Industry Friendly Policies Could Make The Difference

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WHAT THE NEW GOVERNMENT NEEDS TO DO..AR WHITEPAPER ON CRITICAL ISSUESAFFECTRING TEXTILE VALUE CHAIN AND INTERVENTIONS THAT COULD MAKE THE DIFFERENCE

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About usApparel Resources is as an organization with over two decades of deep interaction with the Apparel and Textile industry in the Indiansubcontinent under the name and style Apparel Resources. We are an established name as a knowledge partner to not only the industry but also to the academicians and students. The organization is actively involved in Research & Development, Industrial Training and Consultancy initiatives. Apparel Resources has been involved in conducting surveys, publishing annual Top100 rating of companies in the garment industry besides insightful research/ analysis of textile and apparel trade statistics, especially related to global trade.

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Scope of White PaperAs India stands on the cusp of change, waiting with hope that the determination shown by the people of the country to see a fresh style of governance is reflected in the work of the new Government, the textile and apparel industry seeks its place in the sun… While welcoming Santosh Gangwar, who takes charge as MoS (Independent Charge), Ministry of Textiles, Apparel Resources brings to his attention the true picture of the industry and the role that the Government can play to change the fortunesof this labour-intensive sector, taking it to its potential as a massive employment generator and foreign exchange earner.

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table of content

5• Apparel manufacturing the driver for value

8• Need for integrated textile policy

• Labour reforms 9

11• Re-starting of skill development scheme...

• Inconsistency in policies 12

• Defining Issues 15

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Apparel manufacturing the driver for value business in Textile chainIndustry friendly policies could makethe differenceWe have put together a white paper on the core issues that impact competitiveness and in cases the survival of the industry. We understand that change does not happen in a day… but the intent and boldness to face the issues eye to eye is the first stepping stone. While the first three issues require major policy decisions, the remaining are ‘irritants’ that need to be looked into.As the global market conditions become increasingly competitive, the industry is looking towards the Government, not for sops but for policies that could create a level playing field. Yet, there are a number of inadequacies in the policies, which if addressed can facilitate the growth of the industry… The industry is very clear that just by raising the bar for garment exports the industry cannot deliver. A target of 18 billion US dollars for garments and 50 billion US dollars for textiles and garments put together by 2015 is unachievable in the current situation. Many steps need to be taken to even get close to the target.

It is interesting to note that over a period of 10 years from 2004 to 2014, the garment industry grew from US $ 6 billion to US$ 15 billion, which means at about 6% per annum; taking into consideration inflation and strengthening dollar rates, the actual growth would in fact be much less… How does the Government expect the industry to grow 20% in about a year’s time to achieve the target set with both inflation and dollar rates declining, while all other ground realities remain intact!

Over the past two decades successive Governments, textile ministers and textile secretaries have failed to push for reforms to give the industry a level playing field to grow in a very competitive environment, where the margins are shrinking by the day.Unfortunately, the Ministry has always been of the opinion that garment exporters are asking for incentives, but the fact is the

Over a period of 10 years from 2004 to 2014, the garment industry grew from US $ 6 billion to US$ 15 billion, which means at about 6% per annum; taking into consideration inflation and strengthening dollar rates, the actual growth would in fact be much less…

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industry actually needs much more than ‘money’ to do business in a global market competitively, money comes by default. The garment industry is very disappointed that the Government’s inaction and inability to take firm steps has led to a situation where the industry is at a crossroad, despite its fighting entrepreneurial spirit… missing out at its end on employment generation and improving the BOP situation.

It was indeed heartening to hear the new Minister declare on his first official press brief that the first focus is to bring out a blueprint for the Textiles Industry, at the earliest. However, it was disappointingto again hear the Textile Industry being equated to the Handloom and Handicraft Industry… the first thing that needs to change is the perception that the industry is only about artisans… Bangladesh has built its country’s economy using apparel manufacturing sector as the key driver, and we still think it is a cottage industry… What a waste of potential!

Garment exports are at the nodal point of the textile chain and are capable of giving value to each element in the chain… Unfortunately most of the policies and interventions are lower down the value chain, when the reality is that by giving the garment manufacturing industry the required environment for growth, will give the desired impetus to the whole chain.

What is needed, is not major policy changes, but ‘reforms’… smart twitching of policies for long-term benefits.

Further, garment manufacturing adds immense value to the fibre, yarn, fabric and processing chain, creating value for the entire chain and the country through the garments exported to international brands. Not only that the industry is not even capital intensive and a mere Rs. 10,000 investment can give employment to 1 person on a 35 days training, while an investment of Rs. 50,000 crore in a car factory will employ just 5,000 people.

