Of Funds and Fab­rics

Samir Alam ex­plains the in­tri­ca­cies of the Union Budget 2018 and its im­pact on the tex­tile in­dus­try.

Apparel - - Contents -

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.

PEND­ING IM­PROVE­MENTS

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.

MONEY MAT­TERS

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.

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