It is important to have FTA with UK
Established in 1958, the Northern India Textile Mills' Association (NITMA) is a non-profit body solely engaged in helping promote the interests of the Indian textiles industry not only in the northern part as the name suggests but also in central and western states of the country. Many of the large, medium and small textile industries located in northern India are associated with NITMA with a combined turnover of more than ₹50,000 crore and represents approximately 20 per cent of textile production capacity. President Sanjay Garg discusses with Rajesh Kumar Shah the current situation and the issues facing the Indian textiles industry, particularly the north Indian textile mills.
It is now more than two years since the introduction of the goods and services tax (GST). Have things become simpler? How has GST affected the textiles industry?
The GST has certainly affected the industry in more than one way. First, of course, is bringing one segment of the textiles industry under the GST ambit, which was not there earlier. Second, the compliance cost for GST has proven to be a cumbersome process. The GST Council has been making efforts to simplify the process, but we are quite far from it. Last, a huge amount of working capital has got blocked in the processing, fabrics and garments industry which has an inverted duty structure. This blocking of funds is mainly in the MSME sector, where extensively job working services are availed for stitching, knitting, weaving printing, embroidery, common effluent services, etc. Despite refund of inverted duty being allowed, due to the job working being categorised as services, the reality is that no refund is coming, and hence the same is being passed on to next person in the chain making the overall cost structure of Indian textiles expensive and impacting exports and leading to more imports. Industry has been seeking a simplified and more convergent GST rates with fewer slabs and lifting of the long-term capital gains tax to boost disposable incomes that would help revive consumption.
Interest rates have come down in recent years. How is this helping textile mills in the North?
Visibly, it is the same as before.
To what extent has the US-China trade war benefited the Indian textiles industry? Has any strategy been worked out to capitalise on the opportunities that may have cropped up?
The US and China are the first two ranked economic powers of the world. Once the US imposed a higher tariff for Chinese exports up to 24.3 per cent after June 2019, some imbalance crept into the global economy order. The smooth trade in global markets was affected.
Likewise, with the beginning of the trade war, our export of yarn to the Chinese market reduced by 50 per cent. The yarn that was not exported to China became a surplus quantity in the domestic market, resulting in a trade imbalance. The reduction in demand increased the inventory of finished goods with manufacturers, blocking their working capital. This is one of the major causes that has been forcing the industries to curtail their production. This has also resulted in employees living with a fear of losing their jobs, as some of them are receiving delayed wages while some others experiencing a sizable cut in their average earnings per month.
The ongoing US-China trade war has slowed growth in the EU and the lack of nominations to the appellate body of the World Trade Organization (WTO) are behind the global trade slowdown. As per a report, India's low participation in regional trade agreements (RTAs) is seen as the reason for its low free trade agreement (FTA) utilisation. The government should set up a market facilitation cell to help Indian industry diversify export markets and products and develop a mechanism to leverage and navigate RTAs.
As per official data, a total of 1.19 crore preferential certificates of origin were issued from 2005-06 to 2018-19, amounting to a total trade of $307.04 billion. This is a low number compared to India's total trade and this includes generalised system of preferences (GSP) certificates. In 2018-19, the total trade through the preferential route was only $32.22 billion, which is less than 10 per cent of India's total exports in 2018-19, according to the report. India has not signed any new FTAs since 2012.
How important is the UK market for Indian textiles? Is Brexit going to change the equation?
It is important to have an FTA with the UK after Brexit. Various textile bodies have urged international buyers to push their governments to sign an FTA with India. Because of the quality goods exported from India, many UK buyers have agreed to take up the matter with their government. An umbrella federation of nationwide textile associations has been formed in New Delhi and industry has decided to put pressure on the Central government to act in favour of signing FTAs soon.
Some existing schemes like Merchandise Exports from India Scheme (MEIS) are being withdrawn due to a WTO ruling against India's export subsidies. How will this affect the textiles industry?
As per official and trade sources, the government has decided to defer the introduction of a ₹50,000 crore exports programme-which was supposed to replace its flagship, but WTO-incompatible, MEIS-to the next fiscal from the proposed date of January 1, 2020.
Commerce minister Piyush Goyal is said to have acceded to exporters' request to grant them more time to prepare for a transition from the MEIS to the new scheme called Remission of Duties and Taxes on Export Product (RoDTEP), given the operational challenges. Also, the next foreign trade policy, which will contain broad contours of the RoDTEP, will only be rolled out from April 2020, as the current one is in effect up to March. The new scheme is supposed to reimburse all taxes and duties paid on inputs consumed in exports in sync with WTO norms. Since the potential revenue forgone in the current MEIS is around ₹40,000 crore a year, the RoDTEP is expected to cost the government an additional ₹10,000 crore annually.
