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NATIONAL MANUFACTURING COMPETITIVENESS COUNCIL

Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report

March, 2009

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report

DISCLAIMER CRISIL Risk and Infrastructure Solutions Limited (CRIS), a subsidiary of CRISIL Limited, has taken due care and caution in preparation of this Report. This Report is based on the information obtained by CRIS from sources, which it considers reliable. CRIS does not guarantee the accuracy, adequacy or completeness of any information contained in this Report and is not responsible for any errors or omissions, or for the results obtained from the use of such information. This Report should be used in its entirety only and shall not be reproduced in any form without prior permission from CRIS. CRIS and any of its directors, representatives or employees do not accept any liability for any direct, consequential or perceived loss arising from the use of this Report or its contents. CRIS specifically states that it has no financial liability whatsoever to the users of this Report.

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report

TABLE OF CONTENTS

LIST OF FIGURES...................................................................................................................................i LIST OF ABBREVIATIONS.................................................................................................................... iv EXECUTIVE SUMMARY....................................................................................................................... vii

1 ASSIGNMENT BACKGROUND............................................................................................................. 1

2 ECONOMIC ANALYSIS......................................................................................................................... 3

2.1 INDIA’S POSITION IN THE GLOBAL ECONOMY............................................................................... 3 2.2 LOCATING MANUFACTURING IN THE INDIAN ECONOMY ............................................................. 9 2.3 SHARE OF THE THREE INDUSTRIES COVERED BY THE ASSIGNMENT.....................................13 2.4 FREE TRADE AGREEMENT (FTA)/REGIONAL TRADE AGREEMENT (RTA).................................15

3 TEXTILES AND GARMENTS INDUSTRY ............................................................................................18

3.1 TEXTILES AND GARMENTS INDUSTRY IN INDIA AND WORLD ....................................................18 3.2 VALUE CHAIN OF THE TEXTILES AND GARMENT INDUSTRY......................................................20 3.3 MAJOR STATES IN THE INDIAN TEXTILES AND GARMENTS INDUSTRY....................................23 3.4 COVERAGE OF PRIMARY SURVEY.................................................................................................26 3.5 FINDING FROM PRIMARY SURVEY FOR TEXTILES AND GARMENTS INDUSTRY .....................27 3.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS.......................................................29 3.7 COMPETITIVE BENCHMARKING......................................................................................................38 3.8 SUPPLY CHAIN COMPETITIVENESS OF TEXTILES & GARMENTS INDUSTRY ...........................42 3.9 ISSUES TO BE ADDRESSED FOR TEXTILES & GARMENTS INDUSTRY......................................43 3.10 RECOMMENDATIONS FOR TEXTILES AND GARMENTS INDUSTRY..........................................44

4 LEATHER AND FOOTWEAR INDUSTRY ............................................................................................48

4.1 LEATHER AND FOOTWEAR INDUSTRY IN INDIA AND WORLD ....................................................48 4.2 VALUE CHAIN OF THE LEATHER AND FOOTWEAR INDUSTRY ...................................................50 4.3 MAJOR STATES IN THE INDIAN LEATHER AND FOOTWEAR INDUSTRY....................................51 4.4 COVERAGE OF PRIMARY SURVEY.................................................................................................53 4.5 FINDING FROM PRIMARY SURVEY FOR LEATHER AND FOOTWEAR INDUSTRY .....................54 4.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS.......................................................57 4.7 COMPETITIVE BENCHMARKING......................................................................................................61 4.8 SUPPLY CHAIN COMPETITIVENESS OF LEATHER AND FOOTWEAR INDUSTRY ......................64 4.9 ISSUES TO BE ADDRESSED FOR LEATHER AND FOOTWEAR INDUSTRY.................................65 4.10 RECOMMENDATIONS FOR LEATHER AND FOOTWEAR INDUSTRY..........................................66

5 FOOD AND AGRO PROCESSING.......................................................................................................70

5.1 FOOD AND AGRO INDUSTRY IN INDIA AND WORLD ....................................................................70 5.2 VALUE CHAIN OF THE FOOD AND AGRO INDUSTRY ...................................................................72 5.3 MAJOR STATES IN THE INDIA IN FOOD AND AGRO INDUSTRY ..................................................73 5.4 COVERAGE OF PRIMARY SURVEY.................................................................................................74 5.5 FINDING FROM PRIMARY SURVEY FOR FOOD AND AGRO INDUSTRY......................................75 5.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS.......................................................77 5.7 COMPETITIVE BENCHMARKING......................................................................................................88 5.8 SUPPLY CHAIN COMPETITIVENESS OF FOOD AND AGRO INDUSTRY ......................................91 5.9 ISSUES TO BE ADDRESSED FOR FOOD AND AGRO INDUSTRY.................................................92 5.10 RECOMMENDATIONS FOR FOOD AND AGRO INDUSTRY ..........................................................94

6 COMMON RECOMMENDATIONS FOR ALL SECTORS ...................................................................100

6.1 SPECIALISED INTERMEDIARY FOR CONSOLIDATION OF FOREX RISK EXPOSURE ..............100 6.2 CHANGE IN LABOUR LAWS APPLICABLE TO ALL THREE INDUSTRIES....................................100 6.3 DEDICATED POWER SUPPLY ARRANGEMENTS FOR CLUSTERS ............................................102

7 PRIORITISING OF RECOMMENDATIONS BY NMCC ......................................................................104

ANNEXURE – List of People Met During Primary Survey...................................................................... 1

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report i

LIST OF FIGURES Figure 2-1 : Real GDP Growth Rates of India and Other Countries................................................................ 3

Figure 2-2 : Share of India in GDP, Exports and Population in the world........................................................ 4

Figure 2-3 : Exports/GDP Ratio and Exports/Population Ratio ....................................................................... 5

Figure 2-4 : Balance on Current Account as a Percent of GDP ...................................................................... 6

Figure 2-5 : Foreign Direct Investment Flows in India and the world .............................................................. 7

Figure 2-6 : Share of Primary, Secondary and Tertiary Sectors in GDP (at factor cost) of India..................... 9

Figure 2-7 : Share of Manufacturing in GDP (at factor cost) of Secondary Sector.........................................10

Figure 2-8 : Year on Year Growth in Primary, Secondary, Tertiary and Manufacturing Sectors ....................10

Figure 2-9 : Year on Year Growth in Secondary Sector in Apr-Sep, 09 .........................................................11

Figure 2-10 : Year on Year Growth in Manufacturing Sectors in Apr-Sep, 09................................................11

Figure 2-11 : Employment and Unemployment Details in India (in crore) ......................................................12

Figure 2-12 : Sector-wise Share of Employment............................................................................................12

Figure 2-13 : Employment in Manufacturing Industry in 2004-05...................................................................13

Figure 2-14 : Share of Three Sectors in Total GDP (at factor cost) and Manufacturing.................................13

Figure 2-15 : Share of Three Sectors in Exports of Commodities from India .................................................14

Figure 2-16 : Share of Three Industries in Exports of Commodities from India..............................................14

Figure 2-17 : Employment in the Organised Sector in Manufacturing in 2004-05 ..........................................15

Figure 2-18 : Employment in the Unorganised Sector in Manufacturing in 2005-06 ......................................15

Figure 2-19 : Bilateral FTAs of India and competing countries.......................................................................16

Figure 2-20 : RTAs - India and major competing countries ............................................................................17

Figure 3-1 : Estimated Size of Domestic and Exports Market ........................................................................18

Figure 3-2 : Exports, Imports and CAGR of Exports and Imports ..................................................................18

Figure 3-3 : Exports of Textiles and Garments from India..............................................................................19

Figure 3-4 : Global Trade in Textiles and Garments ......................................................................................19

Figure 3-5 : Major Exporters of Textiles and Garments in the world ..............................................................20

Figure 3-6 : Major Importers of Textiles and Garments in the world ..............................................................20

Figure 3-7 : Value Chain of Textiles and Garments Industry..........................................................................22

Figure 3-8 : Share of States in India in Textiles and Garments Industry in 2004-05 ......................................23

Figure 3-9 : Textile and Garments Clusters in India.......................................................................................24

Figure 3-10 : Region-wise peak demand-supply of Power in 2006-07 in MW................................................29

Figure 3-11 : Increase in Cotton and Yarn Prices in India..............................................................................30

Figure 3-12 : Production, Consumption and Exports of Cotton by Major Countries .......................................31

Figure 3-13 : Disbursal of funds under TUFS by Stages in Value Chain .......................................................32

Figure 3-14 : Segment wise Application and Disbursement of Funds under TUF from 1999 to 2008............32

Figure 3-15 : Disbursal Process of TUFS.......................................................................................................33

Figure 3-16 : Shipment of shuttle-less looms from 1996-2005.......................................................................33

Figure 3-17 : Weaving Capacity - Ratio of shuttle less looms vis-à-vis total looms in 2005...........................34

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report ii

Figure 3-18 : Weaving and Processing: Stuck in the vicious circle of fragmentation .....................................35

Figure 3-19 : Import of Yarn and Fabrics by India..........................................................................................35

Figure 3-20 : Production of Textiles Machinery by Value...............................................................................36

Figure 3-21 : Exports of Textile and Garments by Competing Countries .......................................................38

Figure 3-22 : Manpower Index of Competing Countries in 2008 ....................................................................39

Figure 3-23 : Manpower Average Cost/Operator Hour for Textiles & Garments Industry in 2007..................39

Figure 3-24 : European Union Scheme of Generalized System of Preferences (GSP) .................................40

Figure 3-25 : Countries falling under Generalized System of Preferences (GSP)..........................................41

Figure 3-26 : Currency Fluctuations of Competing Countries versus USD ....................................................41

Figure 3-27 : Supply Chain Competitiveness Index for Textiles and Garments Industry ...............................42

Figure 3-28 : Framework for Classification of Issues for Textiles and Garments Industry .............................43

Figure 3-29 : Classification of Issues for Textiles and Garments Industry .....................................................44

Figure 3-30 : Value Addition in Each Stage of the Textiles and Garment Industry.........................................46

Figure 3-31 : Fund Allocation and Disbursal under Scheme for Integrated Textiles Park ..............................47

Figure 4-1 : Amount and CAGR of Exports and Imports for Leather & Footwear Industry.............................48

Figure 4-2 : Major Importers of Leather and Footwear from India..................................................................49

Figure 4-3 : Exports of Leather and Footwear by Segments from India.........................................................49

Figure 4-4 : Global Trade in Leather and Footwear Industry .........................................................................49

Figure 4-5 : Major Exporters and Importers of Leather and Footwear Industry in the world ..........................50

Figure 4-6 : Value Chain of Leather and Footwear Industry ..........................................................................51

Figure 4-7 : Share of States in Leather and Footwear Industry in 2004-05 in India .......................................52

Figure 4-8 : Leather and Footwear Clusters in India ......................................................................................53

Figure 4-9 : Share of India and Competing Countries in Live Animas and Recovery of Hides and Skins......58

Figure 4-10 : Exports and Imports by India in different stages of Value Chain in FY2007-08 ........................58

Figure 4-11 : Shortage of Supply for Hides and Skins in Million Sq Ft in India by Category ..........................59

Figure 4-12 : Functioning of ETPs in Uttar Pradesh.......................................................................................59

Figure 4-13 : Import Duties on Leather Chemicals and Auxiliaries after Budget 2008-09..............................60

Figure 4-14 : Exports of Leather and Footwear by Competing Countries ......................................................61

Figure 4-15 : Labour Productivity Index of Asian Countries for Manufacturing ..............................................62

Figure 4-16 : Comparison of Productivity in Leather & Footwear Industry between India & China ................62

Figure 4-17 : Ranking of India with Competing Countries for Starting Business and Paying Taxes ..............64

Figure 4-18 : Supply Chain Competitiveness of Leather and Footwear Industry in India...............................64

Figure 4-19 : Framework for Classification of Issues for Leather and Footwear Industry in India ..................65

Figure 4-20 : Classification of Issues for Leather and Footwear Industry in India ..........................................66

Figure 4-21 : Applicable Excise Duty based on MRP of Footwear in India ....................................................67

Figure 5-1 : Major Exporters of Agricultural Products in the world .................................................................71

Figure 5-2 : Major Importers of Agricultural Products in the world .................................................................71

Figure 5-3 : Value Chain of Food and Agro Processing Industry ...................................................................72

Figure 5-4: Share of States in India in Food and Agro Processing Industry...................................................73

Figure 5-5 : Level of Processing in India across segments in 2005-06 ..........................................................77

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Final Report iii

Figure 5-6 : Level of processing for fruits & vegetables in countries in 2005-06 ............................................78

Figure 5-7 : Capacity of Cold Storage by Commodities .................................................................................78

Figure 5-8 : Comparison of Cold Chain Adoption Spectrum across Countries...............................................79

