Economic Survey 2016-2017 Crux for IAS Exam: Apparel and Footwear Industry in India
Creation of jobs has become a major challenge for India. The major elements of each and every policy in India are economic growth, to create an ecosystem for investment and the creation of jobs. Investment largely dependent on the policies which have the potential to create a large number of jobs and that should be formal and productive.
As per the Economic Survey 2016-17, apparel and leather and footwear sectors have such potential to meet many of these yardsticks and also eminently suitable for the policy makers to focus on.
Why Clothes and Shoes?
Growth and exports
• Nearly every successful economic growth take-off in post-war history in East Asia has been associated with rapid expansion in clothing and footwear exports in the early stages.
• In the successful East Asian economies like Korea, Bangladesh, Thailand, Indonesia, Malaysia, China, Vietnam and India, where GDP growth booms averaged between 7-10 per cent, growth in the exports of these two sectors was exceptional.
• In its take-off phase of growth (the take-off year 1980), India has underperformed relative to the East Asian competitors, its underperformance, has been particularly marked in the leather sector.
Jobs, especially for women
• Apparels and Leather sectors offer tremendous opportunities for the creation of jobs, especially for women.
• The Economic Survey data shows that the apparel sector is the most labour-intensive, followed by footwear i.e. apparels are 80-fold more labour-intensive than autos and 240-fold more jobs than steel.
• As per the World Bank employment elasticities, it is estimated that rapid export growth could generate about half a million additional direct jobs every year.
• The opportunity created for women implies that these sectors could be vehicles for social transformation.
• In Bangladesh, remarkable stats says that female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector.
A historic opportunity – China vacating; space filled by others and not India!
• India has an opportunity to promote apparel, leather and footwear sectors because of rising wage levels in China that has resulted in China stabilising or losing market share in these products.
• India is well positioned to take advantage of China’s deteriorating competitiveness because wage costs in most
• Indian states (81 to 119 USD) are significantly lower than in China 250 to (300 USD) but the space vacated by China is fast being taken over by Bangladesh and Vietnam in the case of apparels; Vietnam and Indonesia in the case of leather and footwear.
• Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia.
• India still has the potential comparative advantage in terms of cheaper and more abundant labour, the apparel and leather sectors facing the common challenges associated with logistics, labour regulations, and tax & tariff policy, and disadvantages emanating from the international trading environment compared to competitor countries.
• The leather and footwear sector faces the specific challenge relating to policies that prevent converting its comparative advantage-abundance of cattle- into export opportunities.
• In India, there are strict regulations for overtime wage payment as the Minimum Wages Act 1948 mandates payment of overtime wages at twice the rate of ordinary rates of wages of the worker.
• Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam which is estimated that 78 per cent of firms in India employs less than 50 workers with 10 percent employing more than 500 while in China, the comparable numbers are about 15 per cent and 28 per cent respectively.
• On the one hand, high tariffs on yarn and fibre increase the cost of producing clothing while on the other hand; domestic taxes also favour cotton-based production rather than production based on man-made fibres with 7.5 per cent tax on the former and 8.4 percent on the latter.
Policy response and conclusions
• Several measures form part of the package approved by the Government for textiles and apparels in June 2016.
• India will still need to carefully weigh the benefits and costs of negotiating new Free Trade Agreements, such as, with the European Union (EU) and the United Kingdom (UK).
• Based on the recent in-house analysis in 2016, it is estimated that an FTA with the EU and UK can lead to 108029, 23156, and 14347 additional direct jobs per annum in the apparel, leather and footwear sectors respectively.
• The introduction of the Goods and Service Tax (GST) offers an excellent opportunity to rationalize domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibres; and in the case of footwear against the production of non-leather based footwear (if there is such a discrimination).
• Number of FTAs, GST-induced tax rationalisation, and labour law reform would add considerably to the job creation potential of the clothing and footwear sectors.