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.

Apparel - - Contents -

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.

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