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Tiruppur knitwear industry

Looming crisis

Published : Sep 26, 2018 12:30 IST

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T+T-
 A fabric unit in Tiruppur that was closed down.

A fabric unit in Tiruppur that was closed down.

 A worker at a knitting unit in Tiruppur on September 1.

A worker at a knitting unit in Tiruppur on September 1.

 Migrant workers from Bihar at a knitting unit in Tiruppur.

Migrant workers from Bihar at a knitting unit in Tiruppur.

 Carrying knitwear fabric on a moped in Tiruppur.

Carrying knitwear fabric on a moped in Tiruppur.

The knitwear industry in Tiruppur has not recovered from the double whammy of demonetisation and GST implementation. With a stack of government policies blocking their way, the manufacturers feel that it is a matter of time before many units shut shop.

The knitwear industry in what is perhaps India’s most resilient town, Tiruppur, is gasping for survival. A combination of factors—bad policy; poor implementation; promises the Central and State governments have failed to deliver on; sudden spikes in raw material costs; strict enforcement of environmental laws; dwindling access to organised credit; competition from emerging players such as Bangladesh, Vietnam and Sri Lanka; and mounting production time demands of buyers who are familiar with how the industry operates—is driving the industry into a downward spiral.

Exports from Tiruppur, which accounts for about 50 per cent of the total knitwear exports from India, were growing around 10 per cent annually until about last year. Each year, the town added 15,000 to 20,000 jobs in the process. But the past year witnessed a decline, of 7 per cent, for the first time since 2011: the value of exports fell to Rs.24,000 crore in 2017-18 from Rs.26,000 crore in 2016-17. Although India was in a major growth mode after the cessation of the Multi Fibre Arrangement in 2004, which governed the world textile trade for three decades until 2004, it is now struggling to hold on to the nearly 4 per cent market share because of competition and favourable policies implemented in Vietnam, Bangladesh and Turkey.

It does not look that good this year too. “Export orders are down,” said a leading industry representative. “At this rate, we will go further down from the numbers of last year,” he added.

In the industrial town, nothing much has changed on the surface: it is not yet a ghost town with shut factory units or locked houses; it exudes a confidence that emerges from the collective victory won in handling adversity from the time the first exports began to Italy in 1978. Although wages are down marginally and job losses are mounting, rentals and real estate prices have not nosedived with the stagnation in economic activity. It almost appears as if a “fix” for all of Tiruppur’s problems is round the corner. It is this optimism that has kept the people of the town of nearly a million—the fifth largest urban agglomeration in Tamil Nadu—afloat.

A rather strange signage greets anyone entering an export-oriented garment factory in Tiruppur, which is now trying to redefine the place as the world’s capital for fine and specialised garments: “No Child Labour.” The display is so prominent that in some factories it is quite in-your-face. This is not a requirement that the Government of India or the Government of Tamil Nadu insists on. India has enacted anti-child labour laws but scarcely has there been any serious enforcement of the law across the country. The signage is there because of the insistence of buyers in Europe and North America, who have been forced to adopt higher standards through their production chain, following criticism about a decade ago that multinational companies, the main buyers, had simply outsourced production to sweatshops in Asia. Like the case of the implementation of child labour laws, improvements in labour welfare and safe working practices in Tiruppur are not because of the State or Central governments but because of the standards that are mandatorily adopted by multinational firms in developed countries.

Steepest fall in exports

Until last year, there was one more sign next to this one: “Aatkal thevai” [people wanted]. In some places there were multilingual boards too. This year, there are no such boards in front of most companies because the workforce is shrinking as exports have fallen sharply. The Rs.2,000 crore fall in exports is the steepest in terms of value since 1984, the year from which the Tiruppur Exporters’ Association has maintained statistics. There have been bad years earlier too. For instance, in 2000, the net export was worth Rs.3,581 crore. This fell to Rs.3,528 crore the next year and Rs.3,250 crore the following year. In 2006-07, exports zoomed to Rs.11,000 crore and slid to Rs.9,950 crore the next year. (See table.)

