Tiruppur, once the thriving export hub of Tamil Nadu, is fraying at edges

GST glitches are crimping working capital supply and adding to the difficulties of competing against nimble, low-cost competitors in other countries

The hiring signs outside Tiruppur's garment factories, until recently a source of prosperity, have been replaced by ones saying “To let” and “Up for sale”, leaving no doubt about the distress in this once-thriving export hub of Tamil Nadu.

Trouble in the state’s garment industry, brewing for years because of competition from Bangladesh and Vietnam, has worsened owing to technical and policy on refund problems with the goods and services tax (GST) and the inability of manufacturers to innovate.

Exports have been on a steady decline in recent years. They dropped to Rs 24,000 crore in 2017-18 from Rs 26,000 crore in 2016-17. In 2018-19, exports grew marginally to Rs 26,000 crore helped by a stronger rupee, but are expected to remain flat in 2019-20.

Smaller players who have traditionally been dependent on a cluster model — where bigger players outsource part of their work to them — have been the worst hit. Orders have nearly dried up because many of the bigger players are opting for vertical integration to cut costs instead of outsourcing work.

And cost has become a central concern because of duty disadvantages with competing nations. Raja M Shanmugham, president, Tiruppur Exporters Association (TEA), says exporters are unable to compete with Bangladesh, Sri Lanka, Cambodia and now Vietnam, which will get duty free status from the European Union from January 2020. Duty alone for India-made products is 9.6 per cent. Add to this high borrowing costs, labour cost, raw material prices and so on, he says, and the pressures have only multiplied.

A leading exporter with business worth around Rs 600 crore annually recently attended a vendor meet in Europe and was surprised to see the top 20 vendors out of 75 were either from Bangladesh, or from Vietnam and Cambodia.

India has also not been able to take advantage of the opportunities presented by the space vacated by China, whose share has reduced by 5 per cent to 31 per cent in the global garment market. It could increase its market by only 0.5 per cent with the remaining going to other Asian countries.

A big problem has been the delay in refunds under GST. Although exporters say GST has been a good idea, glitches in its implementation have had severe consequences for their cash flow.

First and foremost, there is the issue of pending rebate of state levies (ROSL) worth 1.7 per cent of freight on board value of garments. Dues of Rs 425 crore from January to December 2019 have not been cleared by the Centre.

Then there is the January 2019 announcement of an additional 2 per cent rebate on state and centre taxes and levies (ROSCTL). The scheme that was to come into effect from March 7, 2019 and remain valid till March 3, 2020, however, is still to be implemented. In anticipation of the rebate, many exporters slashed prices by 2 per cent, but now are saddled by this additional burden which has added to their costs.

Similarly, another Rs 750 crore is pending with the Centre under the Merchandise Exports from India Scheme. GST refunds, too, have stopped from August 1.

A new problem has also arisen with the government classifying 225 units as “Risky Exporters” and stopping IGST and drawback refunds worth Rs 200 crore to them from June 2019.

“The complex system does not provide any mechanism to the exporting units concerned to provide clarifications, so these units do not know what criteria has been used to identify them as Risky Exporters. There was no show cause notice issued or reasons given to identify them as Risky Exporters,” said Shanmugam.

Besides blocked refunds, which cause a working capital crisis, units in the Risky Exporters' list have to undergo 100 per cent inspection at the port against the usual practice of random inspection. This not only delays consignments but also damages the garments in the process of inspection, causing problems for exporters. Meanwhile, banks are turning down their requests for fresh capital because many of the units are unable to service loans due to pending claims.

T Thirukumaran, managing director, Esstee Exports, one of the leading exporters, says unless the government comes forward and extends support, it will be difficult for the industry to sustain itself in the current scenario.

Besides issues related to refund, he wants the government to sign free trade agreements with European and other countries to buffer demand and create a more level playing field for them.

The upshot of these multiple problems is that companies are expanding outside Tiruppur. Companies such as KPR, Best Corporation and Jay Jay Mills are setting up factories in Ethiopia where they believe significantly lower manufacturing costs will help them compete more effectively with Bangladesh, Cambodia, Mynamar, Sri Lanka and others. European brands are also urging their India vendors to set up plants in Vietnam, which enjoys duty benefits from European countries and from the US.

But there is more the industry will have to do to thrive and compete effectively with nimble Asian neighbours. Best Corporation’s Managing Director Rajkumar points out that the industry is still heavily dependent on cotton, whereas nearly 60 per cent of the demand today globally is for man-made fibre.