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Applications of the new export regime on Indian textile industry
Arvind Poddar
 Speculation
is rife about the likely position of Indian textile industry is the post-quota
regime. Some quarters believe this as a billion dollar question. A lot has been
said and a lot written on this issue and one should not be surprised to watch
further deluge in the months to come.
To my mind the question is already answered. Discerning foreign analysts concede
that the result is already out, even before the start of the international race
for supremacy in textiles. It is widely acclaimed that the coming decades are
bright for the Indian textile industry. No wonder, if India emerges as a one-stop
shop for textile requirements of major countries in the world. The circle has
run its full course. No more is the textile industry condemned as a sunset industry,
no more talks of its epitaph. For doubting Thomas, proof is recalled below:-
- Major textile retail chains like Walmart, J C Penneys and a lot more have
opened Buying offices in India and are repeatedly visiting the country to
strengthen their buying operations. They have made public their profound interest
in Indian textiles;
- Outsourcing is becoming the biggest success story for India;
- Africans, Mexicans and Turks have started a campaign for postponement of
lifting of quotas to 2008. Three European countries have also joined in the
chorus. This is an indirect admission of their weakness and simultaneous acknowledgement
of the superiority of China and India;
- Recently, CMD of a major nationalised bank in the country has publicly
stated that the perception of the banking industry about the textiles has
undergone a sea change. If PLR plus three percentage points was the earlier
norm, it is now PLR or at the most PLR plus one percentage point.
- Textile shares are quite active on all bourses and are attracting the investing
community in a big way.
How has this miracle taken place? It is worth unfolding here the events in the
recent past which led to a sea change in textile scenario, for which credit
must be given to the government and also to the industry.
(a) Cenvat chain
The government took a significant step in the Budget for 2003-2004 for near
completion of Cenvat chain for the textile industry. An incomplete Cenvat chain
was a major eyesore for the industry, because it failed to eradicate the nefarious
activities of tax-dodgers. Two or three breaks in the Cenvat chain provided
a fertile ground for malpractices to thrive. The situation then existing was
being fully exploited by unscrupulous elements to avoid or underpay legal duties
at the cost of honest units. The incomplete Cenvat chain, thanks to the tax-evaders,
became a double-barrel gun. It took a heavy toll on the organised sector and
robbed the decentralised sector of the impetus to upgrade its technology.
The completion of Cenvat chain has brought discipline and orderliness in the
textile industry. The decentralised sector has been drawn into the main stream
and the different stages in value chain have realised the importance of remaining
on the right side of tax law. Every successive stage in the value chain is now
demanding supplies of inputs against duty-paid documents, which enable them
to avail of Cenvat credit and reduce their duty liability. It is only in the
condition of stability and equal opportunity to all players, the industry thinks
of fresh investment, not otherwise.
The completion of Cenvat chain is only one aspect. Equally important is the
question of levying same duty across the value chain. Today, there are multiple
rates of duty operating in the industry. Fibres pay duty at 16 per cent, blended
yarns at 12 per cent, polyester filament yarn at 24 per cent, per cent other
filament yarn at 12, certain fabrics at 10 per cent and some others at 8 per
cent. Clothing being a basic necessity, it should be moderately taxed at 8 per
cent across the board.
(b) Launching of Technology Upgradation Fund Scheme and
reduction of import duty on capital goods
In 1999, the government took an unprecedented step to boost modernisation of
the industry by launching the Technology Upgradation Fund Scheme (TUFS) under
which interest subsidy of 5 per cent is given on fresh investment in machinery
of latest technology. As the exercise for upgradation of technology would necessitate
import of machines, the government started giving relaxations in small doses
in Export Promotion Capital Goods (EPCG) Scheme and also started reducing import
duty on machines.
Thus, these two measures, which are complementary to each other, are broadly
speaking the two sides of the same coin. Reduction in import duty has reduced
capital requirement to that extent, while TUFS has made debt servicing that
much easier. These measures have provided a shot in the arm for fresh investment.
