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ITMA birmingham 2003
Challenges before the domestic textile industry
Sachit Jain
During the controlled economy regime from 1951 to 1991,
whenever the government wanted to achieve specific objectives, a special scheme
of incentives or promotional in nature was designed and initiated. This approach
of micro-level initiatives for specific purposes was very much relevant uptill
1991 and the government did introduce schemes like EOUs, EPCGs and Free Economic
Zones etc. Similarly, tools like duty drawback and DEPB were designed and successfully
used. Net result of this approach is very encouraging. EOU spinning mills alone
export yarn around Rs 7000 crore.
Uptill 1991 or even 1995, it was observed that benefits
of one scheme impinge negatively to the benefits of other schemes. For example,
recent hiking of DEPB for DTA units on the questionable basis that they use
imported cotton, has played havoc with the profitability of EOUs. Even it is
doubtful, if there is any data with the government to understand as to how much
imported cotton is used by EOUs and how much is used by DTAs. By single stroke,
the government hiked the DEPB for DTAs, while at the same time they imposed
the duty of 10 per cent on cotton imports. Apparently it was a bonanza for the
DTAs as well as the cotton farmers. In spite of extremely high prices of cotton,
duty on imported cotton remained 10 per cent.
Economics of yarn industry is based on assumption of
relatively cheaper cotton to offset the disadvantages of infrastructure deficiency,
high power cost, unnecessary taxes like AED (levied to finance Janta Fabric
Scheme which itself lapsed 10 years back), hank yarn obligation and cess to
finance the working of Textiles Committee which is none of the business of organised
mill sector. The above said dysfunctionality of the economic instruments is
hurting much more seriously when the economy is shifting from the assumptions
of controlled economy to the assumptions of liberalised open economy which ought
to be internationally competitive. In fact, patch work economic tools of fragmented
industry should have been abandoned after 1991, but much before 2004.
However, the government is not only carrying forward
the institutions of patch work economics meant for controlled economy but has
also introduced concepts like Special Economic Zone (SEZ), which would have
been a brilliant instrument, had it been initiated in 1980 but phased out before
December 2004. Today’s liberalised open economy requires a unified, unfragmented
industry which exists and runs its operations purely on nationally and internationally
competitive strengths. International market is merely an extension of domestic
market and thus can not be given preferential treatment. The unified industry
within the country in its totality is either a competitive hard hitting entity
or it is less competitive or non competitive. There cannot be puddles of export
segment excellence which is efficiently run and domestic segment which suffer
local debilities. Unless we cry wolf all the times and resort to anti-dumping
proceedings in innumerable cases, domestic units are bound to feel the pinch
of competitive imports. Chances are fairly high that India may be the sole country
having the maximum number of anti dumping cases with the legal apparatus of
WTO. Even we may become the laughing stock in international economic scenario.
There is a need to phase out patch-up economics instrument like EOUs or EPCG
etc in a more smoother fashion. Even for SEZ as a concept, there are serious
question marks. Are we trying to safeguard our exports partially through SEZ
because we know that it may take us another 30 to 50 years to update our infrastructure?
The solution lies in making the conditions easier so
that units can exit out of the EOU/EPCG status. For example, the government
may consider allowing EOUs to de-bond without payment of duty on the residual
value of depreciated assets which were brought in under EOU scheme and they
have already fulfilled their export obligation. Similarly we may impose some
notional penalty and allow EPCG units to get out of export obligation and become
exporting DTAs. These could be one time measures for a specific time span. Finally,
we have to throw out the concept of “indigenous angle”. All raw materials
and intermediate products, which serve as inputs, including machinery, should
attract a customs duty of 5 per cent forgetting the indigenous angle. Similarly,
excise duty charged on the finished product should be 8 per cent, irrespective
of whether it is synthetics or cotton or blends. Finished imported goods meant
for consumption and not meant for inputs should be taxed at 15 per cent and
nothing more. Approach is to cut costs and prices, increase supply and demand,
make the industry more profitable so that it can attract investments. Technology
will never become obsolete and TUFs will never be needed.
There are few other concepts which are heartily accepted
by the industry, bureaucracy, politicians, public at large and even some academicians
— the concept of “forward and backward linkages”. Again this
concept has become irrelevant because it depicts the philosophy of self sufficiency
whereas the competitive open economy requires specialisation, economies of scale,
latest technology and least cost. The concept of self sufficiency leads to opposite
direction and belongs to the era of controlled economy. It is time to recognise
that we discard the concepts like “backward and forward linkages”
and moves towards specialisation and mutual inter-dependencies.
(The author is president, NITMA)
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