* A mid-sized clothing export house on the outskirts of the national capital landed a sizable order from a Texas-based American retailer. The sheer size of the order meant sourcing fabric from one textile mill, that too from a single lot, in order to ensure shade consistency. Not one mill in India qualified, given the relatively small size of operations of individual units that entrepreneurs deliberately limit for easier labour-related compliances. A supplier in Bangladesh was identified, who, in turn, contracted to source the fabric from China. The new QCO (quality control order) norms on man-made fabric in India meant the shipment was stuck for an extended period of time before landing at the export house, resulting in the order eventually getting pared down by the buyer.
* Gurugram-based Pearl Global Industries’ diversification strategy of expanding its operations to Vietnam, Indonesia, and Bangladesh is suddenly paying dividends in the face of the American tariffs. As the company is able to continue executing orders with American clients while using its location advantage and the relative duty arbitrage, other larger players are now looking to follow suit. While Bangladesh has been a destination for Indian exporters, others such as Indonesia and Vietnam are being explored, industry players said.
* Tata Group-owned Titan, the country’s biggest jeweller and watchmaker, which announced a deal worth over $280 million to acquire a majority stake in Dubai-based luxury retailer Damas in August, is looking to move some of its manufacturing to West Asia. Delhi-based EV company Omega Seiki Mobility too is setting up a $25 million vehicle assembly plant in the UAE’s Jebel Ali Free Zone.
Story continues below this ad
The US tariffs have brought back sharply into focus the hurdles India’s structural anomalies and market distortions end up placing on manufacturers, especially exporters. Some of the larger entities, especially garment exporters, have started moving part of their manufacturing base out of India to mitigate some of the emergent risks and also get around the multiple contradictions in regulations that work at cross-purposes and weigh down entrepreneurs. While garment exporters are following Pearl Global’s lead, others such as jewellery makers are looking at West Asia.
Market distortions
In the country’s textiles and the clothing segment, for instance, there are two lingering contradictions:
One, India is perhaps unique in encouraging competition on finished garments, while at the same time protecting the raw materials and the inputs – a complete reversal of economic logic. Ideally, raw material should be made available to manufacturers and exporters at the lowest level of price through active competition, including the permission to import inputs that we are lacking in. The entire effort should be to boost exports of the finished goods. But it is the other way around.
Second, around 70 per cent of the garments sold the world over are non-cotton, essentially synthetics, sportswear, and man-made fabric-based dresses, while cotton comprises just 30 per cent. India’s clothing exports are exactly the reverse — around 70 per cent is cotton while only 30 per cent is synthetics. This is primarily because imports of man-made fibre has been made cumbersome and expensive by the imposition of tariffs and non-tariff barriers such as the Quality Control Orders or QCOs, which end up making raw material imports prohibitive for most exporters who have no option but to buy local material at an over 20-25 per cent markup. India’s exports are weighed down by these market distortions.
Story continues below this ad
“These are self-inflicted wounds. Part of the reason why India continues to be out of sync with the world and the country is losing market share,” said Ajay Srivastava, the founder of Delhi-based Global Trade Research Initiative (GTRI) and a former Indian Trade Service officer with experience in trade policy making, WTO and FTA negotiations.
A representative with an industry body that works with the government on policy issues said that while the inverted tax (earlier VAT and now GST) regime is a lingering concern for the textile sector, the fact that restricted competition in sectoral inputs, particularly man made fibre such as polyester staple fibre and viscose staple fibre, is a policy flaw that continues to fester. This drains the competitiveness of Indian manufacturers and exporters.
Bangladesh and Vietnam have succeeded because they allowed open trade policies on inputs, given that both countries do not have a substantial cotton or man-made fibre base. So exporters can import inputs from any geography at relatively lower duties. In India, it is exactly the reverse. Competition is allowed at the final stage of the garmenting value chain, but the input stages are tightly controlled to protect some domestic man-made fibre players at the cost of exporters. “Those who have diversified their export manufacturing base now attest to the benefits of moving out of India and are now at a significant advantage after the US tariffs have come into play. The ones impacted the most are smaller exporters who are unable to shift bases or can lobby the government for cheaper access to inputs,” the industry representative quoted above said.
A government representative that The Indian Express spoke to on the issue said that inverted duty structure is a problem that has existed for decades and that in the last ten years, the NDA government has tried addressing the inversion issue across sectors. “The new GST rate rationalisation exercise would further ease some of these anomalies,” the official said.
Trump tariff Impact
Story continues below this ad
The Centre is exploring the possibility of a stop-gap package, including cheaper credit. The problem is that it is not known how long this pain will last and if there is no visibility into how the demand itself will be impacted, credit sops can only solve a small part of this problem. The Federation of Indian Export Organisations said Tuesday that textiles and apparel manufacturers in Tirupur, Noida, and Surat have halted production amid worsening cost competitiveness and uncertainties over flow of fresh orders.
In terms of interventions to counter the impact of the Trump tariffs, another official linked to the EAC-PM said that there is an expectation that the 25 per cent secondary tariffs will get removed over time. The post-pandemic interventions would be a template this time around too, given that the American tariffs threaten a demand shock.
The challenge for the government is that whatever measures are announced, they are not US-specific. They have to be general measures, since an incremental sop for a particular market such as the US could lead to the imposition of a corresponding countervailing duty by Washington — something that has happened in the past.
There has been a demand from industry to restore the Interest Equalisation scheme (IES), one of the most effective instruments to remove cost disability of Indian exports, that was inexplicably wound up by the central government last year. This scheme provided much needed competitiveness to India’s exports, particularly to the MSMEs, as the interest costs in India are much higher than in competitors’ countries. It was a relatively small scheme, with some Rs 2,500 crore annual expenditure available mostly to the MSMEs, and not to the larger firms.
Story continues below this ad
“That scheme was withdrawn last year, and needs to be reintroduced. The allocation may have to be increased now,” GTRI’s Srivastava said.
Some of the bigger exporters have started talks with big domestic retailers such as Reliance Retail and the Aditya Birla Group for an entry into the domestic market, at least to ride out the secondary tariffs. Exporters have also asked the government for facilitating access to big domestic buyers, including the Indian Railways and procurement by various government departments and undertakings.
Meanwhile, downstream synthetic textile manufacturers are among those petitioning the government to make imports cheaper and withdraw QCOs on man-made fibres, which have distorted the competitiveness of the MMF supply chain by limiting access to specialised raw materials at competitive prices. QCOs on polyester and viscose inputs have exacerbated the woes of a sector already plagued by a demand shock. Some action on easing cotton imports has already commenced. A top CII representative said some of the QCOs were initiated after representations were made by domestic industry, including MSMEs. Other industry bodies contend that MSMEs have been rallying for the removal of these QCOs, which have been brought in singularly after lobbying by big industry players, who have a literal monopoly in sectors such as man-made fibres.
On companies looking to relocate out, what could be key for them is to meet ‘rules of origin’ criteria and avoid getting labelled as transhippers. Companies typically need to demonstrate 35-40 per cent local value addition, as per US norms. This means that a meaningful portion of manufacturing, assembly, or finishing must take place in these external markets that they’re increasingly relocating to.