India’s foreign trade policy pundits need to renegotiate tariffs on apparel exports with the EU and the US to tackle the emergent economic slowdown in the country. The apparel industry is the country’s largest low technology employer after agriculture, with 45 million workers, contributing two per cent of GDP and 15 per cent of export earnings.

Today, Indian apparel exports are burdened with 9-32 per cent duty in the EU and US markets which blunts its competitive edge. Now that Vietnam has signed (on June 30) a Free Trade Agreement with the EU, which enables apparel exports at zero duty, Indian exports to these markets will be impacted adversely.

Considering the economic importance of the apparel sector, the government needs to support them through economic diplomacy and not abandon them to unfavourable policies of foreign governments.

India’s two major competitors, Vietnam and Bangladesh, export apparels to the tune of $27 billion and $33 billion, respectively. India’s exports are at $17 billion. Vietnam has taken advantage of its bilateral trade agreements, while Bangladesh has benefited from its Least Developed Country status. They have not only tapped opportunities with the declining market share of China, but have also eaten into India’s market share.

Over the years, Indian apparel exports have been in distress and survived largely due to export incentives. While these incentives have proved partially useful, they have not helped Indian apparel manufacturers compete on price with their competitors. To that extent, the flawed foreign trade policy does not augur well for apparel exports.

Policy flip-flop

The situation is further complicated by the flip-flop on incentive schemes. For example, the government decided to introduce the Rebate of Central Taxes and Levies (RoSCTL) in March 2019. While the apparel industry welcomed the announcement, its optimism has been dampened following news from North Block that an earlier scheme called Merchandise Export Incentive Scheme (MEIS) meant to offset infrastructural inefficiencies will be retrospectively withdrawn.

This incentive is calculated as a percentage of export (freight on board) value and given in the form of tradable scrips which can be used as currency to pay Customs duty or sold to other importers.

The reality is that several of these are actually not incentives. The RoSCTL reimburses the sector for the embedded State and Central taxes that cannot be claimed as input tax credits under GST. These should perhaps be called “equalisation schemes”, where the sector is left no better, or worse, than before GST.

Therefore, to introduce an equalisation scheme, and then withdraw the MEIS incentive which was meant to help level the play field with competitors, is retrograde. The rationale of the government is that the MEIS scheme is not WTO compliant.

Be that as it may, the withdrawal means more hardship for the industry.

Some industry experts point out that it is far better for Indian apparel makers to expand or perhaps shift their existing manufacturing to Vietnam and Bangladesh to benefit from tariff arbitrage, labour laws, low wages, conducive business environment and, hence, better return on capital employed.

While China was able to cope with loss of apparel industry jobs, due to its manufacturing prowess in other areas, it is not the same for India. The employment ratios in apparels are far more attractive than in agriculture or automobiles, which are often considered flagship economic indicators.

For instance, the man-machine ratio in apparels is far better than the farmers to cultivable land ratio, which has fallen significantly over the years. In the automobile sector too, for every crore revenue earned Maruti Suzuki generates 0.45 jobs, while for an apparel manufacturer like Orient Craft, a crore earned in revenue creates 18.5 jobs. This stark comparison sums up the employment generation capability of the sector. With low tech job-seekers rising, and manufacturing in general not providing enough opportunities, the apparel sector is somewhat of a White Knight. Recent trends in manufacturing capex clearly indicate a bias towards mechanisation rather than mass employment generation. Apparel manufacturing capex on the other hand is mainly towards adding sewing machines which generate proportionate employment. Clearly, the policy environment for the apparel industry is not conducive in a competitive international political economy. The government, therefore, not only needs to protect but also provide the necessary support to the apparel sector which would positively impact the economy .

Urgent steps are needed to re-focus on low tech mass-employment generation like what the apparel sector has to offer. The sector needs more support not less, to keep getting more and more orders despite the competition from other countries which have a tariff advantage. Such policy support will fuel the bottom of the pyramid economic activity. There is no better stimulus package than regular monthly wages in the hands of the poor.

The writer is an Adjunct Faculty at Christ Deemed to be University, Bengaluru