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Is duty drawback the only ‘margin’ for profitability in Indian garment & textile business

Image Courtesy: srsl.in

The industry is on ventilator today and if remedial measures are not taken in the next two weeks, the industry will die a slow and painful death taking with it the livelihood of over 6 million workers by March 2018! Indeed a strong statement undoubtedly, but one that finds echo with many exporters who have already closed factories and reduced their workforce.

That the industry is in dire trouble is obvious, liquidity is at an all-time low and margins are practically non-existent. Also interesting is the fact that for the first time ever, all associations claiming to be representing the industry are grouping together with one common agenda… ‘restore duty drawback rates as in existence prior to implementation of GST’. The argument is quite simple that the only margin with the industry today, is the drawback that is available to them.

RS 500 billion (US $ 7.7 billion) Refund pending with Government post GST

If industry sources are true, even a company like Shahi, which works on volumes is heavily dependent on duty drawbacks, as more than 40 per cent of its production is duty dependent for profitability. And this is the story for many companies that play in volumes. “We only have duty drawbacks as our support and there is no connection between GST and drawbacks; the Government should not equate them in any way,” argues Sudhir Sekhri, MD, Trendsetters and Chairman GEA.

An issue that is being raised time and again is related to the abolishment of all subsidies in 2018, as prior commitment to WTO agreements. But according to industry informed, this issue is misinterpreted to include duty drawbacks. It is argued that the drawbacks are not subsidies, but compensation for all cost incurred that hinder competitiveness… and they need not be only tax related. The Government too has never even suggested that drawbacks come under the ambit of subsidies and if we look at the drawbacks being offered by competing countries like Pakistan which has just recently increased it to 50 per cent, the industry is just getting peanuts, at an average 11 per cent.

75% Exporters claim that they have shut down one unit

Over the years, the downward movement of prices has pushed the business margins to levels that vary from 1 to 5 per cent, with value-added products getting better margins. However, any company which is complacent because it is doing value-added products, is actually fooling itself. “Our products are very high-end and we are working with buyers that only talk innovation, yet the quantities that they offer are reducing drastically and of late, we are compelled to pick up orders of merely 50 pieces…earlier we never budged at less than at least 10,000, which was the benchmark for small quantities,” bemoans Naveen Advani who, besides being the MD of Choice Fashions, Rajasthan, is also the Vice President of Garment Exporters Association of Rajasthan (GEAR).

China, which was earlier known as the factory of the world for huge volumes, because it could churn out at very competitive prices, is now equally competent to do really small quantities. ‘How they do it?’ is something everyone is asking…and rightly so. Henceforth, even the companies doing small quantities are not relaxed and they too are looking at reducing prices, which is possible only if they have the cushion of duty drawback to fall back upon.

The fear is that if the industry is unable to pick up orders because of the unviability of cost…, buyers will turn to other destinations, and bringing them back to India could be a bigger challenge than retaining them today. Now the ball is in the Government’s court, as the industry holds its breath for the next ‘shot’…will it bounce back the industry on its path to achieve USD 20 billion turnover by 2020 or shroud the industry under a pall of gloom?