It is indeed sad that despite being a labour-intensive industry, it has never been a thrust industry for the Government. The industry works on an average 1.75 man/machine ratio, which means that if 2 lakh machines are added, around 4 lakh people are simultaneously employed; no other industry can do that… The industry is also a

Not only that the industry is not even capital intensive and a mere Rs. 10,000 investment cangive employment to 1 personon a 35 days training, while an investment of Rs. 50,000 crore in a car factory will employ just 5,000 people.

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low capital-intensive industry where an investment of Rs. 10,000 on machines gets them gainful employment, as against industries which would require 10 times the capital value to employ a person. In a factory like Hero Honda, they are giving salary to 25,000 people and their export may be around Rs. 500 crore; and in the garment industry we have 5 million people working and the exports are at Rs. 40,000 crore, the Government has to decide which should be the thrust area in line with their national goals and objectives.

The country should take leaf from Bangladesh and Vietnam – small countries with almost no fibre/fabric base that have overtaken Indian garment exports. New regions (states) should be offered for garment manufacturing – West Bengal, Orissa, Andhra, Jharkhand with sops (incentives) on power, land/building, labour laws – apprenticeship – and competitive minimum wage (based on present living wages in the respective area); One window clearance for all factory/establishment/ VAT/TIN/PCB approvals – no red tape.

The reality today is that China is full and they are exporting garments to the tune of 150 billion dollars and even if India manages to take 1% of their work, we don’t have the capacity to handle this. The country can grow from US $ 12 billion export to US $ 18 billion export only if a comprehensive growth policy is followed and not only relying on incentives. The thrust has to come from the Textile Ministry together with the commerce to the PMO they must get all the ministries together and declare the industry as a priority industry.

The country can grow from US $ 12 billion export to US $ 18 billion export only if a comprehensive growth policy is followed and not only relying on incentives.

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Need for integrated textile policyFluctuating yarn prices and availability of the same is a major difficulty that exporters face when trying to meet price points. There are methods, by which the Government can judicially regulate theavailability of yarn for domestic use, but the politics of diverse interest groups is bigger than national interest and no Government has had the commitment to think above these interests. This is one of the biggest reasons that the country does not have an integrated textile policy and each segment in the supply chain is always at loggerheads to get the maximum benefit.

Garments being at the end of the chain, invariably suffers the most, as its representation is the weakest with few companies at a level, which can make a difference with the Government in policy making.

The Government can put cotton yarn under a restrictive list that says you have to take a license when you want to export of a certainquantity can be earmarked for the intre year considering the quantity required for consumption by the end of line sector that is garement manufacturers and also the quntity for exports at the yarn stage.

It is also important to look at garments as a value adding business… in fact, it is the garment exporters who are ambassadors of our complete textile chain, including the artisans as every value created by the chain is represented by these frequent fliers in their collections, bringing recognition and business to the entire chain. Neglecting the growth potential and needs of the garment segment is a disservice to the textile value chain.

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Labour reformsIt has been argued time and again that labour laws need to be relooked at… the very fact that the Factories Act was established in 1948 denotes that it needs to be relooked in totality. Quite a many laws are cumbersome to implement thus causing harassment from the authorities; no doubt there is requirement to review and amend based on practicality.

However, till the time any ruling party has the guts to take a stand on the issue, there is urgent need of policy intervention for overcoming major non-compliance in garment factories through two amendments in the Act – Section 59, dealing with overtime. It is suggested that wages at the rate of one-and-one-quarter times of the regular rate (as per ILO convention) instead of two times be allowed, as Indian law exceeds the ILO convention. Section 64, wherein the cap of 50 hours a quarter overtime is defined should be removed and still the industry will remain ILO compatible.

Labour laws have been a bone of contention for time immemorial, and now it is becoming very difficult for the industry to increase productivity within the working hours parameters set by the Government. The industry has approached the cost competitive committee to increase the permissible overtime hours of work from 52 hours in three months to 150 hours in three months to allfactories in India. The Karnataka Government has already approved the increase in working hours for the apparel industry within the ILO parameters and the same is lying with the President of India for past one-and-a-half year for his signature to make it a national regulation.

In this regard current working hours for women also needs to be reviewed…; the industry is missing out on an important human resource for want of better engagement initiatives for women. It has been proven that women workers are more productive and committed; all that is needed is more women-friendly interventions.

There is a need to understand the psyche of the workers and in India, workers want overtime as they come to the city with a mindset to earn money, but the buyer limits overtime to 52 hours in a quarter, which does not augur well for both the worker and the industry.The proposal has been pending since 2008 to increase overtime…;

Industry needs two amendments in the act

Section 59, dealing with overtime. Itis suggested that wages at the rate of one-and-one-quarter times of the regular rate (as per ILO convention) instead of two times be allowed.Section 64, wherein the cap of 50 hours a quarter overtime is defined should beremoved and still the industry will remain ILO compatible.

