Incentives Oct2019

Looking Beyond Fiscal Incentives - 6 Things Indian Textile & Apparel Industry Should Ask Government Instead of Sops

A Paradox called Incentive

Indian textile & apparel industry has historically been a recipient of number of fiscal incentives from central and state governments in form of capital subsidy, interest subsidy, training subsidy, export promotion incentives, tax breaks, etc. The rationale behind providing such incentives is to handhold investors in first few years of business establishment, support in continuous expansion and also to overcome certain country level disadvantages that India has. Ideally, incentives are meant for viability gap funding, i.e. support businesses to operate and expand in instances where financial returns are not very attractive.

However, procedural delays and numerous uncertainties in getting incentives prevent businesses to get the anticipated gain from these incentives, time wise as well as quantum wise. This results in tremendous financial stress for the businesses whose models were primarily developed on incentives. Policy changes also add to this challenge. Another macro level issue with prolonged incentive regimes is the complacency that sets-in with the businesses. Businesses surviving on incentives for long forget the art of innovation and render themselves uncompetitive in the long run.

Indian textile and apparel industry is a case in point!

Today, hundreds of crores of incentive is pending under TUFS, many of the state governments that promised huge investment subsidies are yet to clear them, export incentives are under global scanner, tariff changes overnight create havoc in specific segments and so on. An industry that has savoured incentives for long is thus in doldrums. Promoters and teams spend far more time on incentives related matters which they should instead be spending on business growth, strategic planning, operations excellence and innovation.

Year after year, we have seen industry associations and representatives talking about newer models for government fiscal support – packages, special status, new schemes, etc. but the end result is not very encouraging. If exports stagnation in last 3 years, rapid increase in imports, rise in NPAs, no large project announcement, declining sales of machinery suppliers, diversion of Chinese businesses to competing nations are any indicator, then industry should take a step back and think for once that perhaps what it has taken from or is asking now from government may not be what they actually need. Perhaps it is time that entire paradigm of subsidies and incentives should be revisited.

If not incentives, then what?

Indian textile and apparel industry should focus its energy in approaching central and state governments to play their respective parts and support in following 6 key areas:

1. Faster Clearances and Approvals

In today’s competitive, global industry approval delayed is approval denied. While India is improving its rank in World Bank’s Ease of Doing Business rank every year and few states have even adopted the “approved if not reverted” models; there still exists a huge gap in several aspects. Whether it is environmental clearance, land use change approval, power & water connection clearance, every single clearance for investments need to be online, transparent and time bound in real sense. The so-called “Single window” sometime becomes one more window adding to the woes of industry.

Another area where industry should point Government’s focus is the simplification of rules and regulations, which would automatically result in faster decision makig. The policy makers are correct in envisaging all sorts of possible leakages and including clauses to avoid them. However, the clauses become a fodder for practicing professionals to interpret in various ‘expert’ ways which defeats the spirit of the policy itself.

Automated approvals or self-declaration with random checks and heavy fines for non-compliance should be the model that serious investors should ask the central and state governments to adopt at all possible places.

2. Trained Manpower

India’s one of the key strengths for labour intensive sectors such as textile and apparel manufacturing is the availability of large working age manpower. However, aptness of that manpower for industry is a different issue altogether. This statement is not exclusively meant for workers; in fact it is more valid for the job roles higher in hierarchy.

Industry should ask government to make available trained manpower (incl. supervisory staff, foremen, maintenance, middle management, etc.) on the actual technology, machinery and systems that are prevalent in the industry. The industry needs trained manpower, not provide money for training. Training as a subject matter should be best left to experts as practiced in nations such as Japan and Germany.

3. Plug & Play Set-up

Plug & play set-ups have the potential of completely changing the face of investments in garment manufacturing sector. In fact such readymade set-ups were one of the key ingredients of large scale industrialization of China in late 80s. New emerging destinations such as Ethiopia are also following this model and getting excellent response specifically from international investors.

In India, the concept exists in a diluted form in some places. Barring a couple of textile parks, there is no location where any large investor can find ready sheds of say, 60 thousand or 1 lakh square feet. If government can provide ready to move in sheds with basic support infrastructure including power and water connections, water treatment facility, road connectivity etc. then garment investors can save tremendously on start-up time, and reduce the business risks.

4. Competitive Cost of Raw Material

One of India’s biggest strength in textile and apparel sector is its raw material base. Being the first and second largest producer of cotton and polyester, respectively, India is well positioned to dominate the global market. However, the fibre cost in India is consistently higher than that overseas. In cotton sector, the recent higher price was a result of higher declared MSP while in manmade sector the prices are higher for so many years because of either anti-dumping duties on feedstock or fibre itself.

Making raw material available at globally competitive prices is a prime requisite for India to achieve higher market share in global trade and also ward off cheaper imports of finished products. The industry should present a case to government to revisit the current regulations for market protection which were introduced several years ago and may not be relevant in their current form.

5. Level Playing Field in Global Markets

Except China, every single major textile and apparel producer-exporter nation today has duty-free access to one or more major markets. Indian exporters are uncompetitive compared to their counterparts in countries like Bangladesh, Vietnam, Ethiopia, Sri Lanka, etc. from 10 to 30% depending on product and market because of this duty differential. This high gap is impossible to be filled by means of subsidies constantly.

Being a large consumer economy, there is a very bleak chance that any major nation would give us one-sided duty-free access to its market. This means that there may not be net gain for us as a country. For example, if India-EU FTA is finalized, India clearly stands to gain in textile and apparel segment; but those gains may completely be wiped out by opening Indian markets for European exporters in say automobiles, pharmaceuticals, wines, etc.

This is where industry needs to persuade government to devise innovative partnership models for the textile and apparel sector. In addition, we also need to focus beyond EU and US, to non-traditional markets where India stands to gain prominence in specific products.

Time and again, industry has raised concerns about the existing trade agreements which appear to be negotiated by a team that was not provided the actual on-the-ground situation, resulting in a deal where India does not get immediate market access for important commodities (such as Cotton yarn) and also not sufficiently safeguarding the interest of domestic manufacturers by eliminating duties on critical products. This issue can come again in a worse form in RCEP which is being discussed currently. To avoid such issues in RCEP, industry needs to come together immediately and commission a study so that the Indian trade negotiators are provided with clear lists for ‘must haves, desirable and unimportant’ categories based on data analysis, as well as feedback of entire value chain.

6. Policy Predictability

Lastly, a general requirement that is valid for all sectors is the predictable nature of policies. Predictability helps investors to take informed decision that will hold good for a certain time while frequent policy changes can defeat the entire premise on which a business case was developed. Well defined and well laid policies at the time of introduction can help make smooth transitions.

Financial incentives are not the way ahead. Future will depend on ease of doing business and getting a conducive ecosystem for businesses to perform. The industry’s expectation for government should in fact end here. Beyond this, it is industry’s own initiatives for operations excellence and innovation which would help them to survive, and thrive.

This article has been authored by Varun Vaid, Associate Director, Wazir Advisors. It was also featured in the Diwali 2019 Special edition of Tecoya Trend.