These will offset the challenges apparel exporters face, from higher duties in major markets to domestic hurdles.
India needs to generate jobs that are formal and productive, provide bang-for-buck in terms of jobs created relative to investment, have the potential for broader social transformation, and can generate exports and growth. The apparel (or garment) sector meets all these criteria, making it an excellent vehicle for an employment creation strategy with macroeconomic impact. Cabinet approval on Wednesday for a number of measures to boost the apparel sector is therefore a significant policy initiative.
Nearly every successful economic growth take-off in post-war history in East Asia has been associated with rapid expansion in apparels exports in the early stages. During their growth booms that averaged between 7% and 10%, countries registered apparels export growth in excess of 20% per year, sometimes closer to 50%.
Given their high labour intensity—the highest in any manufacturing sector—apparels also have the greatest potential for employment growth. For example, as the accompanying graphic shows, every unit of investment in clothing generates 12 times as many jobs as that in autos and nearly 30 times that in steel. Drawing upon World Bank employment elasticities, we estimate that rapid export growth could generate about half a million additional direct jobs every year.
Most significantly, from a social transformation perspective, apparels generate large number of jobs for women, substantially more than in any other sector. On a visit to one of India’s top textile exporters, women workers spoke about the agency they had gained on financial decisions. Agency also extended to husbands starting to help with household chores, including chopping vegetables and making tea! In Bangladesh, female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector. India’s low and declining female labour force participation could be similarly boosted by this initiative.
India has an opportunity to promote apparels because of rising wage levels in China that has resulted in China losing market share to competitors. India is well positioned to take advantage of China’s deteriorating competitiveness because wage costs in most Indian states are significantly lower than in China.
Alas, this is not happening or at least not enough. The space vacated by China is being filled by Bangladesh and Vietnam which have overtaken Indian apparel exports. Indeed, Indian apparel firms are re-locating to Bangladesh, Vietnam, Myanmar, and even Ethiopia. The window of opportunity is narrowing and India needs to act fast if it is to regain competitiveness and market share in apparels. Hence, the urgency.
But why is India losing out? Several factors play a role.
First, India’s competitors enjoy better market access by way of zero or lower tariffs to the two major importing markets, namely the US and Europe. The accompanying graphic shows the average tariffs faced by India and its competitors in the US and the EU. In the EU, Bangladesh’s exports enter mostly duty-free while Indian exports face an average tariff of 9.2 %. If the EU-Vietnam deal goes through, a similar disadvantage will arise for India vis-à-vis Vietnam. In the US, when TPP goes through, Vietnam will enjoy duty-free access and India will be disadvantaged in that market, too.
Second, in addition, to the external disadvantage, Indian exporting firms face a number of domestic challenges—logistics and de facto labour costs—that render them less competitive than their peers in competitor countries.
On logistics, India is handicapped relative to competitors in a number of ways. The costs and time involved in getting goods from factory to destination are greater than those for other countries. Further, few large containers come to Indian ports to take cargo so that all exports have to be trans-shipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers.
Labour costs, perhaps one of India’s only source of comparative advantage in this sector, also seem not to work in its favour. The problems are well-known: regulations on minimum overtime pay, onerous contributions that become de facto taxes for low-paid workers (documented in Chapter 10 of Volume 1 of the Economic Survey 2015-16), lack of flexibility in part-time work, and high minimum wages in some cases. One symptom of labour market problems is that Indian apparel firms are smaller compared to firms in say China and Bangladesh. An estimated 78% of firms in India employ less than 50 workers with 10% employing more than 500. In China, the comparable numbers are about 15% and 28%, respectively.
Another challenge is that world demand is increasingly shifting toward clothing based on man-made fibres while Indian domestic tax policy favours cotton-based production and tariff policy shields an inefficient man-made fibre sector. These factors undermine clothing competitiveness.
Policy responses and their rationale
Several measures form part of the package approved by the Union Cabinet. But their rationale is to address the challenges described above. The policies suggested do not address all the challenges highlighted above but will definitely go a long way in strengthening India’s apparel industry. Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports which could be as high as about 5% of exports. This is not a subsidy but really a drawback scheme that should be WTO-consistent because it offsets taxes on exports.
Next, firms will be provided a subsidy for increasing employment. This will take the form of government contributing the employers’ 12 % contribution to the EPF (the government is already committed to contributing 8.3%; so, the new measure will be additional to that).
Third, the government is taking very seriously the impact of Indian exporters being disadvantaged in foreign markets. India will still need to carefully weigh the benefits and costs of negotiating new FTAs such as with the European Union. But in this calculus, the impact on export- and job-creating sectors such as apparels compared to other sectors that do not share these characteristics (luxury cars, for example) will receive high priority.
All industrial policy aimed at promoting particular sectors is not without risks. But the externality generating attributes—employment, exports, social transformation—of the apparel sector, India’s potential comparative advantage in it, and the narrow window of opportunity, make the risk worth taking. That is why Wednesday’s decision is important, bold, and very timely.
(Archana Mathur, Virender Singh and Kanika Wadhawan of the finance ministry contributed to the analysis)
The authors are, respectively, chief economic adviser, ministry of finance, and secretary, ministry of textiles