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industry is willing to pay more than the wage rate for 2 hours of overtime. What we want is more working hours to meet shrinking deadlines. Our competing country, Bangladesh has built in 2 hours of daily overtime permissible.

ESI and PF laws are necessary, but the contention point is that even if a worker doesn’t want his PF to be deducted the factory still has to pay, which means cost goes up by 25%. Our request is to let the worker work for at least six months before he is eligible for PF. The whole idea of these laws is to give social benefit to workers, but forcompliant factories, these small issues should not be impediments for letting the goods cleared on time. Also one of the main reasons is the attrition of workers – hence opening a PF account and then “closing” the same when the worker exits!

Additionally, since garment exports is a seasonal business – Peak and Non Peak season – the industry should be allowed to hire workers based on needs of season; Today invariably about 4 months of lean season burdens the industry with the running cost.

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Re-starting of skill development schemewith better implementationAn integrated skill development scheme was initiated by the Textile Ministry in 2010; this was on top of other skill development initiatives under the National Skill Development Policy (NSDP).Though the intent of the policy was very clear and the objectives well defined – to skill 30 lakh persons in 5 years, the scheme was put on hold in 2012 and is since then pending clearance. The low rate of placement under the scheme is a matter of concern,considering that besides Government efforts through associations like ATDC, many private players have also taken funds forskill development.While the first priority should be to restart skill development scheme, appropriate changes need to be made, as on the surface many discrepancies are apparent in the scheme. For one, most of the training centres have been setup in regions that do not even have a garment manufacturing industry defeating the whole purpose of skill development, as energy is wasted in convincing people to take the training!Another major flaw of the current skill development efforts is that training is primarily for operators, with little or no emphasis on other important areas of garment manufacturing like supervisor, pattern making, checking, cutting, etc. Even the methodology for training is traditional with no thought of upgrading to meet fresh needs of automation and use of attachments and folders.

Industry oriented or industry supported training should be evolved – Why not extend the “Apprenticeship” culture to say 2 to 3 years whereby the worker is benefited by learning the skill and the industry gets a worker with less than minimum wages. This will be beneficial to both the industry and employees. If the industry is to grow, skilled workers are the backbone on which expansions can be made, however if even after allocating funds, the implementation is not up to the mark and the industry faces shortage of workers, there is certainly something wrong with the scheme…

During the two year period, official data claims that out of 2,47,812 persons enrolled under the scheme, only 2,33,848 out of them completed their perspective training. However, only 35,859 of them have been placed, while another 1,97,989 people are looking for placementfrom the industry and the restare not seeking employment.

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Inconsistency in policiesThere is no consistency of policy, some Government gives one concession then the other pulls it back and offers something different…; how can exporters plan in long-term in such uncertainty. The tax structures and inconsistency of the same over the years is a matter of great discontentment. “Service tax are killing, we are paying reverse service tax on lab dips being done overseas and when I remit to them I am deducting 20% TDS and 12.5% service tax, if he (service provider) doesn’t pay then I have to pay the same and it is a very high cost, so my price is very high, then the Government says don’t export taxes,” bemoans the industry.

Different rate of interest being charged as per the negotiation power, subvention given by Government is not being told separately by bankers, rates vary from 9% to 12% without subvention while banks have facility to get export refinance at much cheaper rates.

The Government needs to be proactive rather than keep sitting on policies…, there should be a separate ministry or a sub ministry of the textiles department which only deals with the apparel sector to address their needs since the focus of the Textile Ministry is always on protecting handloom and handicraft industry. No doubt the handloom and handicraft is an important sector, but the truth is that this protectionist attitude has not allowed the sector to grow, but for the few who control the outcome. The predecessor Government understood vote banks and for them the handloom and handicraft artisans is the only segment that needs to be appeased… how wrong they are… the over 45 million people employed in the Indian textile and garment sector are capable to affect results of at least 40 parliamentary seats across the nation with their strong presence!

The mindset of the Government is indeed a major irritant for the industry and is seen in many policies including the cap on duty drawbacks. If somebody is exporting embellished dresses for 12 dollars, what interest does he have to export if Government is giving him a cap of Rs. 45-50. The Government should be more pragmatic, if a person exports 10,000 high value garment of 12 dollar, then he will have to export 40,000 garments of 3 dollar to get that same value, why should it make a difference, in fact they should encourage the exporters to move up the value chain.

