'Toyconomy': Has new regulation translated into growth for toy industry?

Fresh rules on product standards and a steep rise in basic customs duty have altered the dynamics of the industry but not necessarily to the benefit of small players

India is home to around 472 million children and 26 per cent of its population is below 15 years of age. This age cohort could soon be facing a shortage, not of any basic commodities but toys that remain an essential element of learning-by-play development, thanks principally to the Covid-19 pandemic and government regulations.

On January 1, India had banned the sale of toys that are not certified by the Bureau of Indian Standards (BIS). Now, all factories producing toys to be sold in India are required to be certified by the BIS and product testing has been made mandatory — and that applies to units abroad as well. Before this, India used to import 80 per cent of its toy requirement. This has slumped significantly. That’s because global restrictions on travel during the pandemic has meant BIS officials have been unable to travel and certify manufacturing units abroad.

But has this new regulation translated into major growth for the domestic toy industry? The answer depends on who you talk to.

“The reduction in imports has led to a rise in domestic production and also an increase in exports from India. Our company expects an increase of at least 25 per cent in our exports this year. We also see that there is a lot of rise in investments in the sector post-January 2021,” said R Jeswant, chief executive officer of Chennai-based Funskool, a company promoted by the group that owns tyre-maker MRF.

According to Jeswant, this will be a huge boost to the Indian organised toy industry that contributes only 0.5-0.6 per cent to the global market. “For brands like ours, this is a huge opportunity. Increasingly, more and more toy companies are sourcing from India,” he said.

Earlier this year, Prime Minister Narendra Modi also stressed the importance of the “toyconomy” under the Atmanirbhar Bharat (self-reliant India) package. Stating that India’s share in the $100-billion global toy market is as low as $1.5 billion, the government also lined up a steep increase in the basic customs duties on imported toys from 20 to 60 per cent to help the domestic industry compete against imports from countries such as China. At the same time, the Directorate General of Foreign Trade mandated sample testing from each consignment to curb imports of sub-standard toys.

“This is not an act of protectionism. Our aim was to ensure that quality is maintained as the health of our kids is top priority. We were unable to travel abroad from January onwards because of the stricter travel restrictions in some of those countries and also keeping the safety of officials in mind. The situation is gradually improving and we have started the process again,” a senior BIS official told Business Standard.

India’s toy imports declined 46 per cent between FY20 and FY21. Moreover, industry bodies say that during the first six months of the current financial year, the industry saw imports to the tune of only around Rs 300 crore. This, too, was not in the form of toys but as raw materials and parts that get assembled in India, according to sources.

Despite this, industry bodies and distributors indicate that these incentives have not translated into a rise in production for the domestic sector. That’s because the bulk of toy manufacturers are in the unorganised sector. Data available in Udyog Aadhaar Memorandum shows that there are 7,560 registered medium and small enterprises (MSMEs) manufacturing toys. “Because the stringent guidelines are not particularly MSME-friendly, only around 400 of them have acquired BIS certification so far. This may lead to a shortage,” said Ajay Aggarwal, president of the Toy Association of India (TAI). To make the certification process more attractive for MSMEs, BIS had lined up a 50 per cent discount on the minimum marking fee, which BIS charges on each product for inspection and certification, for them, in addition to a 10 per cent rebate for old licence holders.

India is one of the fastest growing markets for toys, growing at a compound annual growth rate of around 13 per cent as against a global average of around 5 per cent. But wiping out 80 per cent of the market seems to be hurting the retail market for sure.

“The only import relief we have is that you can import parts and assemble them here. But because imports of finished goods are near zero, the availability of good toys has gone down. Even if you go to big toy chains, they have started selling garments and baby items there. Retail market is shrinking,” said Pawan Gupta, owner of R P Associates, a distributor, importer and exporter based out of Delhi.

According to Gupta, domestic manufacturers are seeing a rise in production, but it will not be enough to replace the imports and hence the sector may see a shortage due to dip in stocks. Industry experts indicate that fresh investment in the sector from January would be Rs 150-200 crore.

“The sudden replacement of 80 per cent of the market with domestic manufacturing is impossible. I believe that they should consider implementing this certification in a phase-wise manner to ensure that there is no shortage in the retail front,” Gupta added.

As always, however, the question is one of monitoring regulatory compliance, which is non-existent. “Today thousands of manufacturers are coming out with their products without BIS certification. There is no enforcing agency to look into it and there is no mechanism to protect the interests of those who have complied with the regulations,” Aggarwal added. This is likely to create an unintended asymmetry bet­ween manufacturers who are BIS compliant and those who are not. The in­ev­itable price arbitrage between the two may create the sort of situation that regulations were seeking to avoid.