The Import Impact
The imposition of GST has led to a rise in textile imports. What does this mean for the domestic apparel market? Samir Alam reports.
Understanding the impact of GST on rising textile imports and its effect on the domestic market
The aftermath of demonetisation was beginning to fade in 2017 and players in the Indian textile industry had begun gearing up for recovery. However, as the Goods and Services Tax (GST) came into effect from July, their hopes were sadly demolished. In the months following demonetisation, production activities had already experienced a slow down, but there was hope that by January, things would normalise. As trade began to rise as per expectations, the early news regarding GST once again began to raise red flags. The textile industry is notoriously well known for being extremely fragmented and reliant on cash liquidity.
The news of the new tax system coming into effect months after demonetisation caused many traders to worry. As a result, many traders became unwilling to hold on to any inventory and this immediately disrupted the industry’s overall production cycle. As retail traders began to clear their inventory, by offering special discount sales before the GST could come into effect, the manufacturing side of the business straggled behind, with a stalled production market and low domestic demand. Many in the industry have attributed the problematic implementation of the GST as impacting textile production to the tune of up to four per cent. However, the more worrying trend has been the impact it has had on international business relations, as the amount of Indian imports in textile have increased dramatically, flooding domestic markets with goods from competing nations.
GOOD NEWS, BAD NEWS
While experts agree that the long term effects of the Goods and Services Tax will be positive, there are signs that it has negatively affected the Indian textile industry. As international demand for goods improves, with China, the U S and the European Union showing indications of positive activity, Indian traders are confident they will be able to fulfil the demand. In terms of exports, Indian textile and garment exporters are optimistic about the coming year, which will build on the growth in 2017. However, they are still plagued by problems of GST refunds from the government, resulting in a backlog.
According to government data, the original allocation of R1555 crore for the Rebate of State Levies for 2017-18 has been exhausted. The ROSL is reported to have only been dispensed for April and May of 2017, with rebates for made-up exporters until July of 2018. This has proven to be an immense problem for the USD 23 billion garments and made-up segment of the Indian textiles and apparel industry. Although the overall tax rate for garments and made-ups has gone down from 3.7 per cent to 1.8 per cent after GST, the ROSL isn’t established across segments and only benefits garments and made-ups. This is something that industry associations such as Confederation of Indian Textile Industry (CITI) are trying to change in the near future.
MANY IN THE INDUSTRY HAVE ATTRIBUTED THE PROBLEMATIC IMPLEMENTATION OF GST AS IMPACTING TEXTILE PRODUCTION TO THE TUNE OF UP TO FOUR PER CENT.
RISE OF IMPORTS
The cascading effects arrived nearly at the same time as GST, as cotton fabric imports experienced dramatic 45 per cent rise in July 2017. These imports again rose 29 per cent in August and 12 per cent in September. The import of textile fabric, yarn and made-ups rose by over 12 per cent in October 2017, at an estimated USD 154 million. The total imports for this segment increased by USD 1388 million during the April to December 2017 period – a staggering 19.65 per cent increase. When juxtaposed with the figures from the Export Promotion Bureau of Bangladesh, these figures indicated that India’s imports from the neighbouring nation were at a record high. India’s imports of garments from Bangladesh rose by 66 per cent during the same period, rising from USD 66.9 million to USD 111.3 million, in one year.
Furthermore, the most recent reports from the Ministry of Commerce and Industry in December 2017 also showed that textiles and apparel exports had declined by nearly USD 2996 million in December 2016. This three per cent fall in exports was worse off, given that the total exports of the nation had only improved by two per cent in April to December 2017. The total figures had marginally risen from USD 25721 million to USD 26136 million on a yearon-year basis, indicating that the textile and apparel industry has suffered particularly badly, in comparison to other sectors. This was an ongoing concern for those in the industry, as the change in tax slabs and lack of import tariffs made it possible for garments to cross borders through Bangladesh, while being sourced in raw materials from China. In this manner, these goods avoided the import duties that domestic manufacturers would otherwise bear when importing raw materials from China. All the while, the pressures of GST implementation resulted in the lack of pre-GST import duties and export incentives, which contributed to lowering competitive domestic production.
By late 2017, the government had recognised the threat that these imports posed, given the adjustability of IGST against GST liabilities on the sale of imported products. As a result, they increased import duty on man-made fabrics from 10 per cent to 20 per cent. However, there was no recourse for man-made fibre yarn and cotton fabric, which still remain vulnerable at old rates. The industry has called on the government to increase these rates to 15 per cent, in order to protect domestic manufacturing. They are also asking the government to impose safeguard measures such as ‘Rules of Origin’, ‘Yarn Forward’ and ‘Fabric Forward’. These rules will ensure that cheap raw materials from China are not routed into India, tax and duty free, through our Free Trade partner nations like Sri Lanka and Bangladesh. This is in addition to the prevailing
THE COMING PERIOD IS GOING TO BE ONE OF AUSTERITY AND STIFF COMPETITION FOR THE TEXTILE AND APPAREL INDUSTRY.
competition that India faces from products from non-free trade nations such as Indonesia, Thailand and North Korea, which operate on a greatly subsidized industrial model.
THE FUTURE FOR FABRICS
There is every indication that the coming period is going to be one of austerity and stiff competition for the textile and apparel industry. As the effects of GST rationalise, and the new tax brackets come into effect, there are only a few saving graces. The Union Budget 2018 allocations for the textile sector overall are positive, with R7148 being assigned for the year. The increase in the Technology Upgradation Fund Scheme and the Amended Technology Upgradation Fund Scheme are also seen as steps in the right direction. The segmental support for the power looms industry and the increase in Basic Custom Duty on silk fabric is also being appreciated. Meanwhile, the overarching approach of the government appears to be strategically long term, with the goal of capacity building and reorienting the Indian textile supply chain. The additional long term emphasis on skill building and supporting MSMEs is also aimed towards widening the market opportunities available in the future. As a result, many pragmatic and realistic choices have been made that will leave parts of the industry without adequate support. The government goal is still directed towards Vision 2025, when India is expected to achieve USD 300 billion in textile exports, and for this reason, certain tough choices have been made. The industry can only hope that these are the right choices, at the right time and to the right degree – simply because a miscalculation could greatly set back India’s leading position in the world of textile, and watch another nation take its place. Until the future arrives, the industry has to continue business as usual and take advantage of every opportunity that government schemes and the world market have to offer.