|Pre Budget 2012-13||Tuesday, March 06, 2012 20:31 Hrs IST|
PRE BUDGET REPORTS
Ready Made Garments: Remove 10% Excise Duty on Branded Garments
The Domestic Textile and Garment Industry is estimated at Rs. 1,50,000 crore which has grown at an annualized rate of 14% since 2007, providing Direct Employment to about 6 Million People. Majority of the Market is unorganized, characterized by Family run Businesses with small capacities and limited reach. Organized market constitutes only 25-27% of the domestic manufacturing sector, largely driven by the penetration of Organized Retail. High degree of growth is expected on account of rising disposable Incomes, growing Consumer class and advent of International Brands in the Indian Markets which would increase the level of consumption. The Domestic Market Size is expected to reach Rs. 3,00,000 crore by 2017 creating a Direct Employment opportunity to more than 7 Million People.
The Indian Apparel industry is export competitive, thanks to the lower production cost and abundant raw material base. Exports of textile industry have revived from a negative growth of 0.5% in FY08 to 17.7% in FY09, 3.7% in FY10 and 13.3% in FY11. According to the latest available statistics RMG (Ready Made Garments) exports grew 28% to Rs 342.70 billion and constituted 47.3% of the total textile exports in period April – October 11. Cotton RMG and accessories constituted 70.3% of the total RMG exports followed by 15.4% of MMF garments in period under review. On a broader time frame, share of RMG in total textile exports grew from 48.5% in FY04 to 54.6% in FY09 but has slipped from then to 47.1% in FY11. RMG has reported volatile behavior in the exports in line with the total textile exports. The RMG exports grew 29% in FY09 on the back of dip in the raw material prices and boost up of exports from Government. However, the growth remained muted with 1% and flat growth in FY10 and FY11.
India stands as third major supplier to EU (27) and US with share of 7.78% (Trailing China and Turkey) and at 5.96% (trailing China and Vietnam) in each of the respective country's imports. However, for India USA / Canada accounts major market for exports at 23.66% followed by EU (27) 23.55%, Africa Zone 10.34% and Bangladesh 9.32% etc.
On the flipside, for the export of cotton fabrics, Sri Lanka continued to be the leading market with a share of 14% followed by USA (10.36%) and Bangladesh (6.74%). Other leading markets are the UAE, Italy, Senegal, Turkey, Togo, UK and Sudan. USA continued to be the leading market with a share of 47% in the case of Cotton Made ups followed by Germany with (7.78%) and UK (7.57%). Other leading markets include UAE, France, Italy, and Australia.
Government has introduced several export promotion measures in the Union Budget 2011-12 as well as through schemes of Foreign Trade Policy 2009-14, including incentives under Focus Market Scheme and Focus Product Scheme; broad basing the coverage of Market Linked Focus Product Scheme for textile products and extension of Market Linked Focus Product Scheme etc. to increase the Indian share of exports in the global trade of textiles and clothing.
Garments industry has witnessed pressure on margins affecting profitability in FY10 and FY11, mainly on the back of cotton and yarn prices. Further, Industry has witnessed pressure on the profitability over the sharp spike in yarn prices in March 2011. Adding to the above, Government has also increased the excise duty of 10% on branded apparels in budget 2011/12 with Cenvat credit on inputs, input services etc. Post Budget, the Government has increased abatement from 40% to 55%. Thus the excise duty levy on branded readymade garments will be based on Retail Sale price, with abatement of 55%. This means, the excise duty will be levied at 10% on 45% of the retail sale price. Thus the industry has hit the bottom with blow of spike in the cotton prices and also 10% excise duty last year.
With a view to promote the Indian Textile and Garment Sector and provide impetus to promote exports, CMAI (Clothing Manufacturing Association of India) and Apparel Export Promotion Council (AEPC) put forward the following recommendations to the finance ministry for the consideration before upcoming Union Budget 2012/13.
Textile Industry has witnessed fall the cotton prices in the cotton year (October –September) 2011/12. On an average, prices of leading variety of cotton – Shankar 6A fell by 40% from peak of Rs 16771 per Quintal in March 11 to Rs 10028 per Quintal in February 2012. With domestic consumption of 41:59 between MMF and Cotton, the raw material pressure for RMG players can ease on drop in cotton prices. Most of the branded apparel manufacturers have not yet passed on the advantage of dip in the raw material prices. So there are very sleek chances for cut in excise duty on branded RMG. On the other hand, with presentation of National Fiber policy, the Government may place fibers in line with the cotton.
Further according to industry estimates, textile industry requires Rs 188,000 crore of investment during FY10-20 so as to address the growing demand both domestically and internationally. Of the above Rs 112984 crore (around 63% of the total investments) were required in weaving, Knitting, Processing and Garmenting segments. Thus, extension of TUFS to 12th five year plan will be helpful for the capital intensive textile industry.
In January 2012, Government has permitted 100% FDI in single brand retail. This move is expected to provide stimulus to the domestic small and cottage industries and is particularly beneficial to the unorganized small processing and weaving and garmenting sector.
Companies to Watch:
Raymond, Aditya Birla Nuvo, Gokaldas Exports, House of Pearl Fashions, Page Industries, KPR mills etc.
From 2011, European Union relaxed norms whereby even if Bangladesh (and other Least Developed Countries) imports fabrics from other countries and produces Ready Made Garments, the latter will still enjoy duty and quota free exports for 100% of RMG exported by LDCs to European Union. Subsequently, India signed a Free Trade Agreement with Bangladesh, which also included textile products.
The twin effect of the above is that, we are witnessing spike in yarn and fabric exports from India to Bangladesh, and accelerated rise in RMG exports from Bangladesh to India. Bangladesh enjoys significantly lower labour costs compared to India.
Meanwhile, India has banned export of raw cotton in early March 2012. This is leading to restriction in availability, and spike in global cotton prices, which can trickle down to yarn prices too. On the otherhand, the domestic cotton prices can ease from current levels. This should benefit yarn producers, but a part of the benefit can trickle down to Ready Made Garment sector too, depending on the demand.
Indian Garment Industry is undergoing major changes to attract the export orders with product development, improving designs fabric innovation etc. Any boost to improve the export competitiveness for exports to other than EU and US will enhance the industry growth. Also, any interest subvention and extension of duty drawback will flourish competitiveness of the industry.