After Multi Fiber Arrangement (MFA) is phased out, the textile industry of developing economies like India will have a reason to be optimistic about the long-term growth opportunity. The textile manufacturers will have a chance to increase the share of exports to the European Union (EU) and US markets.
The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. Considering the huge potential in the European and the US markets, it seems possible.
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Change the DEPB scheme to make it WTO compatible |
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Reduce the excise duty on man-made filament fibres & yarn to 8% |
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Halve custom duty on synthetic fibre intermediaries - PTA, DMT, MEG and Caprolactum to 10% from 20% |
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Reduce customs duty on POY, PFY, NFY and PSF to 15% from 20% |
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Apparel Export Promotion Council (AEPC) is pitching for 100% tax exemption on profits from apparel exports |
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Exempt texturising companies from mandatory duty |
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Budget 2003-04 |
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Budget 2004-05 |
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The excise duty rates on yarns fixed at 8%, which was not there earlier. Excise duty rates on ready to wear garments at 12%.
Excise duty exemption on handloom fabrics to continue and automatic shuttleless looms provided exemption from excise duty.
The customs duty on automatic shuttle less machinery reduced from 25% to 10%. |
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Reduction of excise duty on polyester filament yarn from 32% to 24%.
Excise duty on all knitted cotton fabrics and garments reduced from 12% to 8%.
Basic customs duty on paraxylene reduced from 10% to 5%.
Excise duty on garments reduced from 12% to 10%. |
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Cenvat duty on handloom and powerlooms withdrawn
Instead a new tax regime for the textile sector introduced
Mandatory Cenvat chain stands abolished.
No mandatory excise duty on pure cotton, wool and silk, be it fibre, yarn, fabric or garment.
Blended textiles and pure non-cotton items like polyester, viscose, acrylic and nylon to have a different tax regime.
Mandatory excise duty on man-made staple fiber at 16% imposed.
2% education cess on all taxes |
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| Key Positives |
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It's a free world: Post 2004, the Multi Fiber Arrangement (MFA) has been phased out. This will enable Indian companies to export their products in any quantity to any country as against a specific quota provided for export. |
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Lower labour costs: Due to cheaper labour available in India as compared to European countries, the big brands have started outsourcing garments from Indian companies. Thus, the growth potential expands post 2004. |
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TRF showing results: In order to restructure the sector, the government set up a textile reconstruction fund that will help in reducing the effective interest burden on viable textile companies. This fund targets reduction in interest rate for all borrowers in range of 8%-9%. This move has proved to be very successful thus far. |
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Huge potential: The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. Considering the huge potential in the European and the US markets, it seems possible. | |
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| Key Negatives |
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Stringent labour laws: Impractical labour laws also restrict large players to lay off redundant workers to improve competitiveness. Though promise of labour reforms have been made n the past, there has been a lag in terms of implementation. |
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High fragmentation: One of the biggest drawbacks of the India textile sector is that it is highly fragmented at lower levels. Access to finance and technology has been hard to come by, thus affecting growth prospects of smaller manufacturers. |
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Volatile raw material prices: Since raw material cost as percentage of expenses is significant, the textile majors have suffered. | |
This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
