Challenges

These sectors face a set of common challenges—logistics, labour regulations, the policies related to tax and tariff, and disadvantages emanating from the international trading environment compared to the competitors. In addition, the leather and footwear sector faces the specific challenge relating to policies that prevent converting its comparative advantage—abundance of cattle—

into export opportunities. India still has potential comparative advantage in terms of cheaper and abundant labour, but these are nullified by other factors. A brief idea about the challenges are as given below:

(i) Logistics: On logistics, India is handicapped relative to competitors in a number of ways. The costs and time involved in getting goods from factory to destination are higher.

(ii) Labour regulations: Labour cost is one advantage to India but it is also not working in its favour. The problems are well-known—

• regulations on minimum overtime pay (the Minimum Wages Act 1948 mandates payment of overtime wages at twice the rate of ordinary rates);

• lack of flexibility in part-time work;

• onerous mandatory contributions (employees funds) that become de facto taxes for low-paid workers in small firms that results in a 45 per cent lower disposable salary {due to their contributions to the 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.}.

• apparel and leather firms in India are smaller compared to firms in say China, Bangladesh and Vietnam (an estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively).

(iii) Tax and Tariff Policies: Tax and tariff policies create distortions impeding India’s export competitiveness. In the case of apparels, there are two sets of policies both of which impede competitiveness in man- made fibres and favour instead cotton-based exports. This is serious because internationally, world demand is shifting strongly towards man- made fibres. Similarly, while world’s exports are shifting from leather to non-leather footwear, India imposes higher tax on the latter.

(iv) Discrimination in export markets: India’s competitor exporting nations for apparels and leather and footwear enjoy better market access by way

of zero or at least lower tariffs in the two major importing markets, namely, the USA and EU (European Union):

• Bangladesh’s exports enter the EU mostly duty free (former being a Less Developed Country), while Indian exports of apparels face average tariffs of 9.1 per cent.

• Vietnam could also attract zero tariffs once the EU–Vietnam FTA (Free Trade Agreement) comes into effect.

• In the US, India faces tariff of 11.4 percent. Ethiopia, which is an emerging new competitor in apparels and leather, enjoys duty free access in US, EU and Canada.

• Indian leather exports also face high tariffs in partner country markets in exports of leather goods and non-leather footwear, with considerable added disadvantage in Japan.

(v) Specific challenge in leather & footwear sectors: The sectors use raw hides and skins of a number of animals like cattle, buffalo, goat, sheep and other smaller animals. Amongst these, leather made from cattle hides has greater global demand (owing to its strength, durability and superior quality)—cattle-based global exports dominate buffalo-based exports by a factor of 8 to 9. 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.

Several measures of the package approved by the Government for textiles and apparels in June 2016 are aimed at addressing the challenges described above. Similar provisions are needed for the leather exporters. Immediate actions are needed in the areas of reforming—labour laws, tax rationalisation (GST will be helpful), employees contributions to security schemes and articulating new FTAs, etc.