Distress by the yard North Indian workers engaged in cutting garment in a hosiery unit in Tirupur M Periasamy – THE HINDU
Hit by falling production and exports in the aftermath of GST, garments needs policy support to address both immediate and structural issues. Amiti Sen and LN Revathy report
Tirupur in Tamil Nadu, India’s well-known garments hub, employing about six lakh, wears a sleepy look these days. There aren’t many load pullers and lorries stacked with material to be seen.
Nearly 3,000 km north, in Noida’s garment units, there is an almost beguiling sense of normalcy. Inside a factory unit with large iron gates, workers are busy piling up reams of patterned cotton cloth, ready to be cut and sewn into attractive clothing. Others are grouped together in different rooms going about their tailoring work like dutiful soldiers. But there can be no denying that India’s garments industry, the second largest employment generator after agriculture, is in trouble. Apparel production and exports have both declined sharply over the past 10 months, despite a growth in global demand
What exactly is ailing our apparels sector, which accounts for over 10 per cent of total exports? “Acute liquidity crunch is the main reason. Because of lower rates of refunds under the duty drawback and remission of state levies (ROSL) schemes, manufacturers and exporters are short of cash. Smaller units are not in a position to take new orders,” explains Anil Peshawari, Meenu Exports, Noida.
GST blues
It’s been a triple whammy. The lowered rate comes on the back of slow GST refunds, as exporters (who are tax exempt) apply for both reimbursement of input taxes as well as IGST paid on the finished goods. The sector has barely recovered from the impact of demonetisation. After GST came into force last July, the Centre re-calculated duty drawback rates and slashed it to 2.2 per cent from an average of 9 per cent while the ROSL rates were reduced to 1.3 per cent from 3.3 per cent.
Subsequently, the government recanted and increased the incentives under the Merchandise Export from India Scheme (MEIS) to 4 per cent, from 2 per cent. But the net loss in reimbursements for exporters is 5-5.5 per cent of export value, as per industry calculations.
What exactly is ailing our apparels sector, which accounts for over 10 per cent of total exports? “Acute liquidity crunch is the main reason. Because of lower rates of refunds under the duty drawback and remission of state levies (ROSL) schemes, manufacturers and exporters are short of cash. Smaller units are not in a position to take new orders,” explains Anil Peshawari, Meenu Exports, Noida.

GST blues
It’s been a triple whammy. The lowered rate comes on the back of slow GST refunds, as exporters (who are tax exempt) apply for both reimbursement of input taxes as well as IGST paid on the finished goods. The sector has barely recovered from the impact of demonetisation. After GST came into force last July, the Centre re-calculated duty drawback rates and slashed it to 2.2 per cent from an average of 9 per cent while the ROSL rates were reduced to 1.3 per cent from 3.3 per cent.
Subsequently, the government recanted and increased the incentives under the Merchandise Export from India Scheme (MEIS) to 4 per cent, from 2 per cent. But the net loss in reimbursements for exporters is 5-5.5 per cent of export value, as per industry calculations.
Tirupur Exporters’ Association (TEA) President Raja M Shanmugham agrees that it is the small exporter who is worst hit. “Small and tiny units are struggling to cope as they have not been able to get GST refunds. Only 300-odd cases were filed for refund up till April 10,” he says. There are about 8,000 MSME units in the knitwear cluster. About 1,000 units are engaged in the export of garments.
While the tax authorities have been advising units to engage a senior person or auditor to help file GST returns, small players contend that they cannot afford to engage a person at a senior level.
HKL Magu, Chairman, Apparel Export Promotion Council, puts it thus: “The industry suffered because funds were blocked and payments to suppliers and workers were hit. This affected production.” Apparel output fell by 10 per cent during April-February 2017-18.
As for the post-GST duty drawback cuts, the government rationalises the move by saying that exporters’ taxes are completely reimbursed now. Exporters, however, contend that input taxes paid by exporters were low in any case and the GST refund was only giving them an advantage equivalent to 0.5 per cent of export value. Despite low input taxes, the drawback rate in the previous regime was high as the government was using it as a mechanism to compensate garment exporters for disadvantages they suffered vis-à-vis competing countries such as Bangladesh, Cambodia and Sri Lanka.
“The high drawback rate was a way to support the domestic industry and help it compete against countries like Bangladesh and Sri Lanka that have got a free trade agreement (FTA) with the EU. Our products straight away become 9.8 per cent more expensive in the EU because of import duties as these countries’ exports are duty free,” says Peshawari. As the EU is one of the biggest markets for Indian garments and textiles, losing it would be a big blow.
According to A Sakthivel, a Tirupur-based garments exporter and an office-bearer of Federation of Indian Export Organisations, the reduction in incentives by about 5 per cent is a jolt. Exporters were already working on a thin margin of 3-4 per cent.
Structural issues
M Vijay Bhaskar, Professor of Economics, Madras Institute of Development Studies, explains that the wafer-thin margins are a result of sellers, mostly small-scale and fragmented, lacking pricing power against large, MNC buyers. With fashions being engineered to change every two months against, say, a year, about two decades ago, sellers are placed at a disadvantage, he explains.
Taking the pricing issue further, Ahmedabad-based Ashim Roy, General Secretary of New Trade Union Initiative, says: “Rather than focus on labour arbitrage at a time when wages are already rock bottom, the government should address the pricing issue by working towards some institutional framework. Logistics costs, too, are much higher in India than in competing countries.” Economic Survey 2016-17 too points out that Vietnam, while prevailing over India in market share, has a higher wage
The other structural issue is the traditional tariff bias against man-made fibre at a time when the global demand for it is on the rise. CMD, Indorama Synthetics, OP Lohia, says:
“For cotton garments, there is synchronisation of taxes from raw material to garment, at 5 per cent. In the synthetic sector, the GST on polyester fibre or yarn is still at 18 per cent, whereas on the fabric it is 5 per cent. It defeats the purpose of tax reform, when you have a higher tax on raw material.”
In sum, a government that seems intent on propelling the labour-intensive garments sector as a central actor in its ‘Make in India’ drive is yet to get its policy mix right.
Inputs by Rutam Vora and A Srinivas

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