New Delhi: India’s garment industry fears job losses over next two to three months as its export competitiveness remains under pressure due to a sharp reduction in duty drawback rate and a blockage of working capital due to the continuing delay in input credit refunds by the government.
Garment exports declined by 3.83% in dollar terms in 2017-18 as exporters failed to get orders due to a higher price. The fall in rupee terms was even sharper at 7.6%.
As The Wire has reported previously, Indian exporters also have struggled to benefit from China’s eroded competitiveness in apparel exports due to an increase in industry wages. Exporters from Bangladesh, Vietnam and Cambodia have instead benefited at the cost of their Indian counterparts.
Industry sources said garment exporters have been refunded just Rs 1,500 crore out of Rs 4,000 crore due to them in input credit since July 2017. They are paying interest rate on short-term loans taken by them from banks for working capital, which is impacting their cost competitiveness.
A Gurgaon-based garment exporter, with an annual turnover of Rs 42 crore, told The Wire that his company is yet to get refund of Rs 2.5 crore due to it as input credit.The duty drawback rate for garment exports has been reduced from 11.2% to 3.5% post-GST.
This exporter also said the industry could be forced to resort to layoffs if its core problems are not addressed soon.
Following an outcry by the industry over the reduction in duty drawback rate after GST implementation, the commerce ministry raised incentives by 2% under the Merchandise Export from India scheme (MEIS) in the mid-term trade policy review last December.
However, operating costs of garment exporters still remain 5% higher than the pre-GST era.
H.K.L. Maggu, chairman, Apparel Export Promotion Council, said garment exporters’ margins have been dented by 5-6% after the implementation of GST. Moreover, since exports from Bangladesh and Vietnam enjoy duty-free access in the EU and the US, India’s competitiveness further gets eroded in these key markets, Maggu added.
Inability to leverage
China’s garment exports have shown a declining trend in recent years as its costs of production rise on the back of an increase in wages. But India has not been able to benefit from China’s retreat from labour-intensive garment export market, Maggu told The Wire.
As a fallout of India’s falling competitiveness in exports, he said, the Tirupur garment industry has seen a 15% decline in business activities over the last eight months.
The garment industry has a huge potential to create jobs. But Prime Minister Narendra Modi’s job creation mission is getting defeated due to lack of support from the finance ministry, the AEPC chairman said. He, however, added that the industry is getting full support from the textiles ministry.
Meanwhile, the US has complained to the WTO against MEIS subsidy regime, which expires on June 30. If the MEIS regime is not extended, garment exporters’ margins could get further eroded. Because of the prevailing uncertainty over the future of MEIS, exporters are hesitant about taking new orders. They fear losing money if the subsidy scheme is allowed to expire.
The AEPC has asked the government to extend the MEIS regime till December 2018. However, sources said, the government has yet to take a view on this.
Global imports of garment fell from $475 billion in 2016 to $432 billion in 2017. This downtrend has the domestic industry worried.
The industry also feels that at a time when the global apparel trade faces serious headwinds, the government should step up its support to the domestic industry.
Meanwhile, in a report released two months ago, credit rating agency Icra has said that the pace of growth in India’s apparel exports is likely to remain contingent upon the industry’s ability to overcome the internal as well as external headwinds that it is currently facing.
While the transition to the new taxation and export incentive regime has posed liquidity challenges for the industry, intense competitive pressures in the global market, particularly in light of impending trade agreements and foreign currency movements pose additional challenges.
In addition, uncertainty on the apparel exports to the UAE looms, in light of inexplicable trends witnessed in the recent months, the rating agency has warned in a recent update on the industry.
The UAE had emerged as one of the prominent apparel export destinations for India, with its share increasing to 23% in FY’17 from 12% in FY’14.
Particularly for the ten-month period ending June 2017, India’s apparel exports to UAE had grown at a sharp pace of 56% on a year-on-year basis. Subsequently, apparel exports to the UAE have fallen at an equally fast pace, by as much as 45% since June 2017.