How India stifles textile and apparel sector with GST and Customs Duty

India has used its tax regime, particularly Goods and Services Tax (GST) and protectionist tariff, Customs Duty and Anti-Dumping Duty, to significantly damage its textile and apparel sector — the second largest job provider, which also significantly contributes to exports.

Even the elimination of 11 per cent tariff on import of cotton, a raw material for a segment of the sector (the other uses man-made fibres or MMFs), is part of a larger design that selectively benefits some players at the cost of others (as it will be clear soon).

Such policies are particularly disconcerting because the Economic Survey of 2020-21 said the sector contributed 2 per cent to the GDP and 11 per cent of total manufacturing GVA in FY20 and provided “total direct and indirect employment of about 10.5 crore (105 million) people” — “the second-largest employment generator next only to agriculture”.

It also said that “most importantly, a major part of this workforce are women — playing a vital role in women empowerment and in the overall social development of the country”.

Also read: TN takes lead with Opposition bloc to push for compensation at GST Council meet

Inverted GST rate structure

Even as the GST Council was meeting in New Delhi to cut GST rates and rationalize its rate structures, former Chief Economic Advisor (CEA) Arvind Subramanian and his colleagues published a report showing how glaring the “inverted” GST structure is for the sector. They showed that inputs for the sector attract 12-18 per cent GST, against 5-12 per cent for finished fabrics/clothing.

Such inversions stifle smaller players who depend on imported raw materials by making their products uncompetitive in both domestic and global markets, thereby helping domestic monopolies to maintain their stranglehold in the markets. By restricting smaller players, India is cutting down businesses, job creations and exports potential.

Cotton imports free but not inputs for MMFs

The textile and apparel sector has two segments — one using cotton (natural) and the other using MMFs.

India decided on August 18 to eliminate 11 per cent tariff (Customs Duty and Cess) on cotton but left untouched the MMF segment, which faces tariffs and Quality Control Orders (QCOs), making it globally uncompetitive.

A few months ago, Amitabh Kant, former CEO of the NITI Aayog, wrote a newspaper article asking the government to immediately dismantle the tariffs and QCOs that stifle MMFs, and thereby exports of this segment, especially in view of the US tariff (which he called “Trumpian disruption”).

The Global Trade Research Initiative (GTRI) points out that “the biggest winner…will be the US”, the largest supplier of cotton to India. The second largest supplier is Australia but the supply from it is already duty-free, as per the bilateral trade agreement — and hence, it has no advantage. This waiver was initially meant till September 30 but was extended till December 31, a time when new cotton crops are harvested, restoring domestic supply.

Also read: GST Council meet on rate reform begins; Opposition states seek compensation

Moving against the tide

Now that India is desperately looking for an alternative to the US markets for textile and apparel (and other sectors), it is important to keep in mind that, as a recent report of the Geneva Environment Network points out, about 60 per cent of clothing and 70 per cent of household textiles globally today are made of synthetic fibres, not cotton. This means, India should be focusing on the MMF-based segment rather than the cotton-based subsector.

India’s clothing exports are exactly the opposite — around 70 per cent is cotton (the US is the big buyer) and 30 per cent synthetic. The US accounts for about 28-29 per cent of India’s total textile and garments exports ($10.5 billion in 2024).

Meanwhile, India stopped trade with Bangladesh through the land route from May 17 this year as the relations with the neighbour deteriorated after the regime change there. Trade is allowed only through the sea route, which delays delivery, and leading fashion retailers like Marks & Spencer, H&M, Zudio, and Lifestyle are now facing shortages ahead of the festive season.

How Indian policies damaged the sector

A recent study by two economists — Abhishek Anand of the Madras Institute of Development Studies and Naveen Joseph Thomas, associate professor at the Jindal School of Government and Public Policy — traced the policy changes in recent years that led to the decline in the textile and apparel sector, including their exports.

They wrote the decline is “not due to any external shock, but rather the result of policy decisions made by the Indian government”, first between 2010 and 2021 and then in 2023, resulting in “monopolies controlling the fibre segment of the man-made clothing value chain”, even as China vacated the space. But instead of India, Bangladesh and Vietnam grabbed the space.

The study pointed out that India’s increased textile and apparel exports explain the conversion of about 800,000 jobs from informal to formal during 1999-2011, representing 0.8 per cent of the labour force. But despite the potential the sector’s performance stagnated since 2011, its global market share “declined sharply post-2014” and now has been overtaken by Bangladesh and Vietnam due to structural bottlenecks (fragmented value chain, complex labour laws, high logistic costs, high power costs etc) and external shocks (de-globalisation post-2011) but these are not enough to explain the decline fully.

It attributed domestic policies for the sharp decline, particularly in the MMFs-based sector which declined sharply, relative to the muted growth in the cotton-based one. In MMFs, the upstream value chain is highly concentrated and dominated by the largest business houses in India and the downstream remains fragmented and struggles to remain competitive.

Also read: India's cotton crops pay the price as gains of technology get squandered

Unique problems of polyester and rayon

MMFs account for 70 per cent of global textile fibre and yarn, but in India, it peaked at 48 per cent, declined to 26 per cent in 2004, before recovering to 41 per cent in 2023. This is because, the study said, polyester and rayon, which dominate MMFs, face unique problems. Both faced high tariffs and Anti-Dumping Duties (ADDs).

The tariffs were reduced for a key intermediary, PTA (Pure Terephthalic Acid), in 2022 — from 10 to 5 per cent — and for rayon (Viscose Staple Fibres or VSF and filament yarns) — from 20 to 5 per cent in 2021. The ADD were removed for both in 2020-2021. But 2023 saw Quality Control Orders (QCOs) effectively undoing the tariff and ADD cuts. The Textile Ministry has issued 16 QCOs until now.

These factors have derailed the growth of the MMF-based sector.

The study also pointed out that the largest domestic producers of polyester are Reliance Industries (the largest in the world), and Indo Rama Synthetics (India) Ltd. Similarly, the production of viscose fibre is extremely concentrated — almost entirely produced by Grasim Industries (Aditya Birla group).

Thomas pointed out that in contrast, no monopoly exists in cotton production to cause discomfort about the tariff.