Apparel production in India has been experiencing a slump. Samir Alam explains the reasons for this downturn.
Explaining the recent production decline in the Indian apparel sector
The past two years have been particularly difficult for the apparel industry. With demonetisation in 2016 resulting in a liquidity crunch, followed months later by the complications of the Goods and Services Tax, the industry has had a tough journey, as it attempted to maintain its growth. The fact that both these reforms came at a time when the global apparel market was just beginning to recover, is seen by many as a critically missed opportunity for Indian business. However, given the long term assurances of prosperity and quick recovery, the Indian apparel industry has managed to endure the difficulties for nearly two years. Given these complications and difficulties, the recently released figures on India’s industrial production have been discouraging for the apparel sector.
The overall output growth estimates that the index of industrial production increased by 7.5 per cent in January 2018 and 7.1 per cent in February 2018. Overall, 16 of the 23 industry groups from the manufacturing sector experienced a positive growth, with a rise in production of 5.8 per cent for primary goods and 14.6 per cent for capital goods. And while the month-over-month increase in manufacturing output rose by 8.7 per cent, the apparel production rate continued to experience its ongoing decline. The ten-month period between April 2017 and January 2018 experienced apparel production decline of 10.4 per cent. In fact, the period from May 2017 has experienced a consistent and gradual decline in production, with the Apparel Export Promotion Council (AEPC) attributing this phenomenon to the issues brought on by the implementation of the Goods and Services Tax, that happened soon after.
This conclusion by the AEPC seems fairly justified when we simply look at the numbers. The India Industrial Production (IIP) figures show a month-to-month decline in apparel productivity from May 2017, when after a hopeful 1.3 per cent rise in April, figures fell by 5 per cent. In June, the trend continued with 3.2 per cent, while in July, just after the GST rollout, the figures fell further to 5.1 per cent. The months to follow were worse with every new result, witnessing the start of a downward trend (August - 6.4 per cent, September - 7.2 per cent, October - 11 per cent, November - 13.1 per cent, and December - 13.5 per cent). Each month after the July GST launch has shown a decline in industrial production.
This phenomenon is made much worse when we look at the export numbers during the same general period, and discover that exports experienced a fall of 14 per cent in January 2018 as well. This trend, most recently, reached a high year-over-year plunge when the March figures were released. The numbers indicated that apparel exports from India had dropped 17.8 per cent in 2018 as compared to the year before, falling from USD 1.81 billion in March 2017 to USD 1.49 in March 2018. In aggregate terms, India’s apparel exports had dropped from USD 17.38 billion in 2016-17 to USD 16.72 in 201718, which is a 3.83 per cent decline.
THE TROUBLE WITH TAXES
While there may be many benefits and improvements underway or expected from the GST system, there have been few that are showcased in the apparel trade. The cash and
THE TEXTILE INDUSTRY IS THE SECOND LARGEST SOURCE OF EMPLOYMENT WITH NEARLY 50 MILLION PEOPLE EMPLOYED.
rebate sensitive structure of the apparel industry has always been a known variable. As the world’s second largest manufacturer of textiles and apparel, India has a serious investment in this industry. The textile industry is the second largest source of employment with nearly 50 million people employed, nearly 13 million of whom work in apparel alone, as well as being a 15 per cent contributor to national exports, and a four per cent contribution to the Gross Domestic Product of the nation. Despite its prime role in the economic structure of the nation, the industry is widely spread out across the land, with a complex supply-chain, that touches everyone from the farm where the raw materials are produced to the e-commerce platform where the finished products are sold. Given this wide spectrum of influence and dependence, the aftermath of demonetisation and GST have hit the industry particularly hard, and in a lasting manner.
The industry’s blocked funds and lack of liquid cash over the last two years have snowballed into a systemic problem. Many manufacturers are unable to pay their suppliers on time, and the suppliers have no security with which to give an advance. As there is no means for suppliers to extend an advance and carry it forward for an extended period, the productivity levels in apparel manufacturing have slowed down. The single most critical issue, which many in the industry have pointed out, is the problem with capital blockage.
The reason for this has been squarely attributed to the government's lack of action with respect to timely disbursements of the rebate from state levies (RoSL) and the IGST dues. Already, the AEPC has made request to the government for urgent release of the cumulative ITC Credit and IGST dues of over USD 613 million which have been blocked so far. This delay in tax refunds is further exacerbated by the fact that due to new taxes, there is an expected GST shortfall of about five per cent. Given the delays in these fund transfers, there seems little likelihood that
the industry will achieve its previous momentum of growth and achieve the year’s export target of USD 20 billion.
THE WAY FORWARD
The past five years have been a turning point in global trade, as the recovery from the Great Recession has finally begun to abate and give encouragement to global trade. In this respect, India’s position as a competitive and leading apparel exporter and manufacturer has always been assured - until now. The recent economic policies, as well as their unpredictable and delay driven implementation has posed major challenges for Indian apparel traders. And even as we witness promising developments everyday in global consumer demand, the ability to service it becomes harder and harder.
The global apparel market is expected to reach USD 5 trillion by 2022, with the Asia region finally usurping the West, with the highest share of this trade. India’s own apparel consumption and market is expected to rise from USD 85 billion currently to USD 160 billion by 2025. Whether the challenge is domestic, regional, or international - there are immense opportunities for Indian businesses to prosper. It was not so long ago that the government, as a part of its Vision, Strategy, and Action plan, expected Indian apparel to achieve over USD 300 billion in exports by 2025. But given the current state of affairs, even those industry leaders who have supported government measures year after year, are beginning to slowly lose faith.
To achieve hundreds of billions in trade requires an economic system that assures capital, credit, speed, efficiency, and liquidity above all else - and for now all those are up to the government. The issue therefore isn’t about what they will do, but if they will do it in time. And while the faithful anxiously plead and wait for their funds to be released and normal trading activities to resume with confidence, there remains one lingering concern - has Indian apparel missed out on its opportune moment, and lost out to other upstarts like Vietnam and Bangladesh? The only way to know for sure would be for India to get back in the game with the complete support of all stakeholders. Until such time that the industry can gain a sense of reliance on the new economic reforms, there will always be hesitation and fear when attempting ambitious deals. The way forward will be filled with hard choices.