Chapter 07 – Clothes and Shoes : Can India Reclaim Low Skill Manufacturing? – Highlights

Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Union finance minister Arun Jaitley tabled the Economic Survey 2016-17 in Parliament during the first day of the budget session. Here are the major highlights from the Chapter 7 of Economic Survey 2016-17.

The Economic Survey 2016-17 notes that creating jobs is India’s central challenge. India needs to generate jobs that are formal and productive, provide bang-for-buck in terms of jobs created relative to investment, have the potential for broader social transformation, and can generate exports and growth. The apparel and leather and footwear sectors meet many or all of these criteria and hence are eminently suitable candidates for targeting.

What is the need to expand the apparel and leather sector?

• Apparels and Leather sectors offer tremendous opportunities for creation of jobs, especially for women.
• The apparel sector is the most labor-intensive, followed by footwear. Apparels are 80-fold more labor-intensive than autos and 240-fold more jobs than steel.

In Bangladesh, female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector.

• India has an opportunity to promote apparel, leather and footwear sectors because of rising wage levels in China that has resulted in China stabilizing or losing market share in these products.
• Wage costs in most Indian states are significantly lower than in China. But, India needs to act fast as countries like Bangladesh and Vietnam are taking up space in the apparel and leather industry.

Challenges to the sector:

• Logistics:

The costs and time involved in getting goods from factory to destination are greater than those for other countries. Further, few very large capacity containers (VLCC) come to Indian ports to take cargo so that exports have to be trans- shipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers.

• Labor regulations:

Regulations on minimum overtime pay, onerous mandatory contributions, lack of flexibility in part-time work and high minimum wages in some cases. 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.

• Tax and Tariff Policies

1. High tariffs on yarn and fiber increase the cost of producing clothing. India imposes a 10 percent tariff on man-made fibers vis a vis 6 percent on cotton fibers. (World demand is shifting strongly towards man- made fibers and against cotton-based exports)
2. Domestic taxes also favor cotton-based production rather than production based on man-made fibers with 7.5 per cent tax on the former and 8.4 per cent on the latter. A similar problem also afflicts footwear production with taxes of 20.5 per cent on leather and 27 per cent on non-leather footwear. (The global demand for footwear is shifting away from leather footwear and towards non-leather footwear).
3. Indian leather exports also face high tariffs in partner country markets in exports of leather goods and non-leather footwear.

Sector specific challenges include,

Comparative advantage in cattle

The leather and footwear industry uses raw hides and skins of a number of animals like cattle, buffalo, goat, sheep and other smaller animals as its chief raw material. Amongst these, leather made from cattle hides has greater global demand owing to its strength, durability and superior quality.

However, despite having a large cattle population, India’s share of global cattle population and exports of cattle hides is low and declining. This trend can be attributed to the limited availability of cattle for slaughter in India, thereby leading to loss of a potential comparative advantage due to underutilization of the abundantly available natural resource.

Policy response for Apparel & Leather industry:

1. Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports, which could be as high as about 5 per cent of exports.
2. Textile and apparel firms will be provided a subsidy for increasing employment. This will take the form of government contributing the employers’ 12 per cent contribution to the Employee Provident Fund (EPF)
3. 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).
4. The introduction of the Goods and Service Tax (GST) offers an excellent opportunity to rationalize domestic indirect taxes
5. Labor law reforms such as,

• Low Wage Employees (people with less than Rs 20,000 salary per month) only receive 55 percent of their salary because 45 per cent goes to statutory deductions like Employee Provident Fund Organisation (EPFO), Employee Pension Scheme (EPS), Labour Welfare Fund (LWF), Employees’ Deposit Linked Insurance Scheme (EDLI), and Employee State Insurance (ESI) etc. 

• Low wage employees do not have a 45 per cent savings rate and therefore they may prefer to receive these contributions today than benefit from them tomorrow. 

• The two largest deductions of Provident Fund and ESI may not result in the best value for money for employees.

Thus, the Economic Survey 2016-17 suggests that more FTAs, GST-induced tax rationalization, and labour law reforms would add considerably to the job creation potential of the clothing and footwear sectors.

Also Read : Top 10 Key Highlights of Economic Survey 2016-17 for UPSC Aspirants

Also Read: Chapter wise highlights of Economic Survey 2016-17

Chapter 01 – Economic Outlook and Policy Challenges

Chapter 02 – The Economic Vision for Precocious, Cleavaged India

Chapter 03 – Demonetization: To Deify or Demonize?

Chapter 04 – The Festering Twin Balance Sheet Problem

Chapter-05 – Fiscal Framework: The World is Changing, Should India Change Too?

Chapter 06 – Fiscal Rules: Lessons from the States

Chapter 07 – Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Chapter 08 – Review of Economic Developments

Chapter 09 – Universal Basic Income

Chapter 10 – Income, Health, and Fertility: Convergence Puzzles

Chapter 11 – One Economic India

Chapter 12 – India on the Move and Churning

Chapter 13 – The ‘Other Indias’ – Highlights of Economic Survey 2016-17

Chapter 14 – From Competitive Federalism to Competitive Sub-Federalism