After each of the earlier downturns, Tiruppur bounced back. One downturn was caused by the rupee appreciating sharply against the dollar and another was because of environmental concerns and the Supreme Court’s intervention with regard to treating waste better. A poor harvest in the cotton-producing regions in Maharashtra and Gujarat also sends Tiruppur into a tizzy because cotton is the raw material for the whole industry. The rebound is because of the entrepreneurial spirit of the town, the cooperation of workers, the quick-footed owners of the factories, and the collective pooling of knowledge on contentious issues.

A cross section of industry representatives, agents, trade union leaders and civil society representatives, whom this correspondent interacted with through June, July and August, said that the industry was the lifeline of the town. According to them, about six lakh people were employed, directly or indirectly, because of the presence of a robust industry in Tiruppur. Estimates of job losses are hard to come by, but more than a dozen factory owners that this correspondent spoke to said that business was down and that they were under-utilising men and machinery. This translates to lower wages a day for the worker, and machinery standing idle means more pressure on the owner to make good the losses.

“I have not dismissed anyone,” said a factory owner who did not wish to be named and who has been in the business for about four decades. “But instead of them working for six days a week, some will have jobs for four days, others for three days, etc.,” he added. This obviously translates to lower wages because most labourers are paid at the end of the working week, Saturday.

Impact of demonetisation & GST

Like the jolt suffered by all business activity across India, the problem for the Tiruppur cluster began the day demonetisation was announced on November 8, 2016. “My first problem was, how do I pay my workers? I pay them every weekend, in cash,” said a factory owner, recounting his days of panic.

The question “Why do you pay in cash?” to factory owners elicited different responses, but almost all of them meant the same thing. One responded with disbelief, wondering if this was a question at all: “You are in India, right?” Another said plainly: “Workers prefer cash.” A third asked, “How else does one pay a daily wage labourer?”

The long and short of the demonetisation story is that Tiruppur ground to a halt in no time after demonetisation because paying the worker in cash is the base of all activity in the city.

Representatives of industry bodies that this correspondent spoke to made it clear that cash was being used as a preferred method not because industries wanted to conceal income but because the nature of labour in Tiruppur made it necessary. The chunk of the workforce was low-skilled migrant labourers who needed the money so that they could send it home. Tiruppur has a fairly large number of money transfer agencies in operation; there are banners and signages in almost all streets about the nearest money transfer agent.

Even as the effects of demonetisation were disappearing came the next blow with the announcement that the Goods and Services Tax would be implemented from July 1, 2017. The manner in which GST is implemented in Tiruppur is slowly but surely killing the industry. One factory owner said that he had opened a unit in Somalia, and a few others had already begun operations out of Bangladesh. Industry representatives told Frontline that these were jobs that should have never left Tiruppur. The typical Tiruppur entrepreneur has no love for these places abroad; given a choice, he would rather invest in additional units in the same district rather than take his business even to another State in India.

A February 2018 study on the sector in Tiruppur titled “Unmade in India”, conducted by the All India Professional Congress, a unit of the Congress party, notes that “in the half year following the GST implementation, imports from Bangladesh grew by more than 50 per cent, year on year. Garment manufacturers in India have to pay duty on imported fabrics, while Bangladesh can import fabric from China duty free and convert them into garments and sell to India duty free. Furthermore, in the pre-GST regime, the government had protected domestic garment manufacturers through the levy of countervailing duty on import, equivalent to the excise duty on domestically manufactured garments, in addition to an education cess. This protection has gone away after GST implementation. With the current regulations, Bangladeshi garment manufacturers get a 10-15 per cent cost advantage over production in India.” Also, Bangladesh has significant savings on labour—on an average, the cost of labour in that country is 20 per cent less than in India.

GST implementation has had several other ramifications too. On August 29, the South India Collar Shirts and Inner Wear Small Scale Manufacturers Association secretary, K.S. Babuji, told the media that the association had made several representations to the Central government on the problems faced by small manufacturers in adapting to the GST system, but in vain. He explained that the industries were forced to submit three different forms each month for procurement, sales and net tax. The association had requested that the three forms be merged into one because small units could not spare the man-hours needed to fill in the three different forms each month. Besides, all the forms were in English, which meant that those with rudimentary knowledge of the language were forced to hire outsiders to complete the paperwork. This, apart from consuming precious finances, was also a drag on the company, because an outside accountant barely knew of the processes in a company.