Figure 5-9 : Proposed Changes in the Scheme for Food Parks under Eleventh Five Year Plan ...................80

Figure 5-10 : Budget Estimates (B.E) and Actual Expenditure for Infrastructure Development .....................82

Figure 5-11 : Supply Chain for Organised and Unorganised Retailing for Fruits and Vegetables..................83

Figure 5-12 : Status of market reforms in APMC Act as on June 30, 2008....................................................85

Figure 5-13 : Potential Benefits to Farmers due to APMC Act Amendments .................................................86

Figure 5-14 : Organised Retailing – Category-wise Share and Penetration...................................................87

Figure 5-15 : Exports of Agricultural Products by Competing Countries ........................................................88

Figure 5-16 : Comparison of Excise and Sales Tax by India and Competing Countries ................................91

Figure 5-17 : Supply Chain Competitiveness Index of Food and Agro Processing Industry in India..............92

Figure 5-18 : Framework for Classification of Issues for Food and Agro Processing Industry in India...........93

Figure 5-19 : Classification of Issues for Food and Agro Processing Industry in India...................................94

Figure 5-20 : Financial Target and Expenditure under various Schemes during Tenth Five Year Plan .........95

Figure 5-21 : F&V routes along roads with high concentration of fruit and vegetable production...................96

Figure 5-22 : Case Studies on Contract Farming in India ..............................................................................98

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report iv

LIST OF ABBREVIATIONS AFTA ASEAN Free Trade Area APEDA Agricultural and Processed Food Products Export Development Authority APMC Act Agricultural Produce Marketing Committees Act APO Asian Productivity Organisation ASEAN Association of South East Asian Nations ASI Annual Survey of Industries BAAC Bank for Agriculture and Agricultural Cooperatives BOO Build Own and Operate CAGR Compounded Annual Growth Rate CARICOM Caribbean Community and Common Market CENVAT Central Value Added Tax CETP Common Effluent Treatment Plant CII Confederation of Indian Industry CLCS Credit Linked Capital Subsidy CLE Council of Leather Exports CLRI Central Leather Research Institute CRIS CRISIL Risk and Infrastructure Solutions Limited CSO Central Statistical Organisation CTKW Centre for Thai Kitchen of the World DGFT Directorate General of Foreign Trade DIPP Department of Industrial Policy and Promotion EBA Everything But Arms EC European Communities ECO Economic Cooperation Organisation EFTA European Free Trade Association ESI Employee Insurance Scheme ETP Effluent Treatment Plant EU European Union F&V Fruits and Vegetables FAO Food and Agriculture Organisation of the United Nations FDDI Footwear Design and Development Institute FDI Foreign Direct Investment FICCI Federation of Indian Chambers of Commerce and Industry FTA Free Trade Agreement FY Financial Year GDP Gross Domestic Product GIDC Gujarat Industrial Development Corporation GMDC Gujarat Mineral Development Corporation GoI Government of India GSTP General System of Trade Preferences

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report v

HACCP Hazard Analysis Critical Control Point HLL Hindustan Lever Limited ICAC International Cotton Advisory Committee IIP Index of Industrial Production IMF International Monetary Fund INR Indian Rupee IRMA International Raw Material Assurance ISO International Organisation for Standardization ITES Information Technology Enabled Services LDC Least Developed Countries MIDC Maharashtra Industrial Development Corporation MRP Maximum Retail Price MW Mega Watt NABARD National Bank for Agriculture and Rural Development NE North East NIFD National Institute of Fashion Design NMCC National Manufacturing Competitiveness Council NSSO National Sample Survey Organisation O&M Operation and Maintenance PLI Primary Lending Institutions PPP Public Private Partnership PTN Protocol relating to Trade Negotiations among Developing Countries R&D Research and Development RBI Reserve Bank of India RMG Ready Made Garment RPI Retail Price Index Rs. Rupees RTA Regional Trade Agreement SAPTA South Asian Preferential Trade Arrangement SGF Schutzgemeinschaft Der Fruichtsaft SIDBI Small Industries Development Bank of India SITP Scheme for Integrated Textiles Park TCT Temperature Controlled Transportation TCW Temperature Controlled Warehousing ToR Terms of Reference TRIPARTITE Tripartite Agreement TUFS Technology Up-gradation Fund Scheme UAE United Arab Emirates UK United Kingdom UNIDO United Nations Industrial Development Organisation USA United States of America USD United States Dollar UT Union Territory

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report vi

VAT Value Added Tax VCS Voluntary Control System VIPL Vidarbha Industries Power Limited WPCPL Wardha Power Company Private Ltd WTO World Trade Organisation ZLD Zero Liquid Discharge

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report vii

EXECUTIVE SUMMARY • The National Manufacturing Competitiveness Council (NMCC) is an apex body set up by the

Government of India (GoI) to serve as a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries in India. NMCC appointed CRISIL Risk and Infrastructure Solutions Limited (CRIS, a wholly owned subsidiary of CRISIL Limited) as a consultant to undertake an assignment aimed at understanding the competitiveness of three specific industries (textile & garments, leather & footwear and food & agro processing) in India and to thereby identify policy measures and other strategic initiatives encompassing administrative support and infrastructure development to enhance competitiveness of these industries.

• This Final Report represents the third and final deliverable of the assignment submitted

by the consultant, following the Inception Report submitted in April, 2008 and the Draft Report submitted on 2nd December, 2008. The scope of work for CRIS and the approach adopted by CRIS leading up to the preparation and submission of this Final report is outlined in Chapter 1, “Assignment Background”.

• In chapter 2, namely “Economic Analysis”, the Indian economy has been positioned vis-à-

vis the global economy by analysing the key economic variables like growth of Real Gross Domestic Product (GDP), share in exports of goods and services, GDP, population and foreign direct investment flows of India in comparison to the other major economies of the world. This clearly brings out that India’s share in the world’s GDP is relatively low (4.6% in 2007) as compared to its share in the world’s population (18.0% in 2007), as is the relative share in world trade, which was 1.4% of the exports of goods and services in 2007 as compared to the highest share among countries at 9.6% (United States) as well as China (7.8%). At the same time, India’s real GDP growth rate in recent years has been high by global standards and along with China the country has contributed significantly to the growth of the world’s GDP during the period 2001-07 though remaining relatively less exposed to the world economy in terms of exports as compared to China. Clearly, India has significant potential to increase its share of world trade.

• Turning to the status of manufacturing within the Indian economy next, it is first noted that the

share of the primary sector (agriculture, forestry and fishing) in India’s GDP has declined (44% in 1970-71 to 18% in 2007-08) and that of the secondary sector (manufacturing, mining and utilities) and tertiary sector (services) have increased over the last 35 odd years. The secondary sector including manufacturing has increased its share of India’s GDP from 15% to 19% over this period. However, GDP growth has been driven to a much greater extent by services since 1970-71 with the share of the tertiary sector increasing from 40% to 63%. Thus, the share of manufacturing in India’s GDP has remained in a fairly narrow range of 13%-16% in this period and the potential for competitive manufacturing to drive India’s GDP growth in an increasingly global world with fewer barriers to the movement of goods, services, technology and capital remains largely under-exploited till date. To an extent, a start has been made in this direction as indicated by the growth of manufacturing during the period 2002-03 to 2007-08, reaching a peak of 12% in 2006-07 though the impact of the global slowdown has led to a decline in manufacturing growth during 2008-09.

• Considering the three industries covered by the assignment, the share of food and agro

processing was 2% of the total GDP and 13% of manufacturing in 2006-07. Textiles and garments contributed to 1.9% of total GDP and accounted for 12% of manufacturing in 2006-07. The share of leather and footwear was 0.2% of total GDP and 1% in manufacturing in 2006-07. The share of the textiles and garments in total exports was 15% (USD 19.5 billion) in 2006-07. Leather and footwear contributed to 3% of total exports (USD 3.2 billion) of India in 2006-07 while food and agro processing had a share of 2% (USD 2.1 billion) in total

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Final Report viii

exports of India in 2006-07. While the share of food and agro processing industry in the GDP of manufacturing sector (13%) was more than the textiles and garment industry (12%) in 2006-07, the total exports of food and agro processing industry (USD 2.1 billion) was very low as compared to the textiles and garments industry (USD 19.5 billion). Given India’s position as a leading producer of fruits, vegetables and food grains, there is scope for significant improvement in exports from the food and agro processing industry.

• The importance of the three industries covered by the assignment also arises from the

contribution of these industries to employment. The food and agro processing industry employed 16% of total workforce in the organised manufacturing sector in 2004-05 while the leather and footwear industry employed 2% of total workforce in the organised manufacturing industry. The textiles and garments industry employed 20% of the workforce employed in the organised manufacturing sector in India. Thus, close to 40% of the employment in the organised manufacturing sector can be traced to the three industries covered by the assignment.

• Further, the share of a) food and agro processing and b) textiles and garments industries in

the total workforce and number of enterprises is higher in the unorganised manufacturing sector as compared to the organised manufacturing sector which indicates that the share of more labour intensive small and medium scale units is relatively higher in these two industries as compared to the other manufacturing industries. The share of food and agro processing, leather and footwear and textiles and garments in total workforce in unorganised manufacturing sector was 32%, 1% and 34% respectively. These three industries thus account for over 65% of the unorganised manufacturing sector employment.

• Based on the analysis of textiles and garments (Chapter 3), it is seen that the total share of

India in the global exports of textiles and clothing has improved from 2.2% in 1990 to 3.7% in 2006. A further strengthening of India’s position is possible following the abolition of the quota regime in 2005. Combining the findings of the primary survey with secondary research, it is clear that while the country has advantages in terms of the availability of low cost labour and large output of cotton, there are also significant challenges to be met – the lack of skilled labour, outdated technology affecting productivity (especially in weaving and knitting), significant increase in cotton prices driven by exports and the fragmented nature of the industry with many small players having limited access to funding, technology and marketing resources are all key issues. These are apart from common issues affecting all industries such as the lack of high quality infrastructure, especially power. In terms of policy imperatives, decentralising and improving the existing schemes for the industry like Technology Up-gradation Fund Scheme (TUFS) and Scheme for Integrated Textile Parks (SITP), refocusing TUFS on weaving and processing and encouraging domestic value addition rather than export of raw materials are all recommended, though it is also recognised that restricting cotton exports would face opposition from cotton farmers.

• In leather and footwear (Chapter 4), India is a key player with exports of USD 3.2 billion in

2006-07. While India’s prospects are good based on the large livestock population in the country, this natural advantage is partly offset by the low rates of recovery of hides and skins that is amplified by the fragmented and unorganised nature of the market for hides and skins. The challenges faced by the industry include stricter environmental norms requiring investments in effluent treatment, high rates of indirect tax on higher priced footwear and leather goods, high customs duties on leather chemicals and the limited ability of small units to invest in technology up-gradation in tanning and processing. Reduction of taxation rates, discouraging exports of leather (as opposed to finished goods) and providing incentives for value addition within the country, formulating schemes for the effective development and continued operation/maintenance of Common Effluent Treatment Plants in leather clusters and setting up development bodies covering

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report ix

both animal husbandry and leather industry are some of the recommended initiatives. The promotion of eco-friendly indigenous technology for tanning of leather using vegetable dyes can also be considered to improve the efficiency and output of such traditional processes. A conscious strategy of targeting high value added leather goods and footwear in the long term can be explored.

• For the food and agro processing industry covered in Chapter 5 of the report, the limited

development of infrastructure (especially cold chains), lack of awareness among farmers, restrictive agriculture markets, inefficient supply chains with too many intermediaries and inadequate budgetary support from the Government all emerge as constraints to be addressed. In light of the potential of this industry, it is recommended that budgetary support should be significantly increased, initiatives for creating fruit and vegetable routes taken up, the process of reforming agriculture markets be speeded up and the entry of large corporate players as large scale integrators and in organised retail besides contract farming be encouraged actively.

• In the Chapter 6 of the report, some common problems affecting all the three industries

covered by the assignment like the supply of power and skilled manpower, restrictions imposed by labour laws in India and the limited access to and awareness of measures to hedge foreign exchange risk among small and medium size exporters have been covered. These are by way of preliminary suggestions that can be developed for implementation.

• In the concluding chapter of the report, five key recommendations have been prioritised for

NMCC to focus on. These include improvements in TUFS and SITP schemes for textiles and garments industry, developing a robust institutional framework for setting up and operation of CETPs for the leather and footwear industry, increasing plan outlay and implementation of proposed amendments in the APMC Act for the food and agro processing industry and dedicated power supply arrangements for industrial clusters.

• The primary survey undertaken by CRIS covered a number of contact persons and entities

spread across the three industries covered by the assignment, in various clusters and states. The list of those covered by the primary survey is annexed to this report for reference.

