The city of Tirupur was always known as an entrepreneur’s paradise — a place where unskilled labour arrived from across the country to receive on-the-job training before ultimately starting their own micro to small units to service India’s largest knitwear export cluster.
Demand was always growing, labour was continuously learning and moving up into higher skill jobs and credit, secured only by trust within the fraternity of over 20,000 small to medium units, was extended freely within the value chain. So, why then are there reports of young entrepreneurs committing suicide in Tirupur?
The reasons for Tirupur’s woes are both external and internal. On the external side is the emergence over the last several years of strong competitors such as Bangladesh and Vietnam.
Rupee appreciation in real terms has hurt Tirupur’s exporters, making it hard to compete on a cost basis with lower income countries such as Bangladesh. Further, in the new era of bilateral free trade agreements where countries across south and east Asia are rushing to sign agreements with the biggest export markets, India has faltered.
This has been primarily due to the FTA-related revenue losses for domestic manufacturers in sectors such as auto and winery. Bangladesh has already signed an FTA with the EU which has given them a 10.5% cost advantage over India. Similarly, Vietnam is currently negotiating a free trade agreement with the EU and is already part of the Trans-Pacific Partnership.
1-2 punch combination
While Tirupur’s exporters managed to overcome external shocks in the past, and ride through periods of slowdown such as the 2008 crisis, the cause of Tirupur’s pain this time is domestic policy. The 1-2 punch combination of demonetisation and a hurried, faulty GST implementation has brought Tirupur to its knees.
Demonetisation completely decimated domestic demand by removing all liquidity from the market. GST has increased costs, not only of compliance but also of materials, services and working capital. Prior to GST implementation, the sum total of export incentives amounted to 13.65% of FOB value. Subsequent to GST, this fell to 8%, a steep reduction of 5.7 percentage points
Of this, exporters can claim GST paid, which will be 2 percentage points, assuming it is paid on time by suppliers to exporters. So, the net loss in incentives is 3.7 percentage points.
The Centre had promised 90% of GST would be refunded within 9 days from the date of export, with the remaining being refunded in 90 days. However, most have still to receive their GST refunds or the promised refund of State levies that were part of the incentive package. This has led to a severe tightening of liquidity for exporters which, in turn, has led to a contraction in demand for downstream processing units, leading to their inability to pay back loans on their capital.
If this wasn’t enough, the e-way bill bogey continues to hang over Tirupur’s textile manufacturers. The many complications of a badly implemented GST are slowly eating away at India’s largest cotton textiles export cluster. One can only hope the Centre expedites payments and institutes a mechanism for faster rebates in future. If not done soon, a labour-intensive industry that generates 2,400 jobs per ₹1 crore of investment will leave lakhs of low-skill workers unemployed, leading to a demographic disaster.
(The writer is president, Tamil Nadu Professionals' Congress)