The growing U.S.-China trade confrontation could give Indian Prime Minister Narendra Modi just the chance he needs to revive his “Make in India” campaign to expand manufacturing.
The drive has so far produced modest results far short of the large-scale job creation so badly needed. But rising wages in China, and U.S. moves to raise import tariffs on Chinese goods present New Delhi with an opening to lure global clothing companies to shift production to India.
This will require a serious effort. Bangladesh and Vietnam have already been drawing the attention of many clothing companies looking for alternatives to China, as have smaller countries including Sri Lanka and Cambodia.
To really get in the game, New Delhi must address outdated regulations that favor natural fibers at the expense of man-made materials and disadvantage larger factories for the benefit of small workshops.
Escalating minimum wage levels will have to be reined in and textiles and apparel will require more consideration in the country’s trade negotiations.
India’s textile and clothing industries now generate about 5% of gross domestic product and about 15% of industrial output and export earnings. Together they are the country’s second-largest employer after agriculture, involving more than 55 million workers.
Despite the clothing industry’s long history in India and its obvious advantages in cotton and labor supplies, its share of the global clothing export market was a meager 4% in 2016. This compared with China’s 36.4% and also trailed Bangladesh’s 6.4% and Vietnam’s 5.5%.
What’s more, India has been losing ground. Its textile and apparel exports slid 7.6% in rupee terms in the financial year that ended in March, under the impact of the government’s chaotic implementation of a new goods and services tax (GST). The declines have continued in the new fiscal year.
It doesn’t help that Indian production is out of alignment with global demand. Government policy, in terms of taxes and tariffs, has long favored cotton over synthetic fibers and fabrics. Under the new GST for example, man-made fibers are taxed at 12% while no duty is collected on cotton. Moreover, import duties in many cases are higher on raw materials than on finished clothes, an implicit discouragement to domestic production.
Globally, man-made fabrics are more important than natural fibers. About 70% of fiber used in clothing production globally is synthetic, according to industry consultants Wazir Advisors. Forcing clothing producers to pay higher levies to use the synthetics required to meet global demand makes little sense.
A further handicap is that India’s apparel export sector is dominated by small- and medium-sized enterprises. This is partly because the country’s post-independence government reserved the sector for smaller producers. While bigger companies are now free to get into the sector, smaller producers still enjoy partial or full exemptions from onerous rules on layoffs, overtime hours and other labor matters.
This has kept production concentrated at small factories that lack the economies of scale of plants in Bangladesh, not to mention China. India’s small producers also are comparatively short of technical know-how and access to cheaper institutional credit. This makes it hard for them to try to move up the industry’s value chain by focusing on quality and design.
Another labor issue is the minimum wage. A recent Boston Consulting Group study found that labor productivity in apparel factories in India is lower than in Vietnam or Bangladesh. Yet India’s minimum wage, at around $112 a month, is about 65% higher than that of Bangladesh — and seeing it as an easy vote-getter, New Delhi continues to raise its minimum. Rather than politics though, minimum wage rises should be linked to productivity.
New Delhi must also give more attention to textiles and apparel in its trade talks. Under the South Asian Free Trade Area agreement, India has allowed duty-free shipments from Bangladesh of finished clothes without any requirement that the raw materials come from within the trade bloc. Duty-free access is also provided to imports from other less-developed nations. Making such access conditional on use of South Asian materials could at least help support domestic yarn and fabric producers.
On the other hand, New Delhi should seek to loosen the sourcing standards in the India-Japan Comprehensive Economic Partnership Agreement. Under this pact, Indian-made apparel can qualify for preferential access to Japan only if less than 7% of the content by weight was sourced from other countries.
Given India’s dependence on imported buttons, fasteners and other such components, this rule effectively disqualifies most clothes from India. Fortunately, the trade pact contains a review mechanism which could allow New Delhi to get this provision relaxed.
Along similar lines, India’s preferential trade agreement with the five-nation Mercosur trade bloc in South America does not cover textiles and apparel, leaving Indian imports facing duties of up to 35%. This oversight should be addressed.
New pacts would help the Indian textile and apparel sectors too. As it now stands, Indian apparel shipments into the EU, the world’s top clothing import market, face duties of 6% to 12% while those from Sri Lanka, Bangladesh and many African countries face no duty at all because of preferences extended to less developed countries or other special preference arrangements.
A free-trade pact with the EU could allow India to level the tariff for its goods. Similarly, the Regional Comprehensive Economic Partnership, being negotiated with 15 other Asia-Pacific nations, stands to improve Indian access to the clothing markets of China and Australia if completed.
The Modi administration acknowledges the need to support the development of the textile and apparel industries, but has yet to focus on the key issues.
The current federal budget raised funding for textile and apparel support by 14.4% to 71.48 billion rupees from the previous year, with technology upgrade programs getting much of the new money.
Also, export subsidy rates were doubled last November. But this has already attracted complaints from the U.S. Trade Representative, which has claimed the subsidies violate World Trade Organization rules.
New Delhi still has a chance to get textiles and apparel exports right. If India’s rules on fabrics and factories are brought up to date and its free trade agreements put in order, there is no reason the country cannot grab a bigger share of the global market. It could easily stand level with Bangladesh and Vietnam. With China embroiled in a trade war with the U.S., there may never be a better opportunity.