******************

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report 1

1 ASSIGNMENT BACKGROUND

The National Manufacturing Competitiveness Council (NMCC) is an apex body set up by the Government of India (GoI) to serve as a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries in India. NMCC appointed CRISIL Risk and Infrastructure Solutions Limited (CRIS, a wholly owned subsidiary of CRISIL Limited) as a consultant to undertake an assignment aimed at understanding the competitiveness of three specific industries (textile & garments, leather & footwear and food & agro processing) in India and thereby identify policy measures and other strategic initiatives encompassing administrative support and infrastructure development to enhance competitiveness of these industries. The two parties signed an agreement to govern the consultancy services to be provided by CRIS on 19th March, 2008. As per the terms of reference (ToR) framed by NMCC, the major objectives and scope of the assignment are as follows:

• To understand the competitiveness of the Indian manufacturing industry and suggest ways and means to enhancing competitiveness and facilitate policy making.

• From the results for organizations in each sector, identify the key areas for focus for

the organizations based on the critical trends and factors driving.

• From the above, provide the contours for strategic initiatives and detail a road map for implementation.

• The above study will aim at registered firms to find out where they stand now and

enhancing their competitiveness by suggesting strategies and giving a blueprint for development. While the Global manufacturing Benchmarking Survey would provide outputs at a firm-level, the output will be consolidated at a sector level for defining the strategic contours and the road-map.

• Essentially, the assignment involved primary research conducted through interaction

with units located in existing clusters for the identified industries as well as secondary research and analysis in order to meet the objectives outlined above, i.e. develop recommendations for policy measures and other strategic initiatives that can be then taken up for implementation by the GoI.

This Final Report represents the third and final deliverable submitted by the consultant, following the Inception Report submitted in April, 2008 and the Draft Report submitted on 2nd December, 2008. The Draft Report followed presentations on the preliminary findings of the primary and secondary survey and analysis made by the consultant to NMCC on 16th October, 2008 and 7th November, 2008. Following the submission of the Draft Report, the consultant made a presentation on the same to the NMCC on 16th December, 2008. This Final Report provides key recommendations for the three industries covered by the assignment after taking into consideration the feedback and inputs provided by NMCC during the presentation on the Draft Report. The structure of this Final Report is as follows: In Chapter 2, namely “Economic Analysis”, the Indian economy has been positioned vis-à-vis the global economy by analysing the key economic variables like growth of Real Gross Domestic Product (GDP), share in exports of goods and services, GDP, population and foreign direct investment flows of India with other major economies of the world. The impact

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Final Report 2

of global meltdown on the Indian economy and manufacturing industry has also been analysed in this section. In addition, the manufacturing sector has been analysed vis-à-vis the Indian economy in terms of contribution to GDP, Secondary or Industrial sector (which includes mining and utilities in addition to manufacturing) and employment. The three industries covered by the assignment have been analysed in terms of share in GDP, manufacturing and exports in India to understand the impact of three industries on the Indian economy. The analysis for the three industries based on primary survey and secondary research has been presented in Chapters 3, 4 and 5. The chapter on each industry covers size of the industry in India and world, major exporters and importers in world, major states in India and the approach and methodology followed to analyse each industry. The findings from the primary survey for each industry have been presented. Further, validation of the same has been carried out through secondary data and analysis wherever. The competitive benchmarking of India has been done with competing countries with respect to parameters like labour productivity, technology, exchange rate fluctuations, infrastructure, government policies, raw materials, manpower, etc. to understand the competitive advantages and disadvantage of India in each industry. In addition, a supply chain competitive index has also been developed for each industry based on primary survey and secondary data and analysis to understand the competitiveness of an industry at each stage of the value chain. A framework has been also developed for classification of issues and challenges for each industry. These issues and challenges for each industry has been classified into location specific, industry specific and macro economic issues to understand the relevant agencies with whom NMCC should interact for resolving the issues related to an industry and increasing the competitiveness of that industry. In the chapter on each industry the key recommendations have been suggested for each industry like improving the existing infrastructure for cold storage for food & agro processing industry, changes in TUFS scheme in textiles & garments industry for disbursing more funds to the processing and weaving stage of the value chain, etc. In chapter 6, Key Recommendations have been suggested for addressing issues and challenges like shortage of power, foreign exchange fluctuations and rigidity in labour which are common to all three industries. In the concluding chapter of the report, five key recommendations have been prioritised for NMCC to focus on. These include improvements in TUFS and SITP schemes for textiles and garments industry, developing a robust institutional framework for setting up and operation of CETPs for the leather and footwear industry, increasing plan outlay and implementation of proposed amendments in the APMC Act for the food and agro processing industry and dedicated power supply arrangements for industrial clusters. In line with the ToR framed by NMCC, CRIS carried out a primary survey covering respondents from large, medium and small manufacturing units (besides industry associations, etc.) spread across all three industries covered by the assignments. These respondents were selected from various industrial clusters in different states to derive conclusions that are pertinent to the nation as a whole. The details of respondents covered by the primary survey across all the clusters covered have been provided as an Annexure to this Final Report.

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2 ECONOMIC ANALYSIS

In this chapter the Indian economy has been positioned vis-à-vis the global economy by analysing the key economic variables like growth of Real Gross Domestic Product (GDP), share in exports of goods and services, GDP, population, foreign direct investment flows of India with other major economies of the world. The impact of global meltdown on the Indian economy and manufacturing industry has also been analysed. In addition, the manufacturing sector has been analysed vis-à-vis the Indian economy in terms of contribution to GDP, Secondary or Industrial sector (which includes mining and utilities in addition to manufacturing) and employment. The three industries covered by the assignment have been analysed in terms of share in GDP, manufacturing and exports in India to understand the impact of three industries on the Indian economy.

2.1 INDIA’S POSITION IN THE GLOBAL ECONOMY Growth in Real GDP in India and the world The analysis shows that the growth rate of world GDP witnessed a marginal decrease in 2007 to 5% after increasing steadily from 2.2% in 2001 to 5.1% in 2006. The world’s real GDP growth has been driven by significant increase in the real GDP of the emerging and developing countries. The developed economies include countries like United States, Germany, France, Italy, United Kingdom, Japan, Canada, Korea, etc. while the emerging and developing economies include countries like China, India, Russia, Brazil, etc. As shown in Figure 2-1, the real GDP growth of developed economies has fluctuated from 1.2% to 3.2% from 2001 to 2007 while that of emerging and developing economies have ranged from 3.8% to 8.0%. China and India has registered significant growth in Real GDP. The real GDP growth of China ranged from 8.3% to 11.9% in the period from 2001 to 2007 while that of India ranged from 3.9% to 9.8% during the same period.

Figure 2-1 : Real GDP Growth Rates of India and Other Countries

Country 2001 2002 2003 2004 2005 2006 2007

Developed economies 1.2 1.6 1.9 3.2 2.6 3.0 2.6

United States 0.8 1.6 2.5 3.6 2.9 2.8 2.0

Canada 1.8 2.9 1.9 3.1 2.9 3.1 2.7

Germany 1.2 0.0 -0.2 1.2 0.8 3.0 2.5

France 1.9 1.0 1.1 2.5 1.9 2.2 2.2

United Kingdom 2.5 2.1 2.8 2.8 2.1 2.8 3.0

Japan 0.2 0.3 1.4 2.7 1.9 2.4 2.1

Emerging and developing economies 3.8 4.8 6.3 7.5 7.1 7.9 8.0

China 8.3 9.1 10.0 10.1 10.4 11.6 11.9

India 3.9 4.6 6.9 7.9 9.1 9.8 9.3

Brazil 1.3 2.7 1.1 5.7 3.2 3.8 5.4

World 2.2 2.8 3.6 4.9 4.5 5.1 5.0

Source: World Economic Outlook and CRIS Analysis

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Share of India in GDP, Exports of Goods and Services and Population in the world An analysis has been done to identify the position of India with respect to share in GDP, exports of goods and services and population in the world. United States had the highest share in GDP of the world at 21.3% in 2007. The share of United States in GDP of the world has decreased marginally in 2007 (21.3%) after increasing in 2001 (21.4%) from 1996 levels (20.7%). The share of India in the GDP of the world has witnessed a marginal fall of 10 basis points in 2007 as compared to 2001 levels. Though the GDP of India witnessed a higher growth rate as compared to the world in the period from 2001 to 2007, the share of India in total GDP of world has reduced due to depreciation in INR vis-à-vis the USD (To calculate the share of each country in total GDP of world, the GDP of each country has been converted to USD). United States also had the highest share in exports of good and services in the world in 2007 at 9.6%. However, the share of United States in total exports of goods and services in the world has witnessed a significant fall in 2007 as compared to 13.6% in 2001. The share of China in exports of goods and services has increased significantly from 4.0% in 2001 to 7.8% in 2007. While the exports of good and services of United States have decreased by 4% in 2007 as compared to 2001, the exports of goods and services of China has increased by 3.8% during the corresponding period. Like China, the share of India in exports of goods and services has also been increasing. The total share of India in exports of goods and services was 1.4% in 2007. China had the highest share in the world population at 20.4% in 2007. However, the share of China in total population of world has been reducing gradually from 21.3% in 1996 to 21.0% in 2001 and 20.4% in 2007. While the share of China in the population of world has been gradually decreasing, the share of India in the population of world has been steadily increasing. The share of India in population of world has increased from 16.6% in 2001 to 18.0% in 2007. The details of share in GDP, exports of goods and services and population have been presented in the table given below.

Figure 2-2 : Share of India in GDP, Exports and Population in the world

% Share in GDP of the world

% Share in Exports of Goods and

Services % Share in the world

Population Country

1996 2001 2007 1996 2001 2007 1996 2001 2007 United States 20.7% 21.4% 21.3% 13.0% 13.6% 9.6% 4.6% 4.6% 4.7%

Canada 1.9% 2.0% 2.0% 3.6% 4.1% 2.9% 0.5% 0.5% 0.5%

Germany 4.7% 4.5% 4.3% 9.4% 8.7% 9.2% 1.4% 1.4% 1.3%

France 3.5% 3.2% 3.2% 5.5% 5.0% 4.0% 1.0% 1.0% 1.0%

United Kingdom 3.3% 3.1% 3.3% 5.2% 5.1% 4.3% 1.0% 1.0% 0.9%

Japan 8.0% 7.3% 6.6% 7.2% 6.0% 4.7% 2.2% 2.1% 2.0%

China 11.1% 12.1% 10.8% 2.4% 4.0% 7.8% 21.3% 21.0% 20.4%

India 4.1% 4.7% 4.6% 0.6% 0.9% 1.4% 16.6% 16.7% 18.0%

Source: World Economic Outlook and CRIS Analysis

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Relative Share of India in Exports of Goods and Services as a Ratio of GDP and Population The share in exports of goods and services in world by share in GDP of world ratio and share in exports of goods and services in world by share in population of world ratio have been calculated to understand the relative position of India in exports of goods and services as compared to other countries. The share in exports of goods and services of world by share in GDP of world ratio of India was lowest at 0.3 in 2007 as compared to other countries like China, United States, Canada, Germany, France, United Kingdom and Japan. The export of goods and services by GDP ratio was highest for Germany at 2.14 in 2007. The share in exports of goods and services of world by share in GDP of world ratio of India has been increasing slowly from 0.15 in 1996 to 0.19 in 2001 to 0.30 in 2007. The share in exports of goods and services in world by share in GDP of world ratio of China increased by 50 basis points from 2001 to 2007 as compared to 11 basis points for India in the same period. The above analysis clearly shows that there is huge potential for growth in exports of goods and services of India. Like share in exports of goods and services in world by share in GDP of world ratio, the share of exports of goods and services in world by share in population of world ratio of India was also very low as compared to other countries. The share of exports of goods and services in world by share in population of world ratio of India was 0.08 as compared to Germany at 7.08 in 2007. The share of exports of goods and services in world by share in population of world ratio of France, United Kingdom and Japan was 4.00, 4.78 and 2.35 in 2007. While the share of exports of goods and services in world by share in population of world ratio of China increased by 19 basis points from 2001 to 2007, India only registered a growth of 3 basis points. The above analysis clearly shows that there is huge potential for growth in exports of goods and services of India. The details of share of exports of goods and services in world by share in GDP of world ratio and share in exports of goods and services of world by share in population of world ratio have been presented in the table given below.