Areas of inconsistency in policies

Service Tax Rate of InterestCap of Duty Drawback Delay in clearance in Duty Drawback

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Delay in clearance of duty drawback bills is another irritant…, there has been no disbursal of duty drawback from December ’13 to mid April ’14, no or part duty adjustment against licences in hands for above period … the industry proposes 24x7 clearances of drawback shipping bills.

As long as the industry is fragmented and the various ministries involved don’t treat the industry as a thrust industry with perishable products, the situation is not really going to change, whoever may be leading the ship.

Custom issuesThough, it has been said a zillion times, the fact remains that even today poor infrastructure and ambiguous custom clearance procedures are the two biggest challenges for any exporter. Whatmakes them even more fatal for the garment industry is the nature of the product, which is seasonal and hence has a limited lifespan. If an exporter misses two vessels, either because of delay in reaching port due to bad roads or because of delays in custom clearance then he has no option but to airlift the container which costs a lot of money. The basic problem is that people manning the customs are not trained to recognize the implication of delay in fashion apparel shipments or be able to guide the exporters properly for smooth transit or do not understand the urgency of lead times.

It is shocking to know that custom clearance of imported fabric can take from 70 hours to 70 days! No wonder exporters prefer towork with product categories that use Indian fabric. At one end, the exporters are criticized for not getting into categories like sportswear and lingerie, fabric for both of which is not available in India and on the other hand the process of imports is so cumbersome that not many want to get into it. A very striking example of growing apparel exports, even after dependency on imported fabric is Bangladesh… where both the procedure for imports and the import duties is industry-friendly.

The fibre composition of imported fabrics is a major friction point and cause of delay. For fabrics where no drawback is applicable to the final garment exported, why stop the imported fabric at all… There should be a clear policy, which says that if the fabric is being imported for garment exports the clearance has to be made in 24

Custom clearance of imported fabric can take from 70 hours to 70 days!

The fibre composition of imported fabrics is a major friction point and cause of delay.

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hours, but no Government has ever thought it necessary to take such action to facilitate increase in our export basket!

Time and again there has been demand for enlargement of the garment export basket by manufacturing garments (knitted and woven) from fabrics which are not widely available in India. To support this, the industry has requested for issuance of duty credit scrip (offsetting custom duties) on import of specialty fabrics at the rate of 5% for the export performance in the entire 12th Five Year Plan.

Even the category under which a particular garment needs to be classified when exporting is opened to interpretation. One of the most common issues is whether a garment is a top or a blouse. The customs is very particular because in tops category drawbacks are given on weight and for blouses they are given on per piece quantities. Another irritant is the classification of a scarf/stole as ahandkerchief. Instead of understanding why the mistake happens and simplifying the definition for greater clarity, the customs impound the shipment when documents are not in line with custom requirements. Broadmindedness has to come in, okay the guy has made a mistake, ask him to mend the documents, maybe even fine him and clear the goods as soon as possible, but why treat an exporter as a ‘thief’.

It is suggested that factories should be rated and given quick clearance as per rating to meet delivery schedules without hindrances, formalities can be looked into as a routine and if someone defaults his rating can be lowered as a punishment. Give us a star rating based on certain defined parameters of performance, compliance, due diligence, etc. and then make it a green channel for shipment clearance and drawback.

Requested for issuance of duty credit scrip(offsetting custom duties) on import of specialty fabrics at the rate of 5% for the export performance in theentire 12th Five Year Plan.

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DEFINING ISSUESIntegrated textile policyThe country does not have an integrated textile policy and each segment in the supply chain is always at loggerheads to get the maximum benefit. Garments being at the end of the chain, invariably suffers the most, as its representation is the weakest

Labour reformsTill the time any ruling party has the guts to take a stand on the issue, there is urgent need of policy intervention for overcoming major non- compliance in garment factories through two amendments in the Act– Section 59, dealing with overtime and section 64, wherein the capof 50 hours a quarter overtime is defined.

Skill DevelopmentWhile the first priority should be to restart skill development scheme, appropriate changes need to be made, as on the surface many discrepancies are apparent in the scheme.

Inconsistency in policiesThe Government needs to be proactive rather than keep sitting on policies…, there should be a separate ministry or a sub ministry of the textiles department which only deals with the apparel sector.

Custom issuesThe basic problem is that people manning the customs are not trained to recognize the implication of delay in fashion apparel shipments or be able to guide the exporters properly for smooth transit or do not understand the urgency of lead times.

Duty drawback issuesDelay in clearance of duty drawback bills is another irritant, there has been no disbursal of duty drawback from December ’13 to mid April ’14, no or part duty adjustment against licences in hands for above period, the industry proposes 24x7 clearances of drawback shipping bills.

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