Scaling up garment production: Incentives alone won't fix structural gaps

 The textile and apparel industry is India’s largest employment generator after agriculture, and contributes 2.3 per cent to the country’s gross domestic product. Notably, 80 per cent of its capacity is spread across clusters of micro, small, and medium enterprises (MSMEs), implying that a significant portion of the production process, from raw-material processing to garment manufacturing, remains labour-intensive. As reported by this newspaper last week, the Union government is in the process of formulating a production-linked incentive (PLI) scheme for garments. This will be separate from the existing PLI scheme for textiles. While the proposal brings fresh hope, past evidence begs the question whether the PLI scheme can indeed transform India’s manufacturing ecosystem.

 

Other than smartphones and pharmaceuticals, overall investment remains far from what was initially expected in other sectors where PLI schemes were launched. India’s industrial strategy, instead of being harnessed to generate productive employment and boost export potential, is tilting towards import substitution. The PLI scheme shortlists firms and provides subsidies ranging from 4-6 per cent, based on conditions like investment and production. However, PLI-induced investment has been unable to create the scale of employment needed, especially in low-skill manufacturing. The PLI scheme for textile is a case in point. Aimed at boosting the production of manmade fibre (MMF) apparel and MMF fabric, it was launched in 2021 with a budgetary outlay of ₹10,683 crore for five years. However, growth in investment in the sector remains slower than anticipated. In fact, textile exports stood at $34.4 billion in 2023-24, marking a decline of over 3 per cent over the previous financial year. It is worth noting that what worked for electronics perhaps cannot be replicated for garments, a sector dominated by tiny artisan clusters and informal micro units. They may not benefit from a model designed to reward firms with capacity and scale. 

 

The key issues in the textile and garment sector, including limited access to raw materials, inefficient logistics, cumbersome trade procedures, and restrictive labour regulations, have significantly eroded India’s competitiveness, particularly in comparison to countries like Bangladesh and Vietnam, which have successfully positioned themselves as low-cost manufacturing export hubs for garments. A recent study conducted by the Global Trade Research Initiative also flagged several domestic barriers. These include high import duties imposed on fabrics, which raise production costs. Additionally, quality norms on key raw materials such as polyester and viscose staple fibres have created compliance burdens for businesses. Customs-related bottlenecks also hinder the smooth flow of raw materials and finished products. A particularly striking example relates to the Directorate General of Foreign Trade’s import policy circular of 2001, which requires that all imports of textile into India be accompanied by a pre-shipment inspection certificate issued by a textile-testing laboratory accredited to the national accreditation agency of the supplier’s country. Therefore, deeper structural reforms are needed to create the kind of competitive, inclusive ecosystem that allows not just a few firms but the entire industry to thrive.