Figure 2-3 : Exports/GDP Ratio and Exports/Population Ratio

Share in Exports of Goods and Services in World/Share in GDP of World Ratio

Share in Exports of Goods and Services in World/Share in Population of World

Country

1996 2001 2007 1996 2001 2007 United States 0.63 0.64 0.45 2.83 2.96 2.04

Canada 1.89 2.05 1.45 7.20 8.20 5.80

Germany 2.00 1.93 2.14 6.71 6.21 7.08

France 1.57 1.56 1.25 5.50 5.00 4.00

United Kingdom 1.58 1.65 1.30 5.20 5.10 4.78

Japan 0.90 0.82 0.71 3.27 2.86 2.35

China 0.22 0.33 0.72 0.11 0.19 0.38

India 0.15 0.19 0.30 0.04 0.05 0.08

Source: World Economic Outlook and CRIS Analysis

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Balance on Current Account as a Percent of GDP in India and the world While the a) exports of goods and services by GDP ratio and b) exports of goods and services by population ratio clearly shows that the relative share of India in exports of goods and services is low, an analysis of balance on current account as a percent of GDP has been done to ascertain if the exports of goods and services is covering the imports of good and services by India. The current account balance as a percent of GDP has been negative for India in last three years from 2005 to 2007. The current account balance as a percent of GDP has ranged from -1.4% to 1.5% for India from 2001 to 2007 as compared to China where the current account balances as a percent of GDP has increased from 1.3% in 2001 to 11.3% in 2007. The current account balance as a percent of GDP has been positive in China in all the years from 2001 to 2007 and has been increasing significantly. The current account balance as a percent of GDP has been negative in all the years from 2001 to 2007 for the developed economies of United Kingdom and United States. The negative current account balance as a percentage of GDP has increased significantly for United States from -3.8% to -6.0% in 2006 before declining in 2007 to -5.3%. The increasing negative balance of United States clearly show increasing dependence of United States for imports of goods and services. Among the developed economies (which have been analysed), Germany and Japan (except for a marginal fall in 2005) has witnessed gradual increase in current account balance in all the years from 2003 to 2007. The above analysis clearly shows that India is lacking behind in terms of exports of goods and services and there is a need of increased focus in increasing the exports of goods and services from India.

Figure 2-4 : Balance on Current Account as a Percent of GDP

Country 2001 2002 2003 2004 2005 2006 2007

United States -3.8 -4.4 -4.8 -5.3 -5.9 -6.0 -5.3

Canada 2.3 1.7 1.2 2.3 1.9 1.4 0.9

Germany 0.0 2.0 2.0 4.7 5.2 6.1 7.6

France 1.9 1.4 0.8 0.6 -0.6 -0.7 -1.2

United Kingdom -2.1 -1.7 -1.6 -2.1 -2.6 -3.4 -3.8

Japan 2.1 2.9 3.2 3.7 3.6 3.9 4.8

China 1.3 2.4 2.8 3.6 7.2 9.4 11.3

India 0.3 1.4 1.5 0.1 -1.3 -1.1 -1.4

Brazil -4.2 -1.5 0.8 1.8 1.6 1.3 0.1

Source: World Economic Outlook and CRIS Analysis Foreign Direct Investment Flows in India and the world An analysis of foreign direct investment flows has been done to identify the share of India in Foreign Direct Investment (FDI) flows. The total foreign direct investment in the world was USD 1,352 billion in 2006. United States had the highest share of 13.6% (USD 181 billion) in FDI in the world in 2006. While the share of India in world GDP was 4.6% in 2007, the share of India in FDI was low at 1.3% (USD 17 billion) in 2007. The share of India in FDI of world has increased slowly from 0.2% (USD 4 billion) in 2000 to 1.3% (USD 17 billion) in 2006 as compared to China whose share in FDI in the world has increased from 2.5% (USD 38 billion) in 2000 to 7.5% (USD 79 billion) in 2005 before declining to 5.8% (USD 78 billion) in 2006.

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Figure 2-5 : Foreign Direct Investment1 Flows in India and the world

2000 2005 2006 2000 2005 2006 Country Amount in USD Billion Percentage Share United States 321 109 181 21.2% 10.4% 13.4%

Canada 66 29 69 4.4% 2.8% 5.1%

Germany 210 35 43 13.8% 3.4% 3.2%

France 42 81 81 2.8% 7.7% 6.0%

United Kingdom 122 196 140 8.0% 18.6% 10.3%

Japan 8 3 -7 0.5% 0.3% -0.5%

China 38 79 78 2.5% 7.5% 5.8%

India 4 7 17 0.2% 0.6% 1.3%

Brazil 33 15 19 2.2% 1.4% 1.4%

World 1,518 1,049 1,352 100.0% 100.0% 100.0%

Source: World Bank and CRIS Analysis Impact of Global Meltdown on Indian Economy The global financial crisis is expected to significantly slow down the growth of the world economy, with the global GDP growth expected to fall to 3.7 per cent and 2.2 per cent in 2008 and 2009, respectively, from 5 per cent in 2007, according to the International Monetary Fund (IMF). The downward revision in growth will ease the demand side pressures on inflation due to a fall in commodity prices, a trend that is already visible. Due to greater integration with the world economy today, India is not expected to remain insulated from the global financial crisis. However, strong domestic demand, which has been a key growth driver for the Indian economy, is expected to provide a buffer against global turbulence. However, it should be noted that even before the onset of the global crisis, the Indian economy had started slowing down on account of proactive monetary tightening during the first half of calendar 2008, aimed at controlling inflation. As a result of the combined effect of global and domestic slowdown, GDP growth is expected to moderate to 6.5-7.0 per cent in both 2008-09 and 2009-10. In view of the worsening global and domestic credit crunch, the Reserve Bank of India (RBI) has taken various steps since mid-September 2008. In addition to cuts in the policy interest rates and cash reserve ratio, a number of credit and re-finance facilities for specific sectors were implemented. By the end of November 2008, through these monetary actions, the RBI had infused liquidity worth Rupees (Rs.) 3,000 billion into the system. Hence, by mid-November 2008, the liquidity problem was largely overcome. However, by end-November 2008, a decline in credit demand and increased risk averseness by commercial banks led to a situation where commercial banks were parking excess cash with the RBI, rather than increasing their lending. On account of this development, in the latest round of measures, to be effective from December 8, 2008, the central bank has not only reduced the repo rate by a further 100 basis points to 6.5 per cent, but also the reverse repo rate - the interest rate paid to commercial banks for their deposits with the RBI by 100 basis points to 5.0 per cent. In addition, the RBI announced targeted measures including concessional treatment of certain

1 Foreign direct investment is defined as the net inflow of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.

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exposures to commercial real estate, classification of loans under Rs. 2 million as priority sector lending and a re-finance facility for the National Housing Bank. To reinforce the monetary measures announced on December 6, 2008, the Government of India unveiled a multi-dimensional fiscal stimulus package on December 7, 2008 that is expected to simulate growth across sectors and fuel consumption. The measures announced by GoI include:

• The GoI plans to spend an additional Rs. 200 billion on infrastructure in 2008-9. Further, the India Infrastructure Finance Company Limited has been authorized to raise Rs. 100 billion through tax-free bonds by March 2009, the proceeds of which will be used to re-finance bank lending of longer maturity to eligible infrastructure projects.

• The GoI affected an across-the-board cut of 4 percentage points in the ad-valorem

CENVAT for the remainder of the current fiscal (2008-09) on all products other than petroleum and those where the existing rate was below 4 per cent. The across the board reduction of 4 per cent in excise duty will apply to machinery, man-made fibres, dyes and chemicals and other products where excise duty is currently being paid in the textiles and garments industry. The central excise duty on footwear segment (of leather and footwear industry) of MRP between Rs. 250/pair to MRP Rs. 750/pair will get reduced from 8% to 4% and for footwear of MRP exceeding Rs. 750/pair will get reduced from 14% to 10% as part of the economic stimulus package.

• Additional funds of Rs. 14 billion have been allocated to clear the Technology Up-

gradation Fund Schemes’ (TUFS) backlog.

• For exporters, the government has given 2 per cent (till March 2009, subject to a minimum of 7 per cent) interest subvention on both pre and post shipment credit for labour intensive export sectors.

• Elimination of import duty on naphtha only for use in the power sector.

• The export duty on iron ore fines has been eliminated, and reduced to 5 per cent on

lumps. Though it is too early to comment on the impact of these measures on the industries covered by the assignment, it can be said that the steps taken by GoI are in the right direction and likely to reduce the adverse impact of the global slow-down on these industries. Further, the lower cost of debt for export oriented industries like textiles and garments, leather and footwear will marginally improve their competitiveness vis-à-vis global players. The benefit of lower CENVAT is likely to be beneficial for the textiles and garments, leather and footwear and food and agro processing industries which would support demand. The series of rate cuts affected by the RBI will help in easing the liquidity position and facilitate the availability of credit in the near term for most industries including the three industries covered in this assignment. Though domestic demand generation insulates the industries covered by the assignment to an extent, the quest for higher levels of competitiveness in the export oriented segments of textiles and garments, leather and footwear as well as food and agro processing will need to be supported actively as global buyers become more price sensitive. In a sense, the current global economic scenario represents both a challenge and an opportunity for Indian exporters, though some adverse impact is bound to be felt.

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In the second stimulus package announced on January 2, 2009, the Duty Entitlement Passbook (DEPB) scheme has been extended till December 31, 2009 which will benefit the exporters in the textiles and garments industry and leather and footwear industry. The duty drawback benefits has also been increased on certain items of textiles and garments industry like cotton knitted fabrics, man made fabrics, woolen knitted fabrics, etc. which will provide more incentives to the exporters in the industry.

2.2 LOCATING MANUFACTURING IN THE INDIAN ECONOMY Share of Primary, Secondary and Tertiary Sectors in GDP The broad sector level break-up of Indian GDP as reported by CSO are a) Primary Sector, b) Secondary or Industrial Sector and c) Tertiary or Services Sector. The Primary Sector consists of agriculture, forestry and fishing while the Secondary Sector or Industrial Sector comprises of mining and quarrying, manufacturing, electricity, gas and water supply. The Tertiary or Services Sector includes construction, trade, hotels, restaurants, transportation, storage, communication, financing, insurance, business services, public administration, defence and other services. The share of primary sector in GDP (at factor cost) of India has decreased from 44% (Rs. 2,908 billion) in 1970-71 to 18% (Rs. 5,543 billion) in 2007-08. The share of the primary sector has been gradually decreasing from 1970-71. The share of the secondary or industrial sector in GDP of India has increased from 15% in 1970-71 (Rs. 732 billion) to 19% (Rs. 6,051 billion) in 2007-08. The share of secondary sector has been in the range of 15% to 21% in the period from 1970-71 to 2007-08. The tertiary sector or the service sector has witnessed the maximum growth with share in total GDP increasing from 40% in 1970-71 to 63% in 2007-08. Though agriculture has lost its share both to industry and service sector over the years, the service sector has gained a larger pie in overall GDP. The details of share of primary, secondary and tertiary sectors in total GDP of India is presented in the table given below.

Figure 2-6 : Share of Primary, Secondary and Tertiary Sectors in GDP (at factor cost) of India

Source: RBI and CRIS Analysis The three industries (textiles and garment, leather and footwear and food and agro processing) covered by the assignment is part of the manufacturing sector which is included under the Secondary or Industrial Sector. In the following section the share of the manufacturing has been identified in the Secondary Sector in India. Share of Manufacturing in Secondary or Industrial Sector The secondary sector or the industrial sector comprises of mining and quarrying, manufacturing, electricity, gas and water supply. Manufacturing with share of 79% is the leading industry in the secondary sector in 2007-08. The share of the industry manufacturing in the secondary sector has ranged from 74% too 82% from 1970-71 to 2007-08. The share of Manufacturing in total GDP (at factor cost) of India has increased from 13% in 1970-71 to

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15% in 2007-08. The share of manufacturing in total GDP of India has varied from 13% to 16% in period from 1970-71 to 2007-08.

Figure 2-7 : Share of Manufacturing in GDP (at factor cost) of Secondary Sector

Source: RBI and CRIS Analysis Growth of Manufacturing In this section, we take a closer look at the growth performance of the manufacturing sector since the early-90s. The year-on-year growth in industrial production since 1993-94 has been depicted in figure given below. If one has to plot a smoothed line touching the mid-point of each bar, it would look like an U. This vindicates the fact that the Indian industrial growth trajectory has never been smooth and there are intervening cyclical periods. However, this also reiterates the fact that the economy has undergone a major structural change and the long run growth rate may have been moved up after last 3 consecutive years of over eight per cent growth. A closer look gives the impression that between 1996-97 and 2001-02, the Indian industrial sector underwent a turbulent period. The growth rate was at its nadir during 2001-02. Since then the average growth has been quite impressive. In the last 3 years from 2005-06 to 2007-08, the secondary sector production grew at more than 8 per cent. The average growth of GDP for the same period is around 9 per cent or more. The tertiary sector has witnessed growth of more then 5% in all the years from 1993-94, the maximum growth rate being 11.2% in 2006-07. The growth of primary sector like secondary sector has fluctuated and has been in the range of -7.2% to 10% in 2003-04. The details of year on year growth rates have been presented in the figure given below.

