11 Key Issues That Are Holding Back Apparel Manufacturing in India

Apparel Manufacturing:- As per the latest data released by the Indian Ministry of Textiles, the textile and apparel industry alone employs 51 million people, including 40% women and 14% rural population.

The textile and apparel industry contributes to India’s GDP and is a crucial investment destination under India’s “Make in India” program. The sector employs over 44 million people, making it the second-largest employer after the Chinese People’s Liberation Army.

The manufacturing sector has been on the decline in the United States for quite some time. However, the manufacturing industry is not dead; it has just changed. Yes, some jobs have been lost or never existed due to automation, but new jobs have arisen and now account for 10% of the country’s production, 5% of GDP, and 13% of its export earnings.

No wonder the current government’s strong focus on pushing this sector to further growth through their policy initiatives can be seen.

Policies like minimum support price to the cotton farmers, technology up-gradation efforts in the handloom sector, Merchandise Exports from India Scheme (MEIS), centers of trade facilitation, Interest Equalization Scheme, financial assistance (up to 50%) for technology up-gradation, 100% FDI under the automatic route, etc. are some of the steps government has taken to make India’s apparel sector more dominant globally.

India’s apparel and textile sector have attracted an FDI inflow of 428 million in 2104-16, with a 41% growth from 2012-to 14. The exports from this sector have grown by 12% in the last four years. The industry contributes 1.8% to the GDP of India and employs 3,50,000 people.

Apparel alone has contributed the highest, i.e., 48% to the country’s textile and apparel export basket during 2016–17. The export of textiles and apparel has been a significant contributor to India’s trade deficit for many years now, despite an increase in total exports from $27 billion in 2009-10 to $64 billion in 2016-17.

But are these figures enough to summarize the current scenario of the sector? There is a second face to the coin.

Now, let’s take a look at some of the issues that are holding the Indian apparel industry back:

Apparel Manufacturing
Apparel Manufacturing

Export Growth Performance

The global production system is the system of interconnected and cooperative activities to produce goods, services, and money. It includes the people, technologies, resources, and companies. This global production system dominates the world economy, and the textile and apparel sector is declining in developed economies.

India’s clothing industry has been in a downturn for the last few years. Raw material prices are high, labor costs are rising, and exports have been declining. But with more and more companies looking to outsource their content creation to AI writing assistants, India’s apparel industry has a huge opportunity to grow.

The chart shows how India’s garments exports were on a downward trend from 2015 – to 2017.

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The Multi-Fiber Arrangement (MFA)

The MFA, or Multi-Fiber Agreement, has long governed the global textile and apparel industry from 1974 to 2004. Under the MFA, quotas were imposed on developing countries to limit their exports to developed countries to protect local farmers and suppliers. Some players got an undue advantage to prevent this agreement from negatively affecting developing countries.

For example, this agreement by the EU has allowed Bangladesh to expand its clothing industry massively and makes them a much better competitor for Indian clothing exports to the EU.

The elimination of quotas also posed the risk of different protectionist measures. Western countries could enact more protectionist legislation like antidumping laws, countervailing duties, labor unions, and environmental regulations to protect their industries from competition.

Buyer-Driven Commodity Chains

The use of decentralized production networks is a strategy for producers to increase market share in the face of tightening margins. Large retailers, prominent brand marketers, and trading companies are now using this approach. Sellers and marketers of the supply chain can leverage this by making campaigns more personal.

The Indian apparel industry is booming and has seen a massive shift towards sourcing raw materials from India. However, with foreign buyers dominating the space, this has led to a significant decrease in bargaining power for the Indian apparel sector on global cues.

 Infrastructure

The clothing industry has been hugely affected by industrialization and globalization, which calls for investments in infrastructure development and process standardization.

Logistics plays a vital role in the success of international trade. The OECD study states that a 10% increase in logistics performance leads to a 70% increase in bilateral imports. This is because logistics is the backbone of international trade. Through increased e-commerce, faster delivery times, and more efficient customs clearance, logistics can be improved.

