Of Funds and Fabrics
Samir Alam explains the intricacies of the Union Budget 2018 and its impact on the textile industry.
Decoding the Union Budget 2018 and its impact on the Textile Industry
The last two years have been challenging for the textile industry in India. With the announcement of demonetisation in November 2016, and the implementation of the Goods and Services Tax in mid-2017, the industry has witnessed a change in how it needs to conduct business. As business models are quickly learning to adapt to digital payments and new tax policies, there have been additional market forces making things difficult. Overall, there has been a slower pace in growth for the domestic apparel sector, due to global competition. At the same time, fibre yarn exports have taken a hit as demand from China has reduced. The demands for a supportive budgetary allocation, with respect to refund of state levies and interest benefits, have
been at the top of the list of expectations from the budget. The hope has always been that the government will recognise these challenges and provide adequate support. In Budget 2018, the government has proposed quite a number of measures for the textile industry which may prove to be integral towards its success.
BOOSTS UNDER BUDGET 2018
The textile industry contributes over 13 per cent to India’s export earnings, making it the second largest contributor amongst all segments. However, these export earnings are dependent on the trade of many textile intermediaries, which have always indicated room for value addition and growth. The need has been for investments in downstream segments of textile, such as apparel and home textiles, to contribute to their full potential. As a means to enable this growth, the government had established the Technology Upgradation Fund Scheme (TUFS). However, last year’s allocation had experienced a reduction by 23 per cent to R2,222 crore. This year, however, the government has proposed a higher allocation of R7,148 crore, which is a promising sign for the industry. Additionally, there is also a higher allocation for the Amended Technology Upgradation Fund Scheme (ATUFS) from R1956 crore to R2300 crore.
The subsidy provided under TUFS and ATUFS is a major driver for investment in the sector, which will assist in the acceleration of capacity building. The resulting impact of this increased allocation is expected to boost investments in downstream segments, and move the industry towards a more value addition model. This can directly impact the nation’s Gross Domestic Product and forex earnings for the coming year, since it can potentially increase apparel exports by up to 3.5 times their current levels. The reason for this is that raw material and export intermediaries would find innovative ways to be processed into apparels for trade. The ambitious outcome would be to nearly double all cottonbased apparel exports and increase overall textile exports by 50 per cent of their current value.
Further areas which have been appreciated by the industry in the run up to the Budget had to do with the increase in Basic Customs Duty for man-made fibre and related fabric products. The rate had been increased from 10 per cent to 20 per cent as a means to protect the interests of domestic traders. In a similar vein, the current budget added silk fabrics to the import tax bracket under Basic Customs Duty as well. The reorientation of GST rates had eased pressure on man-made fibre yarns and related products from 18 per cent to 12 per cent. In addition to this, all textile-based jobs had been categorized under the service list of five per cent GST. A major proposal that tied into these preBudget changes has to do with the government offering to contribute 12 per cent of wages of
THIS YEAR, THE GOVERNMENT HAS PROPOSED AN ALLOCATION OF R7,148 CRORE, WHICH IS A PROMISING SIGN FOR THE INDUSTRY.
A MAJORITY OF PLAYERS STILL FEEL WOEFULLY BURDENED BY THE IMBALANCES CAUSED BY THE GOODS AND SERVICES TAX.
all new employees in the Employee Provident Fund, across sectors, for the next three years. This is along with the extension of fixed term employment, and the reduction female employee contributions to eight per cent for the initial three years, from the standard 12 per cent.
The combination of these measures is expected to have a significantly positive impact on job creation, as well as worker engagement in the sector. The widespread belief in the industry is that such measures, which create employment and support women in the textile sector fall perfectly in alignment with the national ‘Make in India’ campaign. Other fund allocations that are seen as having a positive impact on the future of the textile industry include the increase from R1931 crore to R2223 crore towards Textile Infrastructure Development, and the rise from R153 crore to R252 crore for Research and Development, Skilling and Capacity Building programmes. On the corporate front, the general reduction of income tax rate to 25 per cent is expected to greatly impact micro, small and medium sized companies. This will ease the pressures of competing in a thriving environment for smaller players. In this regard, the ceiling for turnover revenue to qualify for this has been raised from R50 crore to R250 crore in the financial year 2016-17.
Despite the encouraging allocations to the textile industry as a whole, there are still prevailing concerns in the market. A majority of players still feel woefully burdened by the imbalances caused by the Goods and Services Tax. The industry was hoping that corrections to this imbalance would be part of the Budget; however that was not the case. According to reports from the Confederation of Indian Textile Industry, the
domestic market is very disappointed that a wide sweeping increase in import duty, across the textile value chain, wasn’t enacted in the current budget. Their concern is rooted in the fact that, according to the government’s own figures from the Ministry of Commerce and Industry, there has been a rapid decline in exports for the third quarter in 2017-18. The December numbers show that exports fell by three per cent, while there was a rise in textile and apparel imports, which included a 66 per cent rise in imports from Bangladesh alone.
The Confederation of Indian Textile Industry believes that this trend needed to be directly addressed in the Budget. The imbalance in import-export figures for the sector directly affects the domestic market across the chain. The industry was expecting certain safeguard measures to be rolled out in the Budget, such as Rules of Origin, Yarn Forward and Fabric Forward Rules on nations which have Free Trade Agreements with India. Their main concern is that countries like Bangladesh source their cheap fabric from China and process them into garments, selling them duty-free in India. While the imports of fabric from China to India bear an import duty for domestic manufacturing players, it is being avoided by India’s Free Trade manufacturing partners in countries such as Bangladesh. This places the Indian garment industry at a significant disadvantage, which is expected to only get worse over the next year.
The overall tone of the Budget has been considered ‘pragmatic’ and ‘realistic’ by many in the market, but it seems to be more complicated for the textile industry. The industry has had a difficult time since the global economic slowdown seven years ago, and even though the government released a time-bound stimulus package, it is widely considered to have been offset by the problems of demonetisation and GST. The hope for the current budget included a new stimulus package, which would help the industry revitalise itself quickly. However, the state’s offerings have been appreciated for what they offer in terms of boosting technology investment and infrastructure building. What remains to be seen is if that will be enough for the textile industry to follow the trajectory and grow according to its ambitions of USD 300 billion in exports by 2025.