Figure 2-8 : Year on Year Growth in Primary, Secondary, Tertiary and Manufacturing Sectors

Source: RBI and CRIS Analysis

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Impact on the Manufacturing Industry in India due to Global Financial Turmoil The first 6 months of FY2008-09 has seen a growth of 4.9 per cent in the secondary sector, a number significantly lower than last year's (FY 2007-08) growth for the same period. In fact, the industrial growth of the first half of this fiscal is just half the growth recorded during the same period last fiscal. Although such a dismal industrial performance is primarily due to manufacturing, since the mining and electricity sectors have also not behaved any differently. While the cumulative growth rate of manufacturing sector during the first half of this fiscal stands at 5.2 per cent, the figures for mining and electricity for the same period are 3.9 and 2.6 per cent, respectively. As the US financial turmoil and its ripple effects are still being faced globally, CRISIL Research expects the industrial growth during current fiscal to be between in the range of 5.5-6.0 per cent for 2008-09. The year on year growth in secondary sector for the period from April to September in FY08 and FY09 is provided in the figure given below.

Figure 2-9 : Year on Year Growth in Secondary Sector in Apr-Sep, 09

Details Apr-Sep, FY08 Apr-Sep, FY09 Manufacturing 10.0 5.2 Mining 5.1 3.9 Electricity 7.7 2.6 Secondary Sector 9.5 4.9

Source: CSO and CRIS Analysis The manufacturing industries which have performed relatively better during the first six months of this fiscal (FY2008-09) are beverages (23.3%), transport equipment (12.8%) and machinery and equipment (9.8%). Eight industries have posted negative growth during the first 6 months of this fiscal as compared to just one industry during the same period last fiscal (FY2007-08). Among the industries covered in the assignment, leather and footwear industry registered a marginal growth of 0.1% in first six months of FY2008-09 as compared to high growth rate of 9.8% in the corresponding period in FY2007-08. In the textiles and garments industry, the textiles segment has posted negative growth in a) cotton textiles segment and b) jute and other vegetable fibre textiles segment. The textile products segment including wearing apparel has posted a high growth rate of 3.8% in first six months of FY 2008-09 as compared to 3.3% in corresponding period in FY2007-08.

Figure 2-10 : Year on Year Growth in Manufacturing Sectors in Apr-Sep, 09

April to September Manufacturing Sectors FY2007-08 FY2008-09 Food Products 12.2 -0.1 Beverages, Tobacco and Related Products 9.2 23.3 Cotton Textiles 6.2 -0.5 Wool, Silk and Man-Made Fibre Textiles 4.6 0 Jute and Other Vegetable Fibre Textiles 20.6 -5.4 Textile Products (Including Wearing Apparel) 3.3 3.8 Leather and Leather and Fur Products 9.8 0.1 Wood and Wood Products, Furniture and Fixtures 80.3 -9.7 Paper & Paper Products, Printing & Publishing 1 3 Basic Chemicals & Chemical Products 8.7 6.2 Rubber, Plastic, Petroleum and Coal Products 12 -4.1 Non-Metallic Mineral Products 8.7 0.6 Basic Metal and Alloy Industries 18.5 6.2

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April to September Manufacturing Sectors FY2007-08 FY2008-09 Metal Products & Parts, except Machinery & Equipment -0.9 1.4 Machinery and Equipment other than Transport Equipment 11.4 9.8 Transport Equipment and Parts 2 12.8 Other Manufacturing Industries 13 -0.7

Source: CSO and CRIS Analysis Employment in Manufacturing Sector in India The total population of India in 2004-05 was estimated at 109.2 crore growing at a CAGR of 1.7% from 1999-2000 to 2004-05. The labour force including both organised and unorganised sector of India was 38.4% (42 crore) of total population in 2004-05 as compared to 36.3% (36.5 crore) of total population in 1999-2000. The workforce of India which represents employed labour force was 91.7% of total labour force in 2004-05. The unemployment rate in India has been in the range of 6% to 9% with lowest unemployment rate in 1993-94 at 6.1% and highest unemployment rate at 9.2% in 1983.

Figure 2-11 : Employment and Unemployment Details in India (in crore)

Details 1983 1993–94 1999–2000 2004–05

Population 71.8 89.4 100.5 109.3

Labour Force 26.4 33.4 36.5 42.0

Workforce 23.9 31.4 33.8 38.5

No. of Unemployed 2.4 2.0 2.7 3.5

Unemployment Rate (%) 9.2 6.1 7.3 8.3

Source: Eleventh Five Year Plan (2007-12) The analysis of sector-wise share of employment shows that share of agriculture in total workforce has decreased from 65.4% in 1983 to 52.1% in 2004-05. The share of manufacturing in total workforce has been increasing since 1993-94 and was 12.9% in 2004-05. The share of the industry Trade, Hotel and Restaurants has witnessed the highest growth in workforce with share of 12.6% in 2004-05 as compared to 7% in 1993.

Figure 2-12 : Sector-wise Share of Employment

Industry 1983 1993–94 1999–2000 2004–05 Agriculture 65.4 61.0 56.6 52.1 Mining and Quarrying 0.7 0.8 0.7 0.6 Manufacturing 11.3 11.1 12.1 12.9 Electricity, water, etc. 0.3 0.4 0.3 0.4 Construction 2.6 3.6 4.4 5.6 Trade, hotel, and restaurant 7.0 8.3 11.2 12.6 Transport, storage, and comm. 2.9 3.2 4.1 4.6 Financial, insurance, & business services 0.8 1.1 1.4 2.0 Community, social, & personal services 9.1 10.5 9.2 9.2 Total 100.0 100.0 100.0 100.0

Source: Eleventh Five Year Plan (2007-12)

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The break-up of work force of the manufacturing industry into organised and un-organised sectors shows that the organised sector employed 27% of total manufacturing sector employees while the unorganised sector employed 73% of total manufacturing sector employees in 2004-05. The data for the workforce employed in the unorganised sector has been sourced from the National Sample Survey Organisation (NSSO) in 2005-06 while data of total workforce employed in the manufacturing sector has been calculated from the Steering Committee report of Eleventh Five Year (2007-12). Since the employment in the unorganised manufacturing sector in 2004-05 was not directly available, this has been estimated by reducing the corresponding figure for 2005-06 by the observed annual growth rate of increase in total employment in manufacturing industry from 1999-00 to 2004-05. The data on the workforce employed in the organised sector of the manufacturing industry has been calculated by subtracting the data of NSSO from the Five Year Plan Report.

Figure 2-13 : Employment in Manufacturing Industry in 2004-05

Sector Workforce (in Crore)

Percentage Share

Organised 1.32 27%

Unorganised 3.64 73%

Total Manufacturing 4.97 100%

Source: NSSO, Eleventh Five Year Plan (2007-12) and CRIS Analysis

2.3 SHARE OF THE THREE INDUSTRIES COVERED BY THE ASSIGNMENT

Share of Three Sectors in GDP and Manufacturing The share of food and agro processing was 2% in total GDP and 13% in manufacturing in 2006-07. Textiles and garments contributed to 1.9% of total GDP and 12% to manufacturing in 2006-07. The share of leather and footwear was 0.2% in total GDP and 1% in manufacturing in 2006-07.

Figure 2-14 : Share of Three Sectors in Total GDP (at factor cost) and Manufacturing

Sectors in Manufacturing 2006-07 Rs. Billion

% Share in Manufacturing

% Share in GDP

Agro and Food Processing 573 13% 2.00%

Textiles and Garments 537 12% 1.90%

Leather and Footwear 55 1% 0.20%

Other Manufacturing Sectors 3,243 74% 11.30%

GDP at 1999-00 prices 4,408 100% 15.40%

Source: CSO and CRIS Analysis Share of Three Sectors in Exports The share of the textiles and garments in total exports was 15% (USD 19.5 billion) in 2006-07. Leather and footwear contributed to 3% of total exports (USD 3.2 billion) of India in 2006-07 while food and agro processing had a share of 2% (USD 2.1 billion) in total exports of India in 2006-07. While the share of food and agro processing industry in the GDP of manufacturing sector (13%) was more than the textiles and garment industry (12%) in 2006-

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07, the total exports of food and agro processing industry (USD 2.1 billion) was very low as compared to the textiles and garments industry (USD 19.5 billion). The total export of India in 2006-07 was USD 126.3 billion while the total import was USD 185.6 billion in 2006-07.

Figure 2-15 : Share of Three Sectors in Exports of Commodities from India

Sector 2006-07 (USD Billion)

% Share in Exports

Textiles and Garments 19.5 15%

Leather and Footwear 3.2 3%

Food and Agro Processing 2.1 2%

Others 102 80%

Total 126.3 100%

Source: DGFT and CRIS Analysis Impact on Exports of Three Sectors due to Global Financial Turmoil The export data by industries has been sourced from the web-site of the Directorate General of Foreign Trade (DGFT) which is the nodal agency for publishing the external trade data of India. The analysis of exports in the first four months of FY 2008-09 shows that the exports of all the three industries covered by the assignment had registered positive growth. Figure 2-16 : Share of Three Industries in Exports of Commodities from India

Sector Apr-Jul 2007 (USD Million)

Apr-Jul 2008 (USD Million) %Growth

Food and Agro Processing 802 1,184 48%

Leather and Footwear 1,101 1,320 20%

Textiles and Garments 5,840 6,676 14%

Total 48,091 65,079 35%

Exchange Rate: (1USD = Rs.) 41.03 41.95 2%

Source: DGFT and CRIS Analysis Share of Three Sectors in Employment The food and agro processing industry employed 16% of total workforce in the organised manufacturing sector in 2004-05 while the leather and footwear industry employed 2% of total workforce in the organised manufacturing industry. The share of food and agro processing and leather and footwear industries in total number of enterprises was 19% and 2% respectively. While the textiles and garments industry employed 20% of the workforce employed in the organised manufacturing sector in India, the share in total number of enterprises in organised manufacturing sector was low at 12% signifying that the textiles and garment industry is one of the most labour intensive manufacturing industry. The number of workers per enterprise in textiles and garments industry was very high at 106.5 workers per enterprise as compared to average of 62 workers per enterprise for the manufacturing sector. The details of number of workers, number of enterprises and average number of workers per enterprise in organised manufacturing is presented in the table given below. The total number of workers does not match that presented in Figure 2-13 earlier due to difference is coverage by the two different sources underlying these two tables.

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Figure 2-17 : Employment in the Organised Sector in Manufacturing in 2004-05

Source: ASI and CRIS Analysis The share of a) food and agro processing and b) textiles and garments industries in the total workforce and number of enterprises is higher in the unorganised manufacturing sector as compared to the organised manufacturing sector which clearly indicates that the number of small and medium scale units is relatively higher in these two industries as compared to the other manufacturing industries. The share of food and agro processing, leather and footwear and textiles and garments in total workforce in unorganised manufacturing sector was 32%, 1% and 34% respectively. The average number of workers per enterprise in food and agro processing, leather and footwear and textiles and garments was 1.9, 3.3 and 1.95 workers per enterprise respectively. The details of number of workers, number of enterprises, ad workers per enterprises in the unorganised manufacturing is presented in the table given below.

Figure 2-18 : Employment in the Unorganised Sector in Manufacturing in 2005-06

Source: NSSO and CRIS Analysis The key takeaway from the above analysis is that while the share of food and agro processing industry and textiles and garments industry in the manufacturing GDP is low in the range of 12-14% each, the relative share in employment of workforce in manufacturing sector is very high in the range of 26% to 29% each. Similarly, the leather and footwear industry contributes to less than 0.5% of manufacturing GDP but employs more than 1% of the workforce in manufacturing. The above analysis clearly shows that all the three industries covered by the assignment are very crucial in terms of employment generation and more focus towards development of these industries will lead to creation of more employment in India.

2.4 FREE TRADE AGREEMENT (FTA)/REGIONAL TRADE AGREEMENT (RTA)

The comparative analysis of India has been done with Pakistan, Sri Lanka, Bangladesh, China, Korea, Thailand, Malaysia and Hong Kong to identify if India has any competitive advantage/disadvantage due to Free Trade Agreements/Regional Trade Agreements which have been entered by its competitors. China, Bangladesh, Sri Lanka, Pakistan and Korea are the major competitors of India in the textiles and garments industry while China and Hong Kong are the major competitors in leather and footwear industry. Thailand, Malaysia and China are the major competitors of India in the food and agro processing industry.

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Existing Bilateral FTA by Major Competitors of India The analysis of bilateral free trade agreement shows that none of the major competitors in the three industries covered by the assignment have bilateral free trade agreement with United States and European Union which are the major importers of the three industries namely a) textiles and garments, b) leather and footwear and c) agro and food processing industry. Most of the bilateral free trade agreements by competitors like China, Pakistan, Thailand, Malaysia, Korea, Japan and Sri Lanka are with countries in Asia. Similarly, India also has no bilateral free trade agreement with countries in European Union and United States. Bangladesh has no bilateral free trade agreements with any country. Hence it can be concluded that India currently has no competitive disadvantage or advantage with its competitors as far as bilateral free trade agreements are concerned. The details of FTA by India and competing countries of India for three industries covered by the assignment is presented in the table given below.

