By Dr. Jaijit Bhattacharya
The United States’ recent imposition of a 50 per cent tariff on Indian textiles and apparel has delivered a sharp jolt to the sector. India exported nearly Rs 90,000 crore worth of textiles to the US in FY 2024–25, according to data from Ministry of Textiles1. But this important market is now at risk as competing suppliers become relatively more attractive due to the tariff advantage. Bangladesh’s apparel exports face tariffs of just 16–18 percent, Vietnam around 20 percent, and China about 25 percent, all significantly below India’s 50 percent levy.
This tariff differential has made Indian textiles uncompetitive in the US market leading to significant job losses in India and migration of textile manufacturing to other countries. Unfortunately, this migration does not stem from any inherent weakness in Indian textiles, but due to market distortions caused by tax and tariff impositions.
Recognising the seriousness of the problem
The government has moved proactively to ease industry stress through reforms in the GST regime. By lowering GST rates, the reform is expected to increase domestic consumption that will partially offset the loss of access to the US market and save much of the 45 million jobs that are dependent on this sector. The reduced GST rates is expected to provide some cushion for the domestic industry in the near term. But the question remains: will this alone be enough to address the deeper market distortion challenges?
As is the case with many reforms, fixing one issue creates another issue. So is the case with the GST reduction for the textile value chain. Even though the GST has been reduced from yarn to fabric, but it has been increased on the raw materials such as Dissolving Grade Wood Pulp (DGWP) that is critical for India owning the complete textile value chain. Dissolving grade wood pulp (DGWP) makes up nearly 60% of the production cost of viscose staple fibre (VSF). As a natural man-made fibre, VSF is biodegradable and sustainable, making it a crucial alternative to cotton textiles. As per the revised GST rates, the tax rate on the primary raw material DGWP is 18% while the rest of the downstream is 5%. With a higher GST rate on DGWP, now the industry is saddled with an inverted GST structure, which will lead to accumulation of a large amount of GST, making the industry uncompetitive.
Imports from ASEAN countries
In addition, Indian producers of man-made fibre have had to withstand dumped imports from ASEAN countries. The imports from ASEAN countries are particularly worrisome as ASEAN has a Free Trade Agreement (FTA) with India, and therefore the imports of man-made fibre such as Viscose Soluble Fibre are brought in at zero duty. In contrast, raw materials like Dissolving Grade Wood Pulp (DGWP) attract a 2.5% import duty, even though ASEAN countries themselves pay no duty on pulps. Therefore, because of the market distortion due to the tax structure, it is cheaper to import the finished fibre, rather than import the raw material and manufacture locally. This tax phenomenon is referred to as Inverted Duty Structure. A small tweak of reducing the customs duty on DGWP from 2.5% to zero, would help bring partial parity in the tax structure (other inputs like chemicals also attract duty). It is important to note here that all other pulps (meant for paper, newsprint) are exempted from Customs Duty but the wood pulp (DGWP) used in the manufacturing of VSF is not.
The challenges in the viscose fibre chain are only one example of how structural imbalances weigh down India’s textile sector. Similar pressures exist across other fibres, yarns and fabrics, where Indian manufacturers face higher duties & levies on inputs at home while competing against cheaper imports that bypass quality standards.
What India’s textile sector now requires is a coherent framework that builds on recent reforms to further level the playing field. Removing duties on raw materials, removing inverted GST structure and enforcing sustainability standards for raw materials will encourage fresh investment and strengthen India’s competitiveness. With these measures, the industry can consolidate its position in global markets while securing the livelihoods of 45 million workers at home.
The author is the Founder and President of Centre for Domestic Economy Policy Research (C-DEP.in).
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