Economic Survey 2016-17: Chapter-07: Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

In this chapter, the survey has focussed on manufacturing sector, particularly, the textiles and leather industry, and asked the government to do as much good as possible for these sectors. It says that on one hand, India is celebrating its demographic dividend, while on other hand, the state has failed in providing good jobs to its labour force. One of the main reasons is less incentives given to labour intensive industries. Thus, taking clue from China and other East Asian Countries, the government should provide all possible policy support including subsidies, tax rebates, labour law reform etc. to seize the narrow window of demographic dividend.

Why textile and footwear?

In short, the measure of any business be attributed to these:

• Potential for creating more jobs relative to investment,
• Potential for social transformation,
• Creating jobs which are formal and productive and
• Boost up export and growth.

In such context, greater development of footwear, apparel and leather can be a break through, as they suffice the aforementioned parameters.

Why East Asia Example?

In the post war scenario in East Asia, nearly all economic rise has been associated with clothing and footwear business. Such was the case that, though economic rise growth was averaged around 7-10%, these sectors were exceptional. For apparel growth hovered around 20%, in some cases even 50% and for leather and footwear it touched around 25%.

The survey points out that apparels are 80-fold more labour-intensive than autos and 240-fold more jobs than steel { Labour intensiveness is measured as jobs per unit of investment}. The comparable numbers for leather goods are 33 and 100, respectively. Even these sectors have female labour intensity which in turn would help in social transformation.

Wage rate in these sectors are rising which presents an opportunity for India where labour cost is less as compared to china. However the space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear. Even Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia.

Issues in India

India in its early economic take off, has underperformed especially in leather, than other East Asian countries when they initially started off their economy. The various reasons cited by survey are as follows:

Logistics

Cost 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 transhipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers.

Labour issues

Labour related issues like high mandatory over -time payment, high minimum pay in some cases, minimum contribution that eats up the disposable income of low paid workers. All this leads to small firm size thus reduce in competitiveness.

Tax and Tariff policies

In case of apparel the policy favours cotton based export over manmade fibres, although internationally the latter has greater demand. Moreover there is high tariff on yarn and fibre on one hand and footwear on the other. Also there is a need to make India- exporter of non- leather footwear from leather based, as the former has more global demand.

Issue in export market

Bangladesh owing to its Less Developed country (LDC) tag enjoys almost duty free access to EU, while India’s export of apparel faces an average 9.1% tariff. Ethiopia also enjoys duty free access in EU, US and Canada.

Measures taken

Apart from the various schemes for these sectors, the government will contribute the employers’ 12 per cent contribution to the Employee Provident Fund (EPF) (This would be in addition to the Government’s contribution of 8.3 per cent).  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.

What more needs to be done?

FTA with countries like EU and US be given thrust and export and labour intensive sectors be given priority while finalising the deal. GST implementation should not discriminate between manmade and cotton fibres and Leather and non- leather based footwear. Labour laws reform be taken up, where choice be given to employees whether it wants 12% employees contribution deduction, whether 12% goes to EPFO or NPS and decide whether their health insurance premium goes to ESI(employees state insurance) or private health insurance companies. Thus main aim should be to offer choice to the employees.