Figure 2-19 : Bilateral FTAs of India and competing countries

India (3) Pakistan (3) Sri Lanka (2) • Bhutan • Singapore • Sri Lanka

• China • Malaysia • Sri Lanka

• India • Pakistan

Bangladesh (0) China (4) Korea (7) No Bilateral Free Trade Agreements

• Chile • Hong Kong • Macao • Pakistan

• Brunei Darussalam • Chile • Indonesia • Malaysia • Mexico • Singapore • Thailand

Thailand (3) Malaysia (3) Hong Kong (1)

• Japan • Australia • New Zealand

• Japan • Pakistan

China

Source: WTO and CRIS Analysis Existing RTA by Major Competitors of India The analysis of regional trade agreement of India, Pakistan, Sri Lanka, Bangladesh, China, Korea, Thailand, Malaysia and Hong Kong also shows that none of the above countries have any regional trade agreements with European Union or United States which are the major importers of the products of the three industries. There is also a possibility of a) FTA between two regional trade blocs or b) FTA between a regional trade bloc and a country. For example, European Communities (EC) which is a regional trade bloc has FTA with Caribbean Community and Common Market (CARICOM) which is also a regional trade bloc. Similarly, European Free Trade Association (EFTA) which is a regional trade bloc has FTA with Turkey which is a country. However, none of the RTAs entered by India and its competitive countries in Asia for the three industries covered by the assignment has FTA with countries or regional trade blocs in EU or United States. Hence it can be concluded that India currently has no competitive

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disadvantage or advantage with its competitors as far as RTAs are concerned. The details of RTAs by India and competing countries of India for three industries covered by the assignment is presented in the table given below.

Figure 2-20 : RTAs - India and major competing countries

India (4) Pakistan (4) Sri Lanka (3) • Bangkok Agreement

(BANGKOK) • General System of Trade

Preferences among Developing Countries (GSTP)

• South Asian Preferential Trade Arrangement (SAPTA)

• Tripartite Agreement (TRIPARTITE)

• Economic Cooperation Organisation (ECO)

• General System of Trade Preferences among Developing Countries (GSTP)

• Protocol relating to Trade Negotiations among Developing Countries (PTN)

• South Asian Preferential Trade Arrangement (SAPTA)

• Bangkok Agreement (BANGKOK)

• General System of Trade Preferences among Developing Countries (GSTP)

• South Asian Preferential Trade Arrangement (SAPTA)

Bangladesh (4) China (1) Korea (3) • Bangkok Agreement

(BANGKOK) • General System of Trade

Preferences among Developing Countries (GSTP)

• South Asian Preferential Trade Arrangement (SAPTA)

• Protocol relating to Trade Negotiations among Developing Countries (PTN)

• Bangkok Agreement (BANGKOK)

• Bangkok Agreement (BANGKOK)

• General System of Trade Preferences among Developing Countries (GSTP)

• Protocol relating to Trade Negotiations among Developing Countries (PTN)

Thailand (3) Malaysia (3) Hong Kong (0) • Association of South East

Asian Nations (ASEAN) • ASEAN Free Trade Area

(AFTA) • General System of Trade

Preferences among Developing Countries (GSTP)

• Association of South East Asian Nations (ASEAN)

• ASEAN Free Trade Area (AFTA) • General System of Trade

Preferences among Developing Countries (GSTP)

No Regional Trade Agreements

Source: WTO and CRIS Analysis

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3 TEXTILES AND GARMENTS INDUSTRY

3.1 TEXTILES AND GARMENTS INDUSTRY IN INDIA AND WORLD Textile Industry in India: The total size of textiles and clothing industry in India was USD 47 billion in 2005-06 of which USD 17 billion (36%) was accounted by exports market and USD 30 billion (64%) by domestic market. The report of the working group for textiles and jute industry for the Eleventh Plan (2007-12) projected that the industry will grow to USD 115 billion at a CAGR of 16%. The growth in the industry is expected to be driven by the exports market which is estimated to grow at CAGR of 22% from 2006 to 2012.

Figure 3-1 : Estimated Size of Domestic and Exports Market

Source: Report of the Working Group for Textiles and Jute Industry for Eleventh Plan Export and Imports of Textiles and Clothing from India: The textiles and clothing industry which was growing at CAGR of 10% during the last decade of 1990 - 2000 has now accelerated to a CAGR of over 20% since 2000. The exports of textiles and clothing have grown from USD 4.7 billion in 1990 to USD 19.5 billion at the end of 2006. The quota regime which had restrained the export growth of the Indian textile industry was eliminated with effect from January, 2005. The total share of India in the exports of textiles and clothing has improved from 2.2% in 1990 to 3.7% in 2006. The imports have also been increasing at more than 20% since abolition of quota. The total imports of textiles and clothing in India in 2006 was around USD 2 billion.

Figure 3-2 : Exports, Imports and CAGR of Exports and Imports

United States is the largest importer of textile and clothing from India. The exports to US have increased at CAGR of 27% after abolition of quota. The total value of exports to US

Estimated Domestic and Exports Markets ($ Billions) of Textile Industry

1730

4755

115

60

0

20

40

60

80

100

120

140

Exports market Domestic Market Total market

2005-06 (Actual) 2011-12 (Estimated)

CAGR - 22% CAGR - 12%

CAGR - 16%

Exports - Imports ($ Billions) of Textiles and Clothing in India

4.7

12.213.6

17.719.5

0.2 0.6 1.4 1.9 2.0

0

5

10

15

20

25

1990 2000 2004 2005 2006

Source: WTO Exports Imports

CAGR of Exports - Imports of Textiles & Clothing in India

20%20%

10%

3%

9%

25%

0%

10%

20%

30%

1990-2000 2000-2004 2004-06

Source: WTO Exports Imports

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increased from USD 2.9 billion in 2003-04 in the quota regime to USD 4.7 billion in 2005-06 after abolition of quota in 2005. US accounted for 27% of total exports of India in 2005-06. United Kingdom is the second largest importer of textiles and clothing from India with 8% of total exports. The exports to UK have also registered a significant growth after abolition of quotas. The exports to UK have grown from around USD 0.9 billion in 2003-04 to USD 1.4 billion in 2005-06 at CAGR of 22%. Germany, UAE, France and Italy are the other major importers of textiles and clothing from India. The exports to Germany, France and Italy have increased at more than 15% per annum from 2003-04 to 2005-06. However during the same period the exports to UAE have declined from USD 1.1 billion in 2003-04 to USD 0.8 billion in 2005-06.

Figure 3-3 : Exports of Textiles and Garments from India

Source: WTO and CRIS Analysis Global Trade of Textiles and Clothing: The two major segments of the industry are textiles and clothing. The textile consists of yarn, fabrics and made ups of cotton, man-made fibre, wool, silk and jute. The clothing segments comprises of readymade garments of cotton, man-made, silk, wool and other textile materials. The textiles segment accounted for 41% of total trade and clothing represented 59% in 2006. The clothing segment has grown at CAGR of 8% from 2000 to 2006 driving the growth of the industry.

Figure 3-4 : Global Trade in Textiles and Garments

Source: WTO and CRIS Analysis Major Exporters of Textiles and Clothing in the world: China is the leading exporter in the clothing segment with 31% (USD 95 billion) share in 2006. The European Union (EU) consisting of 25 countries is the second biggest exporter. The exports from EU are classified into two categories, intra EU for exports by countries in EU to countries in EU and extra EU for exports from countries in EU to countries which are not included in EU. Intra EU exports accounted 20% (USD 62 billion) of total exports in the clothing segment while extra EU reported 7% (USD 22 billion) of the total exports. Hong Kong and Turkey are the other major exporters with 9% (USD 28 billion) and 4% (USD 12 billion) share in total exports. India

Global Trade (USD Billions) of Textiles & Clothing

159

357

196261

456

205

278

483

219

311

530

198

0

100

200

300

400

500

600

700

Textiles Trade Clothing Trade Total Trade

2000 2004 2005 2006

CAGR - 5%

CAGR - 8%

CAGR - 7%

Exports of Clothing & Textiles from India in Quota and Post Quota

2.9

0.9 0.81.1

0.6 0.5

4.7

1.4 1.1 1.0 0.8 0.8

0

1

2

3

4

5

6

7

US UK Germany UAE France Italy

Quota (2003-04) Post-Quota (2005-06)

CAGR + 27%

CAGR + 22% CAGR + 18% CAGR - 6% CAGR + 18% CAGR + 23%

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exported goods worth USD 10 billion (3% market share) in 2006. Similar to the clothing trends, the China and EU are the largest exporters in the textiles segment as well with 23% (USD 49 billion) and 32% (USD 72 billion) share in total exports. The share of India in textiles category was higher at 4% (USD 9 billion) in 2006.

Figure 3-5 : Major Exporters of Textiles and Garments in the world

Source: WTO and CRIS Analysis Major Importers of Textiles and Clothing in the world: The European Union (EU) consisting of 25 countries was the largest importer of clothing in 2006 with imports of USD 141 billion (45%). The imports to EU are classified into two categories, intra EU for imports by countries in EU from countries in EU and extra EU for imports from countries in EU from countries which are not included in EU. Intra EU imports accounted for 20% (USD 62 billion) of total imports in the clothing segment while extra EU reported 25% (USD 80 billion) of the imports from countries outside EU. The US is the second largest importer in the clothing segment with 27% (USD 83 billion) of total share in 2006. Japan and Hong Kong are the other major importers of clothing with 8% (USD 24 billion) and 6% (USD 19 billion) share in total imports. EU is also the largest importer in the textiles category with 32% (USD 70 billion) share in total imports. US and China are the other major importers with 11% (USD 23 billion) and 7% (USD 16 billion) of total imports in the textiles category.

Figure 3-6 : Major Importers of Textiles and Garments in the world

Source: WTO and CRIS Analysis

3.2 VALUE CHAIN OF THE TEXTILES AND GARMENT INDUSTRY In technical terms, the value chain can be defined as integration or linkages of various organisations, resources and knowledge streams involved in the creation and delivery of value to end-customers. The value chain of any industry means different stages of processing of inputs to generate either intermediate or final output for selling to consumers, where each stage involves value addition in the form of goods (e.g., materials) and/or services (e.g., labour). Each stage can be an industry by itself. The value chain analysis of a particular industry or sector means to analyse its decomposed stages. Accordingly, the

Major Exporters of Clothing in 2006

China 31%

Intra EU 20%

Others24%

Hong Kong 9%

Turkey 4% Extra EU

7%

India 3%

Mexico 2%

Major Exporters of Textiles in 2006

China 23%

Intra EU 21%

Extra EU 11%

Korea 5%

Others20%

C Taipei 4%

India 4%

Hong Kong 6%

US6%

Major Importers of Clothing in 2006

US 26%

Russia 3%

Intra EU 20%

Japan 8%

Hong Kong 6%

Others 12%

Extra EU 25%

Major Importers of Textiles in 2006

Intra EU 21%

Extra EU 11%

US11% China

7%

Others38%

Mexico 3%

Japan 3%

Hong Kong 6%

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textiles and garments industry can be better understood by studying the entire value chain of the industry. The entire value chain of the textiles and garments industry can be decomposed into the following five stages: a) Manufacturing of yarn, b) Knitting or weaving of yarn into grey cloth, c) Processing of grey cloth into processed fabric, d) Manufacturing of garment from the processed fabric and e) Distribution of the ready-to-wear garment. There are two types of yarns: spun yarn and filament yarn. Spun yarn is manufactured by spinning fibres in either spindles (closed-ended spinning) or rotors (open-ended spinning). The fibres could be either natural (cotton, silk, wool, etc.) or man-made (polyester staple fibre, viscose staple fibre, acrylic staple fibre, etc). Weaving/knitting is the second stage in the textile and garments industry value chain, in which the yarn is converted into a cloth. Weaving is the most commonly used method of manufacturing cloth out of the yarn. It involves interlacing at right angles two or more sets of yarns on a loom (either hand-loom or power-loom) to make a fabric. The length-wise yarns are called warp and width-wise yarns are called weft. The machines on which the yarn is woven are called looms. Knitting is another process of turning yarn into fabric. However, unlike the woven fabric, the knitted fabrics are made by interlacing loops of yarn. Weft knitting is when successive loops of a single yarn form a row running across the width of the fabric. Warp knitting is when successive loops of yarn run along the length of the fabric. Weft knitting produces a more extensible fabric and is usually used for producing items such as stockings, tights and socks. Processing is the third stage in the textile and garments industry value chain, in which the grey fabric is processed, so that it can be used for manufacturing end-products such as garments and home textiles. In this stage, the fabric undergoes any one or more of the various processes such as washing, bleaching, dyeing, mercerising and printing. These processes give fabric the texture, drape and finish required to manufacture apparels or home textiles. The fabric may also undergo many other optional processes that impart various properties to the fabric for manufacturing value-added products such as mosquito repellent apparels, anti-bacterial or anti-fungal towels and flame-retardant jackets. The process mainly involves the usage of speciality chemicals for treating the fabrics. Apparel manufacturing is the fourth stage in the textile and garments industry value chain. In this stage, the processed fabric undergoes various courses of actions such as designing, sizing, measuring, cutting, stitching and finishing before ready-to-wear garment is produced. The apparel manufacturing is a labour-intensive process, as each stage - designing, measuring, cutting, stitching and finishing - requires human intervention. However, this process is the least capital-intensive across the entire textile value chain. The fifth stage in the textiles and garments value involves distribution of ready made garments through own stores, discount stores, exports, retailers, distributors and multi-brand outlets. The details of the value chain of the textiles and garments industry is presented in the figure below.

