Budget and textile industry

It is estimated that up to 19 million jobs have been lost in developing countries as a result of quota restrictions on textiles and clothing (T&C), plus an additional eight million owing to high tariffs. For every job protected in rich countries, around 35 have been lost in poor countries.

The one common denominator among the several studies done on the possible impact of quota phase-out on the Indian textile and clothing industry is that Indian exports would surge by as much as 250 per cent in the first years following quota elimination.

It is a different matter that this increase would still be far below the targeted $50 billion worth of Indian T&C exports in the next 5-6 years.

But, for these targets to be achieved, a reform of the tax regime for the textile sector was crucial. The finance minister has thus done his bit by doing away with the numerous exemptions and consequent complexities.

It was, as one wag put it, a masterstroke of balancing political pressures with economic rationale or the CMP with the CPM.

Elementary economics informs us that the best form of taxation is a moderate rate uniformly applied through the entire value chain, without exemptions, or, at best, with minimal exemptions.

However, one needs to visit a textile mill's bloated excise department to get a glimpse of how this principle has been pounded to a pulp.

It requires the expertise of a chartered accountant combined with the experience of an aging excise division employee in the industry to make sense of the plethora of rates -- and exemptions -- across different fibres, along different stages, and across different segments even within the same stage.

The accompanying table illustrates the excise rates and exemptions across only cotton fibre and yarn. The rates on fabric were 8-12 per cent, depending on whether it was cotton or non-cotton.

There were exemptions for powerlooms whose turnover was below Rs 25 lakh, which effectively meant that powerlooms with turnover exceeding the threshold were almost non-existent, even though several of them might be located within the same premises!

I am sure that with the new excise regime, there would be a proliferation of powerloom units whose size would suddenly increase beyond Rs 25 lakh overnight.

What has the finance minister lost in the process? In a static setting, maybe a few thousand crores, but actually perhaps nothing. This is because almost Rs 3,000 crore is generated through excise on staple filament fibres/yarns, which would continue to come into the coffers.

As for the cotton segment, in any case there was huge evasion by the majority of the players. The ones who paid in that segment were mostly in the organised sector, constituting a minuscule minority in terms of their share of production in the industry.

In fact, if some of the unorganised sector players enter the organised sector, as they might under the new Cenvat structure, revenue collection may actually go up.

The question remains, however: Is this a gamble? Chances are the finance minister will succeed. With the optional route of not paying anything at all in the cotton segment, it is very likely that a large number of the existing units in the unorganised sector, specially in weaving and processing, may actually begin to "migrate" from the unorganised and policy-induced tiny sector into the more organised, non-SSI sector, either through expansion, or through setting up new units, and then choose the Cenvat route, given that the chain is now complete.

This process of "organisation" of the industry would actually reduce the fragmentation that the industry has been suffering from, resulting therefore in greater scale economies and efficiencies.

Several units in the unorganised sector preferred to remain within the unorganised sector to escape the attention of tax inspectors and other government authorities. That fear being removed now, most of these units would prefer to grow bigger and become more "organised."

This is good news for the industry's efficiency and competitiveness, as well as for meaningful and fruitful employment generation.

It is not without reason that some industry captains are expecting a fresh influx of investment in an industry which, after agriculture, is the largest employment generator in India.

More important is the strong possibility of these jobs being better in terms of employment and working conditions. One of the principal problems of the huge unorganised sector presence in the Indian T&C industry was the horrible conditions of employment and working environment for a significant majority of the workforce.

There was not even a contractual basis for their employment. These developments will add to competitiveness, especially in the emerging era of labour and environmental standards becoming an important determinant of sourcing decisions of large retailers globally.

However, the Budget does disappoint on one very important matter, viz. FDI in garment retailing in India. A strong home demand creation is vital to sharpening the competitive edge of the Indian T&C industry, which would require a continuous demand on industries in a competitive regime.

Modern-day manufacturing is carried out through what is often called global commodity chains, where the value chain is "sliced up" into several independent operations that are carried out in the most competitive locations across the world, until they are finally assembled closest to the consumer.

And the garment-manufacturing model is a 'buyer-driven' commodity chain. The buyer -- final retailer -- acts as the 'channel creator' for the entire supply chain.

Allowing FDI in garment retailing would lead to strong home demand creation, and therefore a bigger domestic market for garments. This would have tremendous ramifications for the cost-inefficient traditional, multiple supply chains that exist in India.

Garment manufacturers would go in for backward integration, whereas the textile manufacturers would integrate downstream. The resulting scale economies would bring India closer to China in terms of low-cost competitive edge.

And with a burgeoning market at home, India's leverage in international trade negotiations would rise.

The minister for textiles, who has recently moved to allow FDI in garment retailing, seems aware of the benefits. He needs to convince the finance minister and other colleagues in the cabinet.

The need for labour reforms to make the industry competitive has been the refrain for a long time now. But two caveats are needed here. One, the low labour cost that comes with low labour productivity is no longer a competitive edge.

In fact, export firms pay higher wages to their employees, compared to non-exporting firms, and that is on account of indispensable skills of designers, pattern makers and craftsmen, as well as better-trained cutters and tailors employed by exporting firms.

Second, in our enthusiasm to reform labour laws, we should not swing to the other end of the pendulum by allowing an unfettered 'hire and fire' policy without providing for an adequate safety mechanism towards generating 'employability' against generating employment.

Firms, and not nations, compete in industries. The government must play the role only of an effective facilitator. Therefore, the last word on competitiveness can and must be written only by the entrepreneurs themselves.

It is up to the Indian entrepreneurs to pick up the gauntlet and secure India its rightful place in the international trade arena.

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