INDIA: Budget could have been better

NEW DELHI: The Budget has provided incentive packages to improve the cost-competitiveness and profitability of all segments of the textile industry.

Since the accession of textile trade to the WTO framework is expected to increase competition among the developing countries and the prices of garments and fabrics are likely to come under pressure, the Indian industry needs a much higher level of policy support from the Government.

In his last Budget, presented in July 2004, the Finance Minister, Mr P. Chidambaram, had given a package of incentives to the textile industry that had largely benefited the cotton textiles — handlooms, powerlooms and composite mills. All the segments of the cotton textile industry were given the option of complete exemption from payment of excise duty or taking the Cenvat route.

The latest Budget tries to provide further impetus to the sector by removing the prevailing anomaly in the excise duty structure and providing some more incentives aimed at facilitating modernisation and expansion of production capacities. The excise duty on polyester filament yarns has now been reduced from 24 per cent to 16 per cent.

The other sops include:
•  Reduction in Customs duty on textile machinery from 20 per cent to 10 per cent;
•  Introduction of a capital subsidy scheme for the textile processing sector;
•  Reduction in Customs duty on polyester, nylon, fabrics and garments from 15 per cent to 10 per cent; •  De-reservation of 30 textile items in the knitting segment that were within the ambit of SSI reservation so far.

The Finance Minister has further indicated that there will be clustered development approach for the production and marketing of handloom products; 20 clusters are to be taken up in the first phase at Rs 40 crore.

It has also been decided to expand the coverage of life insurance scheme to 20 lakh handloom weavers in two years from two lakh at a cost of Rs 30 crore per year. The scheme provides insurance cover of up to Rs 50,000 per weaver. Similarly, the health insurance scheme is to be extended to cover two lakh weavers, from 25,000 now, at a recurring cost of Rs 30 crore per year.

The Rs 25,000 crore Technology Upgradation Fund (TUF) Scheme is being continued with enhanced allocation of Rs 435 crore for 2005-06. Launched in 1999, the scheme (which offers five per cent interest subsidy on modernisation loans) has made only a marginal impact. The two Budgets (2004-05 and 2005-06) have no doubt provided incentive packages aimed at improving the cost-competitiveness and profitability of all segments of the textile industry.

However, much more needs to be done to undo the damage caused by decades of skewed government policies and help the industry overcome the serious problem of technological obsolescence and achieve economies of scale.

Even today, the textile industry is largely characterised by primitive technology, small scale of operations and low level of integration. There is also an undesirable bias against man-made fibers even after the changes in the tax structure in the latest Budget.

Since the accession of world textile trade to the World Trade Organisation framework is expected to increase competition among developing countries for a bigger market share, and the prices of garments are likely to come under pressure, there is a new urgency to provide a push to this industry.

Unfortunately, the new duty structure on man-made fiber and yarn — PSF and PFY — at 16 per cent cannot be considered benign even now. One of the reasonable demands of the industry was that the excise duty be reduced on all fibers (except cotton which attracts no duty) to 8 per cent. This would have ensured greater competitiveness for the industry, which has been reeling under the impact of high taxes. The industry is of the view that reduction of Customs duty on polyester intermediates such as PTA and MEG from 20 per cent to 15 per cent is inadequate to bring down domestic prices. The input prices need to come down further to make the Indian industry internationally competitive.

Another long-standing demand from the industry for flexibility in labour laws has not been addressed in the Budget. Flexible labour laws would help exporters, especially in labour-intensive segments of the textile value chain, such as apparel manufacturing, to hire more workers during peak seasons.

Recent press reports indicate that the Government is expected to announce a package for liberalising labour laws, at least for the textile industry to generate more employment opportunities. The Finance Minister has stated in his Budget speech that the textile industry has the potential to generate 12 million additional jobs over the next five years. Reports indicate that the Labour Ministry is in the process of giving final touches to the proposed package. This should be done at the earliest.

According to Labour Ministry sources, the Government is exploring the possibility of changing labour laws to allow extension of working hours and a provision to allow women to work in night shifts. It is pointed out that women constitute around 35-40 per cent of the total textile industry workforce.

The apparels segment, which constitutes a major portion of the textile industry today and is set to grow at a much faster pace in the coming years, it provided employment to 4.6 million workers in 2003-04 compared with 1.58 million in 1993-94. This figure is expected to reach 12.5 million by 2010-11, according to the data compiled by the Apparel Export Promotion Council (AEPC).

The de-reservation of some 30 items in the knitwear segment will facilitate the much-needed consolidation and increased exports. The knitwear industry now accounts for about 35 per cent of the country's total textile exports. The Bangalore-based Royal Classic Mills and the Mumbai-based Kaytee Corporation are already examining the option of consolidating their businesses. The same is the case with many companies located in the Tirupur cluster, considered to be the bastion of the knitwear industry.

Some players are also expected to enter the knitwear business following de-reservation of products from the SSI list. For instance, the Bangalore-based Gokaldas Exports, India's largest apparel exporter, has already firmed up plans to set up knitwear manufacturing units. According to industry sources, many overseas players are also likely to enter the knitwear business in India. Already, the Italian fashion apparel firm, Benetton SpA, in collaboration with Benetton Holdings NV of the Netherlands, is planning to set up an integrated manufacturing unit for producing knitwear products.

Meanwhile, even as the US continues to remain the most favoured destination for Indian textile exports, European investors — led by Italians and Germans — are set to emerge as big investors in India's booming textile sector.

While the Italian garment manufacturing major, Carrera, has reportedly firmed up plans to invest nearly Rs 1,000 crore in Maharashtra for setting up manufacturing units across multiple locations, another Italian group is carrying out feasibility studies for setting up a full-fledged `Italian Fashion Village' near Kochi, say industry players. According to industry observers, the proposed village is likely to further intensify the interest generated among Italian entrepreneurs about the potential of India as a manufacturing base.

According to government sources, some German investors have picked up stakes in trading firms Shiv Exports and Janan Exports, which are into textile exports. Among others, a Danish speciality textile major, Vestergaard Frandsen, has received approval for setting up a unit for exporting textile products and Somex SA of Belgium plans to set up a wholly-owned subsidiary for the same purpose.

Hence, the Government should initiate measures to create a textile restructuring fund on the lines of the suggestions made by the Indian Cotton Mills Federation (ICMF) and the Steering Group headed by the former Planning Commission Member, Mr N. K. Singh sometime back.

Also, the Government would do well to create a dedicated fund to realign the high cost debt sourced by "financially weak but technically viable" units. The textile mill sector had earlier petitioned for the creation of such a fund.

In the absence of a more aggressive strategy and adequate policy support, some of the mid-sized Indian garment manufacturing companies are reportedly planning to relocate their operations to neighbouring Bangladesh which is offering attractive tax holidays to apparel exporters in the post-MFA regime.

The Bangladesh incentive package includes a five/seven-year tax holiday, 100 per cent ownership, easy exit norms and full repatriation of invested capital, profits and dividend.

In the context of the growing competition from the major textile trading nations, India should view China as a benchmark while formulating its strategy for the textile sector rather than being satisfied with the improved performance over the past two years.

In the radically-changed business environment, the Indian industry needs a much higher level of policy support from the Government and the financial institutions to overcome the multiple problems being faced by it.

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Added: March 11, 2005 Source: Agencies
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