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Figure 3-7 : Value Chain of Textiles and Garments Industry

Source: CRISIL Research

Processing (bleaching,

dyeing, printing, etc)

Processing (bleaching,

dyeing, printing, etc)

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3.3 MAJOR STATES IN THE INDIAN TEXTILES AND GARMENTS INDUSTRY

Tamil Nadu is the leading state in India in terms of number of factories for textiles and garments industry in India. The state of Tamil Nadu had 35% (5,601) of total registered textiles and garments factories in India at the end of 2004-05. Maharashtra and Gujarat are the second and third leading states in India in terms of number of registered factories with 11% (1,811) and 10% (1,660) market share respectively at the end of 2004-05. The states of Tamil Nadu, Gujarat and Maharashtra together accounted for 56% of total factories in 2004-05. The average invested capital per registered factory was low at Rs. 4.7 crore per factory indicating at the fragmented nature of the textiles and garments industry in India. The average invested capital per registered factory was even lower in the state of Tamil Nadu at Rs. 3.2 crore per factory. The average invested capital per registered factory was more then the national average in the states of Maharashtra and Gujarat at Rs. 5.5 crore and Rs. 6.2 crore respectively.

Figure 3-8 : Share of States in India in Textiles and Garments Industry in 2004-05

Factories In

Operation2

Invested Capital3

Total Output4

Net Value

Added5 Profit State

Number Amount in Rs. Crore Tamil Nadu 5,601 17,715 35,691 4,725 1,384 Maharashtra 1,811 9,893 14,568 1,768 -311 Gujarat 1,660 10,371 16,326 2,027 345 Rajasthan 1,237 4,308 8,438 1,039 190 Punjab 899 5,150 8,807 1,041 244 Karnataka 893 3,795 7,302 1,779 459 Uttar Pradesh 881 3,796 6,181 712 77 Haryana 663 3,295 6,662 1,068 269 Delhi 619 1,537 4,359 639 207 Kerala 400 1,031 1,590 246 -24 Andhra Pradesh 394 2,735 3,547 625 119 West Bengal 305 2,805 5,707 1,372 -392 Dadra & Nagar Haveli 205 3,592 6,433 332 54 Madhya Pradesh 175 2,782 4,449 850 346 Daman & Diu 131 649 1,617 222 128 Himachal Pradesh 43 1,460 1,781 204 16 Orissa 39 89 110 25 2 Assam 26 49 91 11 0

2 Factory is one that is registered under sections 2m (i) and 2m (ii) of the Factories Act, 1948. The sections 2m (i) and 2m (ii) refer to any premises including the precincts thereof (a) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on; or (b) whereon twenty or more workers are working or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on. 3 Invested capital is the total of fixed capital and physical working capital. 4 Total output comprises total ex-factory value of products and by-products as well as other receipts such as receipts from non-industrial services rendered to others. 5 Net value added is arrived by deducting total input and depreciation from total output.

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Factories In

Operation2

Invested Capital3

Total Output4

Net Value

Added5 Profit

Jammu & Kashmir 28 308 336 62 9 Puducherry 24 172 268 53 -44 Bihar 17 42 62 18 -34 Uttaranchal 16 52 129 34 21 Goa 15 81 210 84 73 Chattisgarh 13 155 113 12 -1 Jharkhand 9 14 41 5 1 Total 16,104 75,875 134,817 18,954 3,139

Source: Annual Survey of Industries and CRIS Analysis Textiles and Garments Clusters in India: There are more than 70 textiles and clothing clusters in India comprising about 80% of total production. There are 39 power loom clusters and 13 readymade garment clusters in India. Bhiwandi and Malegaon are the two largest power loom clusters. The major readymade garments clusters are located in Delhi, Mumbai, Gurgaon, Nagpur, Madurai and Salem with annual turnover of more than Rs. 1000 crore in 2003. The state of Maharashtra has10 clusters. The other major states in terms of number of clusters are Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Uttar Pradesh with each of these states having 7 clusters each.

Figure 3-9 : Textile and Garments Clusters in India

State Location Product Annual Turnover (Rs. Crore)

Maharashtra Malegaon Power loom More than Rs. 1000 Maharashtra Bhiwandi Power loom More than Rs. 1000 Gujarat Surat Power loom 100-1000 Haryana Bhiwani Power loom 100-1000 Haryana Panipat Power loom 100-1000 Karnataka Bangalore Power loom 100-1000 Maharashtra Ichalkaranji Power loom 100-1000 Maharashtra Sholapur Power loom 100-1000 Punjab Amritsar Power loom 100-1000 Uttar Pradesh Varanasi Power loom 100-1000 Karnataka Belgaum Power loom 10-100 Maharashtra Nagpur Power loom 10-100 Orissa Ganjam Power loom 10-100 Uttar Pradesh Jhansi Power loom 10-100 West Bengal Ranaghat Power loom 10-100 Andhra Pradesh Warangal Power loom 0-10 Gujarat Kalol Power loom 0-10 Orissa Balasore Power loom 0-10 Orissa Dhenkanal Power loom 0-10 Rajasthan Kishangarh Power loom 0-10 Andhra Pradesh Nagari Power loom Not Available Andhra Pradesh Guntur Power loom Not Available Andhra Pradesh Sirsilla Power loom Not Available Karnataka Gadag Betgeri Power loom Not Available Kerala Ernakulam Power loom Not Available Kerala Kannur Power loom Not Available Kerala Mallappuram Power loom Not Available Kerala Palakkad Power loom Not Available

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Final Report 25

State Location Product Annual Turnover (Rs. Crore)

Kerala Faizlure Power loom Not Available Madhya Pradesh Burhanpur Power loom Not Available Madhya Pradesh Jabalpur Power loom Not Available Madhya Pradesh Ujjain Power loom Not Available Maharashtra Madhavanagar Power loom Not Available Tamil Nadu Coimbatore Power loom Not Available Tamil Nadu Surampatti Power loom Not Available Tamil Nadu Karur Power loom Not Available Uttar Pradesh Mau Power loom Not Available Uttar Pradesh Banda Power loom Not Available Uttar Pradesh Gorakhpur Power loom Not Available Delhi Okhla & Shahdara Readymade Garments More than Rs. 1000 Haryana Gurgaon Readymade Garments More than Rs. 1000 Maharashtra Mumbai Readymade Garments More than Rs. 1000 Maharashtra Nagpur(Butibori) Readymade Garments More than Rs. 1000 Tamil Nadu Madurai Readymade Garments More than Rs. 1000 Tamil Nadu Salem Readymade Garments More than Rs. 1000 Karnataka Bangalore Readymade Garments 100-1000 Madhya Pradesh Indore Readymade Garments 100-1000 Maharashtra Pune Readymade Garments 100-1000 Gujarat Ahmedabad Readymade Garments 10-100 West Bengal Metiaburuj Readymade Garments 0-10 Andhra Pradesh Rayadurg Readymade Garments Not Available Madhya Pradesh Jabalpur Readymade Garments Not Available Kerala Alappuzha Coir & Coir Products 100-1000 Karnataka Arasikara Coir & Coir Products 10-100 Kerala Kollam Coir & Coir Products 0-10 Andhra Pradesh East Godavari Coir & Coir Products Not Available Gujarat Vijapur Cotton Cloth Weaving 0-10 Uttar Pradesh Kanpur Cotton Hosiery 10-100 Tamil Nadu Rajapalayam Cotton Mills 10-100 Haryana Panipat Cotton Spinning 100-1000 Rajasthan Jaipur Garments 10-100 Uttar Pradesh Noida Garments Not Available Punjab Ludhiana Hosiery More than Rs. 1000 Tamil Nadu Tirupur Hosiery More than Rs. 1000 Delhi Delhi Hosiery 100-1000 West Bengal Sovabazar, Cossipur Hosiery 10-100 Maharashtra Mumbai Hosiery Not Available Karnataka Bellary Jeans Garments 100-1000 Andhra Pradesh Chitradurg Jeans Garments Not Available Haryana Panipat Shoddy Yarn 100-1000 Punjab Amritsar Shoddy Yarn 0-10 Karnataka Mysore Silk 100-1000 Gujarat Ahmedabad Textile Machinery Parts 10-100 Gujarat Jetpur Textile Printing 10-100

Source: UNIDO and CRIS Analysis

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Final Report 26

3.4 COVERAGE OF PRIMARY SURVEY The analysis for textiles and garments industry was done through primary and secondary survey. The states covered for primary survey for textiles and garments industry in India was Tamil Nadu and Maharashtra. The state of Tamil Nadu was selected as one of the two states for primary survey as it is the leading state in India with 35% of total factories and 26% of total output as per the Annual Survey of Industries (ASI) in 2004-05. The state of Maharashtra was the other state which was selected for the primary survey for the textiles and garment industry in India. Maharashtra is second major state in terms of number of factories (11%) in 2004-05. The details of the approach and methodology are presented in the figure given below.

The primary survey was done in two clusters of Tamil Nadu (Tirupur and Coimbatore) and Maharashtra (Bhiwandi and Mumbai). While choosing the four clusters, it was ensured that all the stages of the textiles and garments industry were covered. The spinning companies were covered in the Coimbatore cluster, weaving and processing companies in the Bhiwandi cluster, ready made garment companies in the Tirupur cluster while the Mumbai cluster was chosen to meet the companies across the value-chain as many companies in the industry had their head-office in the Mumbai cluster. The primary survey covered 6 companies in each of the four clusters. The survey covered 2 large, medium and small scale companies. The primary survey also covered the industry associations, export promotion councils and advisory bodies in both the states. The secondary survey was done to validate the major challenges and problems which had emerged during the primary survey and identify major players, segments, measures taken by government, global trade, major importers and exporters, etc. in the textiles and garments industry. The secondary survey was through reports published by multilateral organizations, Government agencies, industry associations, export promotion councils, advisory bodies, etc.

Reports by Multilateral Organizations like WTO, UNIDO, World Economic Forum, Doing Business, etc

Secondary Survey Reports by Government agencies like Ministry of Textiles, FICCI, NMCC, CII, Ministry of Commerce and Industry, etc

Reports by Industry agencies like,export promotion councils, advisory bodies, etc

Primary Survey

Tamil Nadu

Maharashtra

Tirupur Cluster

Coimbatore Cluster

− 2 large scale companies

− 2 medium scale companies

− 2 small scale companies

− Industry associations

− Export promotion councils

− Advisory Boards

Bhiwandi Cluster

Mumbai Cluster

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Final Report 27

3.5 FINDING FROM PRIMARY SURVEY FOR TEXTILES AND GARMENTS INDUSTRY

The key issues and challenges which has been voiced during the primary survey has been classified into six categories namely, a) Infrastructure and Raw Materials, b) Manpower, c) Technology, d) Government policies, e) FTA and RTA and f) Competitive Benchmarking. The key issues and challenges detailed in this section represent the views and opinions of the companies and industry associations met during the primary survey. The issues and challenges voiced in the primary survey have been further checked through the secondary data and analysis. The main issues and challenges impacting the competitiveness of the industry have been firmed in the later section based on the secondary data and analysis.