Factory owner after factory owner complained about the processes involved in GST and the delay in getting a refund. “I am yet to receive the refund for January of this year,” an owner, who exports goods worth about Rs.500 crore a year, said in June. “How do I manage my expenses when a third of my working capital is locked up in a refund?” he asked. Another knitwear exporter, however, said that he had no problems with GST refund. “There is a way to get anything done in India. I cannot wait for many months to get my refund. So I employ all means to get back my refund,” he said, adding that this correspondent should not probe what “all means” translated to.

Rising cotton prices

The sudden spike in cotton prices is another issue for the manufacturers. Tiruppur exporters claim that many firms in north India hoard cotton and sell it when the rates skyrocket. The Tiruppur factories are unable to compete with these firms in buying up cotton because not many have the liquidity needed to buy it before an order for a garment is booked. With commodity trading becoming lucrative, more companies are drawn into the trade.

“More often than not, the factory ends up booking an order at a certain price. If the cost of the raw material goes up beyond a reasonable rate, then the factory will end up making losses just on that account,” explained Raja M. Shanmugham, president, Tiruppur Exporters’ Association.

Add to this the reduction of duty drawback, and you have the potential for a calamity on the horizon. The Central Board of Excise and Customs reduced the duty drawback from 7.2 per cent to 2 per cent after the implementation of GST. Most manufacturers say that they will not be able to take this too, coming as it does on the heels ofi the multiple problems that they have been facing. In effect, the duty drawback translates to a reduction of over 1 per cent in the case of cotton yarn (from 2.5 per cent pre-GST to 1.2 per cent post-GST), 3 per cent for cotton grey fabric (4.3 per cent to 1.3 per cent), and over 5 per cent reduction for made-ups (from 7.3 per cent to 2 per cent) and cotton garment (7.7 per cent to 2 per cent).

Anand Srinivasan, a chartered accountant who was part of the Congress’ study, said that there was also a logistics issue, which was rarely highlighted. While India and Vietnam spent $7 a kilometre for shipping, China spent just $2.5, Bangladesh $3.9 and Sri Lanka $3. This was partly because India did not attract any Very Large vessels, and transshipment at Colombo or another port meant additional distance and time taken for the product to reach its destination, he explained. An Indian product took about 30 days to reach its destination while the Chinese manage to achieve this in half the time.

Time and again, industry representatives have met Ministers, bureaucrats and those in a position to help sort out the issues. For instance, Shanmugham, along with treasurer P. Moghan, met Smriti Irani, Union Minister of Textiles, on June 14 in New Delhi and requested her to increase the Duty Drawback Rate, the ROSL [Rebate of State Levies] rate, and the Interest Equalisation Scheme rate to bail the knitwear exporting units out of the crisis. They also explained the need to have a Free Trade Agreement, a Comprehensive Economic Partnership Agreement (CEPA), and a Comprehensive Economic Cooperation Agreement in order to have a level playing field in the global market in view of the increasing Chinese investment in our neighboring countries.

“Most of us were operating on a thin margin of 3 to 5 per cent [profits],” said A. Sakthivel, vice chairman, Apparel Export Promotion Council, who has been the face of the knitwear industry for a few decades. “We are requesting the government to reduce embedded taxes, that is, tax on petroleum products. That works out to about 5.5 to 6 per cent [of our costs]. We have submitted this to the government,” he added.

The second thing that the government needed to do was to draw up a Free Trade Agreement with Europe, he said. If this was not possible, then, it should at least get one done with the United Kingdom and a CEPA with Canada and Australia. “Even if the government takes this up now, it will still take a year to get the formal agreement signed. But if this is done with these three countries, we will not need the withdrawal of the embedded tax, etc.,” he added.

The government announced a Rs.6,000-crore package for the sector in 2016, but this was too little. The government also had accepted a demand to bear the 12 per cent employers’ contribution to the Provident Fund to new workers, but there was no forward movement in even the basics that Tiruppur needed, for instance, a full-fledged Employees’ State Insurance (ESI) hospital.