With globalization being prevalent these days, it is crucial to have a logistics performance that is top-notch and capable of simplifying and standardizing processes like customs. This will help India become more competitive in the Global Apparel Trade Map.

High Costs of Capital

India has one of the highest costs of capital which hikes up production costs, affecting the country’s competitiveness, making it poorer in global markets.

The lending rate in India is between 11 to 12.5%, which makes it significantly higher than countries like China, Vietnam, and Turkey, which offer loans at 5 to 7% only. Due to factors such as high power rates, the rates in India are even higher than those.

Lack of Fiber neutrality

Given the considerable demand for artificial textiles in the clothing industry, India’s production of it sits below other textile exporters, who can provide many different types at competitive prices.

India also has a differential textile value chain which means multinationals have to follow different tax treatments which are not in line with international standards. Countries like Pakistan, Sri Lanka, China, and other Asian countries compete more effectively on the global market for textiles.

Limited FTAs

Bangladesh, Pakistan, Turkey, and other duty-free countries for textiles have the advantages that India doesn’t. This is often a turn-off for international buyers since their products are pricier than those from elsewhere. This is a problem in China and all around the world. In China’s case, the government has helped boost domestic demand in recent years by setting high export taxes on cheap, foreign-made goods.

India’s current foreign policy is expected to bring in more trade agreements and trading partners for the country, but its direct impact on apparel trade will be seen only after the test of time.

Factor Costs

The labor cost in India is higher than that of Bangladesh but marginally lower than in China and Vietnam; China’s advanced training infrastructure compensates for this disadvantage.

The government’s Integrated Skill Development Scheme (ISDS) is focused on growing the pool of skilled labor in India. But, with the rising labor costs, India is losing its competitive edge.

Goods & Services Tax (GST)

GST is a multi-stage tax levied on every value addition and made to transform the previous indirect tax system of the country. It was meant to turn the old direct taxes into indirect ones instead by design.

But, GST has created distortions in the textiles and apparel sectors, hindering its competitiveness.

In 2019, the US had a new import tax on artificial fibers at 18% but left natural fibers untouched at 5%. This is bad for small business owners who buy yarn and turn it into the fabric.

Apart from the policy limitations, system errors, delay in reimbursement of input credit, untimely implementation (while the industry was still feeling demonetization blues), and limited knowledge of GST has hugely impacted the sector in the country.

The Goods and Services Tax (GST) was introduced in India on July 01, 2017. The GST tax is set to affect India’s apparel and textile sector positively in the long term but has brought many small-scale businesses to a complete halt in the short time.

Duty Drawback Rates

The govt has amended the duty drawback rates for exporting garments, and this will be effective from October 01, 2017. A duty drawback is a duty refund that businesses get when importing raw material before export.

The recent increase in duty drawback rates has significantly impacted the price competitiveness of Indian textile & apparel exports.

As garment exports were hampered by the drawback, exporters tried to balance pricing by factoring in the cost of the deficiency.

One of the biggest challenges faced by our sector was how to handle the lack of a transitional period. This caused rising prices, job cuts, and a cash crisis because of so much uncertainty. The GST changes also created new tensions that we still need to deal with.

Lower Efficiency

With the pressures of the global environment, it’s been tough for India’s textile industry. One of their challenges is lower productivity levels.

When it comes to garment manufacturing, India is lagging in productivity compared to countries like Turkey, China, and Bangladesh.

The garment industry can improve working conditions by focusing on modern techniques that are more efficient than the traditional ones. This will allow them to continue functioning sustainably and stably.

As we saw, there are many policy initiatives that the Indian government is taking – such as its “Make in India” campaign – that will support the success of the Indian apparel industry in this global market.

But there are still many factors that hinder the sector’s growth and affect the strategic sustainability of small players in the apparel business in our country.

The Indian apparel sector is one of the few sectors that is not just growing but also creating jobs. With its vast potential, it has become the need of the hour to take one challenge at a time and work towards minimizing it to bring the glory the Indian apparel sector deserves.

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