ECONOMIC SURVEY 2016-17 Summary Chapter – 7 Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

economic survey 2017

Following is the Summary of ECONOMIC SURVEY 2016-17 – Chapter – 6 Fiscal Rules: Lessons from the States:

Creating jobs is India’s central challenge.
India needs to generate jobs that are form a land productive, provide bang-for-buck in terms of jobs created relative to investment,have the potential for broader social transformation, and can generate exports and growth.
The apparel and leather and footwear sectors meet many or all of these criteria and hence are eminently suitable candidates for targeting.

Why Clothes and Shoes?

In the successful East Asian economies,countries where GDP growth booms averaged between 7-10 per cent, growth in the exports of these two sectors was exceptional.
In its take-off phase of growth, India has under performed relative to the East Asian competitors. The Indian under performance,has been particularly marked in the leather sector.

Jobs, especially for women

Apparels and Leather sectors offer tremendous opportunities for creation of jobs, especially for women.
India has an opportunity to promote apparel, leather and footwear sectors because of rising wage levels in China that has resulted in China stabilizing or losing market share in these products.
India is well positioned totake advantage of China’s deteriorating competitiveness because age costs in most Indian states are significantly lower than in China.
The space vacated by Chinais fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear, India needs to act fast if it is to regain competitiveness and market share in these sectors.

Challenges

India still has potential comparative advantage in terms of cheaper and more abundant labour.
The Apparel and Leather sectors face a set of common challenges: logistics, labor regulations, and tax & tariff policy, and disadvantages emanating from the international trading environment compared to competitor countries.
In addition, the leather and footwear sector faces the specific challenge relating to policies that prevent converting its comparative advantage— abundance of cattle—into export opportunities.

Logistics:

The costs and time involved in getting goods from factory to destination are greater than those for other countries.
Further, few very large capacity containers (VLCC) come to Indian ports to take cargo so that exports have to be transshipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers.

Labor regulations

The problems are well-known: regulations on minimum overtime pay, onerous mandatory contributions that become de facto taxes for low-paid workers in small firms that results in a 45 per cent lower disposable salary.
There are strict regulations for overtime wage payment as the Minimum Wages Act 1948 mandates payment of overtime wages at twice the rate of ordinary rates of wages of the worker.
Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam.

Tax and Tariff Policies

On the one hand, high tariffs on yarn and fiber increase the cost of producing clothing. India imposes a 10 percent tariff on man-made fibers vis a vis 6 percent on cotton fibres.
To some extent this need not affect export competitiveness because drawback for tariffs paid on inputs is available. But drawbacks are not provided for purchases of domestically produced yarn that will reflect the high tariffs, adding to clothing costs.
On the other hand, domestic taxes also favor cotton-based production rather than production based on man-made fibers with 7.5 per cent tax on the former and 8.4 per cent on the latter.
The global demand for footwear is shifting away from leather footwear and towards non leather footwear.
India traditionally has been an exporter of leather footwear. Its share of leather footwear exports in the world market is more than double the share of non-leather footwear Efforts are required to promote non-leather footwear to be able to effectively capture world market share particularly in view of China’s slowdown of exports.

Discrimination in export markets

India’s competitor exporting nations for apparels and leather and footwear enjoy better market access by way of zero or at least lower tariffs in the two major importing markets, namely, the United States of America (USA) and European Union (EU).
Indian leather exports also face high tariffs in partner country markets in exports of leather goods and non-leather footwear with considerable added disadvantage in Japan.

Sector Specific Challenge –Leather and Footwear Sector

Comparative advantage in cattle

However, despite having a large cattle population, India’s share of global cattle population and exports of cattle hides is low and declining.
This trend can be attributed to the limited availability of cattle for slaughter in India, thereby leading to loss of a potential comparative advantage due to under utilization of the abundantly available natural resource.

Policy response and Conclusions

Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports, which could be as high as about 5 per cent of exports.
Similar provisions for leather exporters would be useful. This is not a subsidy but really a drawback scheme that should be WTO-consistent because it offsets taxes on exports.
Textile and apparel firms will be provided a subsidy for increasing employment.
This will take the form of government contributing the employers’ 12 per cent contribution to the Employee Provident Fund (EPF) (the Government is already committed to contributing 8.3 per cent; so the new measure will be additional to that).
Based on recent in house analysis in 2016, it is estimated that an FTA with the EU and UK can lead to 108029, 23156, and 14347 additional direct jobs per annum in the apparel, leather and footwear sectors respectively.
The introduction of the Goods and Service Tax (GST) offers an excellent opportunity to rationalize domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibers; and in the case of footwear against the production of non-leather based footwear.
A number of labor law reforms would overcome obstacles to employment creation in these sectors.

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