Because of the general squeeze in the industry, the first to feel the pinch is the worker. There have been many attempts to convert the current labour force in most of the industries into contract labour—a move that trade unions, such as the Centre of Indian Trade Unions (CITU), have been fighting from the time employers have voiced this demand with the Union government. “Their logic is that we are guaranteeing work for at least 250 days and so there is no harm in converting all employees into contract labour,” said K. Kamaraj, leader of the CITU-affiliated Banian Workers Union in Tiruppur. “We are now forced to defend at every stage the few rights that we have,” he added.

Rising cost of living, rentals that are higher than in neighbouring towns, lack of adequate number of schools and transport facilities from and to factories, and lack of proper medical facilities are some of the basic issues that the trade union has been raising.

The newer demands of the employers include raising the working hours from 48 hours to 60 hours for the same pay and bringing knitwear under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act).

The factory owners claim that since most of them were labourers about 30-40 years ago, they are well aware of workers’ problems. “Some of us are children of labourers who have fought their way up. More than 50 per cent of the success stories today are of former labourers or children of labourers,” said a second-generation entrepreneur. But that in itself does not guarantee that they will treat labourers well, say trade union leaders. They argue that it is imperative that the agreements drawn up and the frameworks agreed upon are adhered to.

In addition to these industry-wide issues, Tiruppur has certain other problems that require more than logic and reasoning to comprehend. More often than not, a company can go under merely because of a small mistake in an order placed or because of a delay in reaching the product to the customer. On the face of it, labourers, who get paid at the end of each week, are not directly responsible for deadlines or other intricacies. But when an order goes without payment, they are the first ones to be affected.

Peculiar complaints

Consider this case, for instance. On July 27, a knitwear exporter filed a complaint with the Tiruppur Police Commissioner alleging that an Italian buyer had cheated him and had not paid up Rs.25 lakh for his consignment. Commissioner S. Manoharan, after ascertaining whether the exporter had actually sent the product abroad, directed the filing of a first information report (FIR). As far as the police are concerned, the facts are as follows: The Italian agent had placed an order, the knitwear exporter had fulfilled the order and sent the product to Italy, where it was not cleared with customs by the agent and the agent had not paid the exporter too.

What seems like an open-and-shut case is usually a more complicated one in the context of Tiruppur. While all of the above facts are correct, the one fact that is overlooked here is the deadline. Buyers of textiles and garments from Europe and the United States operate mostly through their agents and place their orders in Tiruppur, Sri Lanka and Bangladesh. The most crucial aspect of the process is the exporter keeping to the schedule dictated by the agent. In this particular case, the exporter could not adhere to the deadline. The quid pro quo was that the exporter could hold on to the consignment until the next season when it would be lifted, said an Indian agent who handles major volumes in Tiruppur.

Right now, the knitwear exporter is in a spot of bother. His consignment is stuck in Italy, he will not receive payment for this consignment, and he has a loan to pay and employees to hold on to. It is on occasions like these that some of these exporters approach moneylenders. There is no turning back because while the capital will keep the company afloat for a few months, the heavy repayments will mean cutting down on operations or shutting shop altogether.

There are more success stories in Tiruppur than in all of south India. The usual rags-to-riches story is dismissed as so commonplace. “Almost all owners of the big factories today were employees in one company or the other a few decades ago,” said Sekar Manohar, a buying agent, who is also one of the successful people.

But rags-to-riches-to-rags-again is also the story of many Tiruppur entrepreneurs. “I have seen people go from the bicycle to Merc [Mercedes] and back to the bicycle,” said Sekar. Some end up in deep debt that they take their own lives, such as 31-year-old Sugandhi, who killed herself because of growing debt on March 31 this year. “The numbers are not that alarming,” said Commissioner Manoharan.

With a stack of government policies blocking their way, Tiruppur’s manufacturers feel that it is a matter of time before the majority of the micro, small and medium enterprises (MSMEs) shut shop simply because they will not have the cash flow to run the show. That will mean a consolidation of the larger players, but it will also mean a massive cutting down of the labour force in the “Dollar City”.

Media

(This story was published in the print edition of Frontline magazine dated Oct 12, 2018.)

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