TIED UP IN KNOTS
INDIA’S TEXTILE SECTOR CAN BECOME A MAJOR JOB CREATOR, BUT STILL REELING FROM THE IMPACT OF DEMONETISATION AND GST, IT MAY BE SPIRALLING TOWARDS DISASTER
Reeling from the impact of demonetisation and GST, the textile industry awaits a rescue act
Arif Ansari, 55, is extremely vocal as we meander through the narrow, shabby bylanes of Bhiwandi, a town 40 kilometres north of Mumbai, to his powerloom factory at Waja Mohalla. This is the older part of Bhiwandi, infamous for the communal riots of 1970, 1984 and 1992. Much has changed since then. The area has been largely peaceful, but not so the lot of textile manufacturers. “Bhiwandi is facing neglect. The present generation is losing interest in the powerloom business, which is Bhiwandi’s only industry, and taking up other jobs,” says Ansari, as we pull up at his factory, where 40 powerlooms of the older generation noisily weave fabrics that will find their way to Mumbai and other markets in India. “Most loom-owners here lead a hand-to-mouth existence,” says Ansari, a third-generation entrepreneur, as he displays his fabrics, mostly curtains and bedsheets. “It will not be long before the ‘Manchester of Asia’ will be remembered only in history books.”
Ansari has reasons to be sour. Bhiwandi, where the first powerloom was installed in 1934 and which shot into prominence after the decline of textile mills in Bombay in the early 1980s, has around 500,000 powerlooms. They produce some 1,000 million metres of cloth every month—half the fabric made in India. The looms employ 1 million people and produce fabric
THE CENTRAL FUND TO HELP TEXTILE UNITS UPGRADE TECHNOLOGY HAS NOT HELPED MUCH OWING TO CUMBERSOME PROCEDURES
worth Rs 24,000 crore every year. However 90 per cent of these units rely on cheaper, outdated technologies that can’t compete with the production of modern plants. A modern loom costs Rs 30-35 lakh. Cash-strapped factory owners import Chinese looms that cost as little as Rs 25,000 for a used machine and Rs 3 lakh for a new one.
To many, the Union textile ministry’s Amended Technology Upgradation Funds Scheme (ATUFS) has not helped much as getting grants is a cumbersome process. Low volumes and the absence of a marketplace have also hit Bhiwandi’s manufacturers. Then, the demonetisation experiment in 2016 brought the looms to a halt for months as workers’ salaries could not be paid. “We are at the mercy of traders in Mumbai,” says Sharadram Sejpal, a loom owner. “While we earn 2-3 per cent margins on the fabrics we sell to traders in Mumbai, they extract 20-25 per cent profit.” According to Manoj Shah, owner of Optimum Silk Mills, a modern unit on the outskirts of Bhiwandi, Indian fabrics can hardly compete globally since products from China, Bangladesh and Vietnam are 30-40 per cent cheaper.
India’s weaving and knitting sector, of which powerlooms are a part, remains highly fragmented, of small scale and labourintensive. The sector has about 3.9 million handlooms and 1.7 million powerlooms, according to India Brand Equity Foundation (IBEF), a trust under the Union commerce ministry tasked with promoting Indian brands overseas. Modern shuttle-less looms account for less than 1 per cent of loom capacity.
The woes of powerloom owners in Bhiwandi are symptomatic of the larger malaise in the Rs 8.9 lakh crore Indian textile sector, which employs 65 million, directly or indirectly. The sector has been sidelined in the global market, with outdated trends and technologies leaving manufacturers in no shape to compete with China. An unintegrated approach has not helped either—the looms where cotton or synthetic yarns are made into cloth, the printing and dyeing units, and the apparel business, where cloth is turned into garments, are scattered at different places, making logistics cumbersome and raising the cost of production. In comparison, countries like China are
focusing on textile clusters to cut down costs and improve movement of goods across the supply chain. Composite mills, which integrate spinning, weaving and fabric finishing, are common in the major textile-producing countries, but in India, they account for only around 3 per cent of the output. Most of India’s 276 composite mills are owned by the public sector, with many deemed ‘sick’. For an industry that contributes 6 per cent to national GDP, the textile sector is still hemmed in by low productivity, outdated machinery and a distorted duty structure that encourages imports of high-value apparel instead of raw cloth that could have been converted into value-added garments for the international market.
Garments or the apparel business is a segment where India has huge untapped potential. According to estimates, apparel is produced by about 77,000 small-scale units. One of the biggest challenges is the threat of imports from neighbouring countries. Rahul Mehta, president, The Clothing Manufacturers Association of India (CMAI), a body representing 20,000 firms mostly into readymade garments, confirms a significant increase in imports from Bangladesh. “The agreements signed with Bangladesh ensure that cheap Chinese fabric going into Bangladesh is routed to India as cheap apparel,” says Mehta. Moreover, India’s exports are in a shambles. “After GST came into effect, our exporters are unable to compete in the world markets as the cost of our products has gone up by 5-7 per cent,” he says. Exporters usually operate on waferthin margins, so a 5 percentage point difference in costs can hit them badly. Further, under the new tax regime, refunds to exporters, amounting to thousands of crores, remain stuck. “This is not a net loss since exporters will ultimately receive the money, but in the interim, they
face working capital shortages,” explains Mehta. The story from Tirupur, one of India’s largest apparel and knitting centres, is no different. Exporters are unhappy with GST. “Since GST came into force, the duty drawback and Remission of State Levies (ROSL) that exporters used to get has fallen from 11 per cent overall to 3 per cent,” says A. Sakthivel, president, Tirupur Exporters Association. This has impacted profits. “We have requested the government for at least a refund of the embedded taxes, such as petroleum products,” he says.