The decision to defer the RoDTEP rollout comes at a time when the WTO's appellate body remains paralysed. So, India is spared the trouble of having to fast restructure some of its contentious trade schemes, as its November 2019 appeal against a ruling of the WTO's Disputes Settlement Body (DSB) in favour of the US against New Delhi's export "subsidies" is still pending. The fate of all such appeals remains uncertain, as the US has refused to relent on its move to block the appointment of appellate members. According to the WTO rules, unless appeals are heard and settled, the findings of the DSB won't be binding on the losing party. The rollout of the RoDTEP from January 2020 was one of a slew of measures-including easier priority-sector lending norms for exports, greater insurance cover under Export Credit Guarantee Corporation (ECGC) and lower premium for MSMEs to avail of such cover-announced by the government in September to help reverse a slide in exports.
Though the GST regime has subsumed a plethora of levies, some still exist. Petroleum and electricity are still outside the GST ambit, while other levies like mandi tax, stamp duty, embedded Central GST and compensation cess, etc, remain unrebated.
The MEIS, exporters have persistently complained, doesn't offset all the taxes; so the new scheme will be beneficial to them when it is implemented.
The proposed transition to the new scheme came after the US dragged India to the WTO, claiming that New Delhi had offered illegal export subsidies and "thousands of Indian companies are receiving benefits totalling over $7 billion annually from these programmes". However, Indian officials have rejected such claims and repeatedly stated that the entire allocation or potential revenue forgone on account of various such schemes (including MEIS) doesn't qualify as export subsidies, as in most cases, they are meant to only soften the blow of imports that exporters have been forced to bear due to a complicated tax structure. Exports are supposed to be zero-rated, in sync with the best global practices, they have argued.
In recent years, the Indian rupee is slowly and steadily depreciating vis-à-vis the US dollar. Are exporters able to take any advantage of this trend?
First, it has caused a drop in domestic consumer purchasing power. The Indian domestic market is very huge and had helped absorb big market upheavals on earlier occasions. But after the high-value currency devaluation, the scenario is totally different with an extra cautious approach by every trader / manufacturer. The purchasing power of the people has dropped to a low level. Though the availability of the textile commodity is huge, the purchasing power of Indians has reduced.
The rupee has been spooked by a combination of global and domestic factors. It has depreciated nearly 3.5 per cent in a matter of a few sessions to hit an eight-month low. On the domestic front, policy flip-flops pertaining to the issue of sovereign foreign currency bonds and super-rich surcharge for (foreign portfolio investments) FPIs has induced an uncertainty. It has resulted in outflows from domestic equity markets. On the global front, the escalation in the trade war between the US and China has dampened risk sentiment and outlook for global growth. This has resulted in unwinding of carry trades and flight of capital from riskier emerging market (EM) assets to safe havens such as US treasuries and gold.
The People's Bank of China (PBoC) responded to fresh tariffs by letting the yuan depreciate. USD/CNY broke the psychological 7 level. The rupee and other EM currencies have closely tracked the yuan. The reaction function of the RBI seems to indicate that it is not too perturbed letting the rupee depreciate in a calibrated manner in real effective exchange rate (REER) terms. The 36-country REER has corrected to 115 from 120. For quite some time, the CNY/INR traded in the 9.95-10.05 band and now the rupee has depreciated beyond the 10.10 mark against the yuan. In a way, a more competitive rupee would help reinvigorate exports and also domestic manufacturing by reducing the import of cheap substitutes. The adjustment in rupee is therefore welcome.
The government is envisaging India to become a $5 trillion economy by 2024-25. Do you see it happening? What will be the contribution of the textiles industry?
India's potential to achieve a $5 trillion GDP by 2024-25 is within the realm of possibility, we believe. A while back, the commerce and industry ministry also came out with a blueprint suggesting a host of long and short-term measures to increase the size of India's economy to $5 trillion by 2025. According to its report, the agriculture and manufacturing sectors can contribute $1 trillion each, while the contribution from the services sector has been pegged at $3 trillion.
As far as the textiles value chain is concerned, the domestic textiles and apparel industry contributes 2.3 per cent to India's GDP and accounts for 13 per cent of industrial production, and 12 per cent of the country's export earnings. It is the second-largest employer in the country providing employment to 45 million people. It is expected that this number will increase to 55 million by 2020.
FDI in the textiles and apparel industry reached $3.1 billion during 2018-19. Exports in the textiles and apparel industry are expected to reach $300 billion by 2024-25 resulting in a tripling of the Indian market share from 5 per cent to 15 per cent.
The textiles and garments industry in India is expected to reach $223 billion by 2021 from $137 billion in 2016. The industry has strengths across the entire value chain from fibre, yarn, fabric to apparel. It is highly diversified with a wide range of segments ranging from products of traditional handloom, handicrafts, wool and silk products to the organised textiles industry. The organised textiles industry is characterised by the use of capital-intensive technology for mass production of textile products and includes spinning, weaving, processing, and apparel manufacturing. The domestic textiles and apparel industry stood at $140 billion in 2018 (including handicrafts) of which $100 billion was domestically consumed while the remaining portion worth $40 billion was exported to the world market.
Further, the domestic consumption of $100 billion was divided into apparel at $74 billion, technical textiles at $19 billion and home furnishings at $7 billion. While textile exports earned $20.5 billion, apparel exports fetched $16.1 billion, and handlooms $3.8 billion.