Loose Threads

Ap­parel pro­duc­tion in In­dia has been ex­pe­ri­enc­ing a slump. Samir Alam ex­plains the rea­sons for this down­turn.

Apparel - - Contents -

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.

DOWN­WARD TRENDS

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.

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