Textile exports have gone downhill in the recent past. According to data compiled by the Confederation of Indian Textile Industry in February this year, textile and apparel exports fell 13 per cent to Rs 18,600 crore in January 2018 from Rs 21,500 crore in January 2017. Textile and apparel exports between April 2017 and January 2018 have declined by 4 per cent from a year ago, at a time when imports of yarn, fabric and readymade garments rose 15 per cent. Experts say one of the major anomalies in the textile business is India’s continuing focus on cotton fabrics, at a time when the world is moving into manmade fibres that are both convenient and cost-effective. Indian textile exports are predominantly cotton-based in contrast to global consumption, where synthetic textiles have over 50 per cent market share, says Anuj Sethi, a senior director with Crisil. Exports of synthetic textiles are dominated by China, due to easier access to raw material. “The inverted duty structure in India—wherein import duty on synthetic raw materials is higher than the export incentives— leads to textile manufacturers favouring cotton exports over synthetic textiles from India,” says Sethi.
Exports aren’t getting enough push either. Bangladesh is focused on boosting exports, generating employment, and realising more from the lucrative readymade garments business. Bangladesh and Pakistan have signed pref-
DOWNSIZING BY US RETAILERS HAS HIT INDIAN HOME TEXTILE EXPORTERS, WITH OPERATING MARGINS DOWN 3 PER CENT
erential treaties with the EU due to which they get a 10-15 per cent price advantage over India. Moreover, wages in India have been on the rise while labour productivity is low. “In the past two years, minimum wages in the textile hubs, such as Tirupur, Bengaluru and Gurugram, have gone up sharply,” says Sethi. Karnataka increased minimum wages by 30-35 per cent. Using its cheap labour, Bangladesh has built formidable capacities in manufacturing readymade garments. However, it lacks fabric manufacturing capabilities. The country imports fabric from India, converts it into value-added products and exports them back. According to sources, the government has been considering import duties on finished products from Bangladesh, but has so far refrained from doing so as some Indian companies have units there.
There is a dire need for factories to shift to modern machines. Factory owners have not been able to take full advantage of ATUFS, citing procedural complications. “The various requirements and paperwork make it cumbersome for the industry, especially since 80 per cent of the players are in the MSME (micro, small and medium enterprises) sector,” says Mehta. According to Crisil, better trade terms with leading export destinations, such as the EU, and more incentives could help Indian entrepreneurs be more competitive globally.
Thanks to the deregulation that began in the mid-1980s, spinning is the most consolidated sector in India’s textile industry. But the average plant size remains small and the technology is outdated. IBEF says the sector consists of about 1,146 small-scale independent firms and 1,599 larger scale independent units. Fabric processing is dominated by smallscale enterprises, with some 2,300 processors in operation (2,100 independent units and 200 units that are integrated with spinning, weaving or knitting units). Availability of credit at attractive rates remains a critical need for the SMEs and mid-corporates to stay competitive. Crisil says the domestic textile sector has been affected by volatile raw material prices, high energy costs and reduced export incentives, impacting competitiveness with
India’s Asian peers, but also notes that the yarn and apparel players are better placed than the dyeing/ printing players in cost management.
That said, India has been doing fairly well in some niche segments, such as denims and home textiles. Domestic home textile firms have had a good run since fiscal 2012, with India’s share of US imports of cotton bedsheets and terry towels increasing from 34 per cent to about 40 per cent in 2016-17; Indian bed linen is cheaper than the products from China and Pakistan. At around $16 billion (Rs 1 lakh crore), the US accounts for a third of the global home textiles market. Almost 47 per cent of India’s home textile exports (Rs 34,450 crore) last fiscal were to the US. But things have changed. With many US retailers pruning inventories and downsizing in the face of the threat from online retailers, the operating margins of Indian home textile exporters have been hit.
It’s not that the government has not been making efforts. In February 2017, a special reforms package was announced to generate around 11 million jobs in the apparel sector, increasing exports to about Rs 2 lakh crore and bringing in investments worth Rs 80,630 crore by 2020. An additional production-linked incentive of 10 per cent under ATUFS is being provided to promote employment.
According to Union textiles minister Smriti Irani, initiatives in the Union budget, such as a 39 per cent increase in ROSL, will boost exports. The budget allocation for ROSL has been raised to Rs 2,163 crore from Rs 1,555 crore in 2017-18. Speaking about a scheme to promote textiles in the Northeast, Irani said, “We want to encourage the local population into formal employment. One of the biggest benefits of this package has been 180,000 garment workers formally becoming a part of EPFO (Employees’ Provident Fund Organisation) in the past one year. That means more and more formalisation is happening.”
The textile sector can lead the way in reviving manufacturing. But its problems are too many and too deep. While various government initiatives have helped, what is lacking is an integrated approach to a sector that could still be a major employment provider.
CRISIL SAYS INCENTIVES AND BETTER TRADE TERMS WITH EXPORT HUBS LIKE THE EU WILL MAKE INDIAN FIRMS MORE COMPETITIVE
A STITCH IN TIME Workers at the Raymonds facility in Chikkaballapura district, Karnataka
DISTRESS CALL A weaver at a powerloom in Bhiwandi near Mumbai
OUT OF THE RACE One of Bhiwandi’s traditional looms