Although teething troubles of TUFS are now over, the industry is still grappling
with some problems. For example, more liberal stand should be taken with regard
to installation of secondhand imported machines. Secondhand machines of latest
technology are available at competitive prices. Naturally, installation of such
machines would be economical and would make the final outputs that much cost
competitive in the international market.
Timely receipt of interest subsidy is threatening to become a perennial problem.
Credit-linked Capital Subsidy Scheme has been designed to accelerate upgradation
of powerlooms in the small-scale sector. Under this scheme, 20 per cent upfront
subsidy is given on installation of powerlooms. However, a broad-based approach
is the need of the hour. Powerloom factories in the middle sector also require
and deserve enhanced interest subsidy like their counterparts in the small-scale
sector. The planners do not seem to have taken into account the fact that, if
one segment gets loans on highly competitive terms, fresh investment in the
same type of machinery by another segment is difficult to materialise because
higher cost of upgradation makes modernisation unremunerative. In other words,
if only one sector becomes recipient of the government’s largesse, the
sector remaining out in the cold does flounder in capital investment because
of higher cost of debt servicing.
A modified scheme is on cards for upgradation of processing sector, the weakest
link in the value chain. Here too, it is fervently hoped that the government
will not make discrimination. The thrust of the government scheme appears to
be on setting up of brand new processing factories. It is necessary that existing
processing factories should also be given enhanced interest subsidy for replacement
of such machines as are not considered to be of modern generation. By this method,
upgradation of the processing sector to the international standards could be
achieved at a faster rate and with lower cost.
c) Debt swap
The government has also formulated a scheme for replacement of high cost debts
taken earlier by debts at lower cost prevailing at present. This scheme is laudable
and would give impetus for financial restructuring. The concern of the industry
is that it is not being universally followed by all banking and financial institutions.
The government should, therefore, take steps to ensure percolation of the benefit
of the scheme to the entire industry. A simpler method could have been to create
a fund for giving direct subsidy to the industry.
(d) Never-say-die spirit
Last but not the least, the industry also deserves some credit, because of its
never-say-die spirit. Although the adverse economic and trading conditions did
take its toll with many units in the organised sector falling by wayside, a
large portion of the industry did show resilience and has come out of long tunnel
of mounting difficulties, like the proverbial phoenix bird.
The industry has been taking full advantage of various schemes launched by the
government and is trying to upgrade itself to the international standards. The
managerial proficiency of the industry and its readiness to assimilate new technologies
have contributed in no small measure to the changed scenario. Equally important
is the role played by the seasoned technicians and skilled labour.
However, there are still some more pending points on the agenda, which must
be addressed without any delay. Firstly, labour reforms have not taken place
although the government has been talking about it for quite sometime. The archaic
labour laws in fact discourage expansion of labour force and go counter to the
interests of the working class. A progressive labour policy will not only help
build modern technically vibrant industry, but would also create many jobs,
which would help resolve the problem of unemployment to a great extent.
Another important aspect is high transaction cost. The following steps are recommended
for reduction in transaction cost:-
1. Avoid delay at customs for clearance of goods;
2. Accelerate procedure for export;
3. Accelerate refund/payment of excise/sales tax/drawback;
4. Accelerate logging of Advance Licence;
5. Improvement of infrastructure at ports; and
6. Accelerate loading and unloading of cargo at ports.
Yet another problem is high power cost. Power is an important element in the
cost of production accounting for 12 to 14 per cent. The government is no doubt
taking active steps to introduce reforms in the power sector. But still a lot
remains to be done.
The burden of cross-subsidisation foisted on the industry should be removed
immediately. Further, power must be made available to all segments of consumers
without any exception. New technologies should be introduced in the power sector
to bring down cost.
The world is watching India minutely, because of her potential to emerge triumphant
in the international competition for textiles. If government policies are suitably
modified as discussed earlier, I am quite confident, the Indian textile industry
will become pride of the nation and envy of other textile producing countries.
President, Federation of All India Textile Manufacturers’
Association (FAITMA)
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