister and will be taken to the Cabinet after it is finalised," she says.
Verma says while the latest package focuses on the garment sector, it will eventually benefit the entire value chain. "When we looked at the value chain, we found that targeted interventions were needed. We want new units to come up and existing ones to augment capacity and make the industry competitive, thereby increasing the overall demand. More garmenting will increase demand for fabric. It will take time for the benefits to flow to the entire value chain - yarning, spinning, weaving as well as processing - but the benefits will come."
Given these supply chain weaknesses and lack of trade agreements, will the government be able to meet the one-crore job target in three years? A recent report by industry body Texprocil and EY said that as the T&A industry is moving towards automation, it is unlikely to create a lot of jobs. Their estimates peg the figure at 2.9 million jobs. "Spinning, autoconers and auto-splicers divisions have replaced 20 workers with two workers. The inter-fibre shift from relatively labour-intensive spun yarn to synthetic filament segment is also leading to lower job creation," it said.
However, the garment industry is upbeat. Dhingra of Orient says in many industries, including the textile value chain, automation will rise. "However, garments will remain the world's most labour-intensive sector. Every sewing machine needs two people. A 1,000-machine factory in India has 3,000 people; in China, it has 2,000 people. Machines are getting computerised, but you still need an operator, you need the supply chain guy, it's the nature of the industry," he says. "There is no plant where you feed a fabric and it delivers a shirt," he affirms.