Faster refund of taxes paid will help improve the sector’s cash flow, but underlying issues remain
India’s apparel exports have dropped about four per cent to $16.7 billion in 2017-18. This is alarming, as this is the first reversal after years of relatively steady 7-8 per cent growth, and more so as apparel exports still account for around 15 per cent of India’s total exports. The recent downturn is largely a consequence of the funds crisis faced by apparel manufacturing and exporting units, a situation created by a combination of delays in processing of refund of taxes and curtailment of duty drawback with the implementation of the Goods and Services Tax in July 2017. The fall will continue if urgent measures are not taken to ease the flow of funds to the units, leading to not only loss of markets to more competitive exporters such as Bangladesh and Vietnam, but closure of units and widespread job losses in this labour-intensive sector. The curtailment of duty drawback dealt a further blow, as compensation for Central taxes and State levies paid was reduced from 11.2 per cent of the value of exports to about 3.5 per cent (two per cent for Central taxes and 1.5 per cent for State levies) initially with the introduction of GST. Some relief of duty drawback came when the Union government increased the drawback rate to four cent for Central taxes under the Merchandise Exports from India scheme when the mid-term export policy was announced in end-November. However, a status quo on rebate for State levies is worrisome for apparel units.
The funds crunch has left apparel manufacturers and exporters with no option but to increase prices by about five per cent, particularly because bank finance without collateral is prohibitively expensive. But in a fiercely competitive market, price increases lead to loss of market. That is what is happening to Indian apparel exports. While intervention of the Prime Minister’s office ensured that much of the Central GST refunds have been released last month, exporters are still facing trouble getting refunds on the State component. An early resolution is needed to prevent a deepening of the crisis in the apparels export industry, particularly at a time when global demand has picked up. Textiles and apparels industry is also one of the largest employers, particularly of women, after the agriculture sector, and its continued health is important for creation of jobs.
India’s apparel industry has also to contend with faster growth of exports from Bangladesh and Vietnam. Both countries experienced about 15 per cent compound annual growth rate between 2012 and 2016 compared with India’s seven per cent. Better infrastructure and smoother clearances with less paperwork are among factors helping exports from those countries. Exports from Bangladesh also have the added advantage of a free trade agreement with the European Union, lower labour costs and higher productivity. India, in comparison, faces the prospect of reduced competitiveness as it needs to phase out export subsidies.