Findings from Primary SurveyFindings from Primary Survey

Flexibility in hiring labour/contract labour

Shortage of skilled labour. For example in Tirupur, the companies met during primary survey face shortage of tailors

Preference for other Industries like ITES at entry level jobs

Lack of Training Institutes for Ready Made Garments

Flexibility in hiring labour/contract labour

Shortage of skilled labour. For example in Tirupur, the companies met during primary survey face shortage of tailors

Preference for other Industries like ITES at entry level jobs

Lack of Training Institutes for Ready Made Garments

Findings from Primary SurveyFindings from Primary Survey

The spinning and apparel industry is highly fragmented

Outdated weaving technology - Shortage of shuttle less looms and Old machineries for weaving and knitting

Lack of processing houses

The quality of indigenous dyes is poor. Most large players import dyes

The spinning and apparel industry is highly fragmented

Outdated weaving technology - Shortage of shuttle less looms and Old machineries for weaving and knitting

Lack of processing houses

The quality of indigenous dyes is poor. Most large players import dyes

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Competitive BenchmarkingCompetitive Benchmarking

Government PoliciesGovernment Policies

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Competitive Benchmarking Competitive Benchmarking

Government PoliciesGovernment Policies

Findings from Primary SurveyFindings from Primary Survey

Shortage of power is a major concern. Firms are forced to rely on alternative sources of power which is expensive

For example, Power cuts in Tirupur takes place from 6 pm to 10 pm every day and are enforced for one full day per week. Power cuts in Coimbatore happens thrice per day

Water shortage is a major problem in Bhiwandi cluster

Spinning industry is facing pressure on margins due to increase in price of cotton

Shortage of Trucks during Mango season, for crackers during Diwali in Tamil Nadu

Shortage of power is a major concern. Firms are forced to rely on alternative sources of power which is expensive

For example, Power cuts in Tirupur takes place from 6 pm to 10 pm every day and are enforced for one full day per week. Power cuts in Coimbatore happens thrice per day

Water shortage is a major problem in Bhiwandi cluster

Spinning industry is facing pressure on margins due to increase in price of cotton

Shortage of Trucks during Mango season, for crackers during Diwali in Tamil Nadu

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Final Report 28

Findings from Primary SurveyFindings from Primary Survey

The companies want exports of cotton to be banned/regulated to meet acute shortage of cotton

Increase in MSP by 47% is the major concern of spinning companies met during the primary survey

Hoarding of cotton by middlemen is leading to shortage of cotton and subsequent increase in prices

Taxes vary from one state to another. Each state has different VAT rules

TUF refunds are slow and are delayed by several months to 2 years. TUF subsidy for weaving, knitting and processing sector should be increased from 5% to 7-8%

Dyers cannot afford zero discharge plants. Government must support common effluent plants through grants, subsidy, soft loans, etc.

Customs duty for equipments should be removed

Online trading needs to be controlled to avoid speculation

Lack of Indian brands in foreign market

The companies want exports of cotton to be banned/regulated to meet acute shortage of cotton

Increase in MSP by 47% is the major concern of spinning companies met during the primary survey

Hoarding of cotton by middlemen is leading to shortage of cotton and subsequent increase in prices

Taxes vary from one state to another. Each state has different VAT rules

TUF refunds are slow and are delayed by several months to 2 years. TUF subsidy for weaving, knitting and processing sector should be increased from 5% to 7-8%

Dyers cannot afford zero discharge plants. Government must support common effluent plants through grants, subsidy, soft loans, etc.

Customs duty for equipments should be removed

Online trading needs to be controlled to avoid speculation

Lack of Indian brands in foreign market

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Competitive BenchmarkingCompetitive Benchmarking

Findings from Primary SurveyFindings from Primary Survey

FTA with Sri Lanka and South East Asian Countries impacting industry rather then benefiting India

India has not been able to enter into FTA/RTA with countries in EU or US which are the major importers of textiles and garments

FTA with Sri Lanka and South East Asian Countries impacting industry rather then benefiting India

India has not been able to enter into FTA/RTA with countries in EU or US which are the major importers of textiles and garments

FTA and RTAFTA and RTA

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

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Final Report 29

3.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS The issues and challenges voiced during the primary survey have been further validated through secondary data and analysis. The final set of issues and challenges to be addressed for improving the competitiveness of industry has been firmed up after taking into account both primary survey and secondary data and analysis. Shortage of Power in India An analysis of peak demand-supply of power in India in 2006-07 shows that there was a deficit of 17% in supply of power in India as compared to total demand. The west region in India had the highest deficit at -26% at compared to other regions of India. The region wise peak demand-supply shows that all the regions in India are experiencing power deficit. The details of power deficit by regions are presented in the figure given below.

Figure 3-10 : Region-wise peak demand-supply of Power in 2006-07 in MW

Source: Central Electrical Authority and CRIS Analysis

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

FTA and RTAFTA and RTA

Findings from Primary SurveyFindings from Primary Survey

The cost of labour is lower in countries like Bangladesh, Pakistan, Indonesia as compared to India

Buyers from EU and US favour China for large orders due to large scale of operations

The technology in India is outdated for weaving and processing as compared to China, Indonesia, Pakistan, etc

The removal of additional restrictions on imports by EU and US on China in 2007 and 2008 respectively can significantly impact the exports of other countries

Zero Duty Exports by Bangladesh to EU and US due to classification as Least Developed Countries (LDC) under Generalized System of Preferences

The fluctuation in exchange rates of INR and other countries is a major cause of concern for exporters

The cost of labour is lower in countries like Bangladesh, Pakistan, Indonesia as compared to India

Buyers from EU and US favour China for large orders due to large scale of operations

The technology in India is outdated for weaving and processing as compared to China, Indonesia, Pakistan, etc

The removal of additional restrictions on imports by EU and US on China in 2007 and 2008 respectively can significantly impact the exports of other countries

Zero Duty Exports by Bangladesh to EU and US due to classification as Least Developed Countries (LDC) under Generalized System of Preferences

The fluctuation in exchange rates of INR and other countries is a major cause of concern for exporters

-17%(20,029)98,787 1,18,816 India-15%(262)1,435 1,697 North-East

-5%(511)10,789 11,300 East

-8%(2,304)26,075 28,379 South

-26%(10,783)30,096 40,879 West

-17%(6,169)30,392 36,561 North

Surplus or Deficit %

Surplus or DeficitSupplyDemandRegion

Power - Region-wise peak demand-supply (2006-07) in MW

-17%(20,029)98,787 1,18,816 India-15%(262)1,435 1,697 North-East

-5%(511)10,789 11,300 East

-8%(2,304)26,075 28,379 South

-26%(10,783)30,096 40,879 West

-17%(6,169)30,392 36,561 North

Surplus or Deficit %

Surplus or DeficitSupplyDemandRegion

Power - Region-wise peak demand-supply (2006-07) in MW

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Final Report 30

Significant Increase in Cotton Prices Cotton prices in the country increased by 23 per cent across various categories in the 2007-08. However, the pricing flexibility for yarn players is limited and the increase in yarn prices has been less commensurate at 6% in 2007-08. The margins of spinning companies is expected to come under immense pressure in 2008-09 and is likely to stay under pressure in 2009-10. Cotton costs accounts for more than 50% of sales of spinning companies. The comparative analysis of increase in cotton and yarn prices is presented in the figure given below.

Figure 3-11 : Increase in Cotton and Yarn Prices in India

Source: CRIS Analysis Increasing Export of Cotton from India The share of India in total production of cotton in world in 2007-08 was 21% but the consumption of cotton by India was low at 15%. The exports of cotton from India has increased a CAGR of 78% from 2003-04 to 2007-08. China produced 30% of total cotton in world but consumed 42% of cotton in 2007-08. The export of cotton from China was negligible at 10 million kg (0.1%) in 2007-08 as compared to 1,200 million kg by India which was 15% of total cotton exported in 2007-08. USA is also major producer of cotton in world with 16% share in total production but the share of USA in consumption was low at 4%. USA is the largest exporter of cotton with exports of 3,040 million kg (37%) in 2007-08. The details of production, consumption and exports of cotton by major countries are presented in the table given below.

51 5466

107 111 117

0

35

70

105

140

Jun-06 Jun-07 Jun-08

Rs/

Kg

Cotton S.6 Cotton yarn 40s

Growth: 23%

Growth: 6%

Growth: 6%

Growth: 4%

51 5466

107 111 117

0

35

70

105

140

Jun-06 Jun-07 Jun-08

Rs/

Kg

Cotton S.6 Cotton yarn 40s

Growth: 23%

Growth: 6%

Growth: 6%

Growth: 4%

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Figure 3-12 : Production, Consumption and Exports of Cotton by Major Countries

Source: ICAC and CRIS Analysis The International Cotton Advisory Committee (ICAC) estimates that global cotton production will continue to decline in 2008-09, primarily led by a sharp decline in US cotton output on account of shifting acreage towards corn. China's consumption is expected to surpass production; therefore, it will need to rely on imports to meet the shortfall. Exports to China will continue to increase from India, thus keeping cotton prices firm. GoI has scrapped basic customs duty of 10% and special additional duty of customs of 4% on imports of cotton. GoI has also withdrawn drawback benefit on raw cotton exports to increase the availability of cotton in the domestic market. Low Disbursement under Technology Up-gradation Fund Scheme TUFS for Weaving and Processing Segment

The following are the major incentives which are available to the textiles and garments companies in India under the TUFS scheme,

• Reimbursement of interest charged by the lending agency on a project of technology Up-gradation

• Cover for foreign exchange rate fluctuation not exceeding 5% but 4% for spinning machinery

• 5% interest reimbursement plus 10% capital subsidy for specified processing machinery

• 15% Margin Money subsidy for SSI textile and jute sector in lieu of 5% interest reimbursement on investment

• 25% capital subsidy on purchase of the new machinery and equipments for the pre-loom and post-loom operations, handlooms/up-gradation of handlooms and testing and Quality Control equipments, for handloom production units

• 5% interest reimbursement plus 10% capital subsidy for specified machinery required in manufacture of technical textiles and garmenting machineries

6%100%26,178 26,671 25,530 26,293 20,732 Total15%21%5,369 4,760 4,097 4,131 3,043 India2%16%4,224 4,730 5,201 5,062 3,975 USA

13%30%7,831 7,966 6,612 7,086 4,871 China

CAGR 2003-2008

Share in 2007-082007-082006-072005-062004-05 2003-04Country

Cotton: Country-wise production (million kgs)

6%100%26,178 26,671 25,530 26,293 20,732 Total15%21%5,369 4,760 4,097 4,131 3,043 India2%16%4,224 4,730 5,201 5,062 3,975 USA

13%30%7,831 7,966 6,612 7,086 4,871 China

CAGR 2003-2008

Share in 2007-082007-082006-072005-062004-05 2003-04Country

Cotton: Country-wise production (million kgs)

5%100%26,70726,69525,04423,52621,780Total

8%15%4,0503,9323,6553,2652,987India

-7%4%1,0231,0771,2781,4571,364USA

11%42%11,12410,8009,4398,2397,224China

Cotton: Country-wise consumption (million kgs)

5%100%26,70726,69525,04423,52621,780Total

8%15%4,0503,9323,6553,2652,987India

-7%4%1,0231,0771,2781,4571,364USA

11%42%11,12410,8009,4398,2397,224China

Cotton: Country-wise consumption (million kgs)

3%31%8,1268,1159,7287,8017,256Total78%15%1,200960751136119India0%37%3,0402,8333,8213,1432,995USA

-28%0%10108738China

Cotton: Country-wise exports (million kgs)

3%31%8,1268,1159,7287,8017,256Total78%15%1,200960751136119India0%37%3,0402,8333,8213,1432,995USA

-28%0%10108738China

Cotton: Country-wise exports (million kgs)

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• Option to the power looms units to avail of 20% Margin Money subsidy under TUFS in lieu of 5% interest reimbursement on investment in TUF

Spinning sector has been the largest beneficiary of funds disbursed under TUFS. The amount disbursed under TUFS was the highest for ginning, pressing and spinning stage which formed about 47 per cent of the total amount disbursed under the scheme. The GoI modified the scheme in July, 2007 by lowering the interest subsidy for spinning companies from 5 per cent to 4 per cent, while other parts of the value chain would continue to benefit from the 5 per cent interest subsidy. Interest subsidy for spinning was reduced to correct the skew in investments under TUFS towards spinning, and provide more funds for weaving and processing. The GoI has provided additional funds of Rs. 1,400 crore for TUFS which have been allocated under the fiscal stimulus package announced on 7th December, 2008.

Figure 3-13 : Disbursal of funds under TUFS by Stages in Value Chain Source: Textile Commissioner and CRIS Analysis The approval percentage has been calculated to identify the cause of low disbursal of funds under TUFS to weaving and processing. The analysis of approval percentage across the different stages of value chain of textile and garments show that the approval percentage is similar (ranging from 70% to 78% in different stages with average of 75% for the entire industry) across different stages of the value-chain of the textiles and garments industry. The low disbursal for the stages 2, 3 and 4 is linked to low applications for TUFS and not to low approval rates.

Figure 3-14 : Segment wise Application and Disbursement of Funds under TUF from 1999 to 2008 Source: Textile Commissioner and CRIS Analysis To identify the low applications for funds under TUFS by weaving and processing stages, the responses of companies met have been further analysed. As per the responses from the companies met during the primary survey, the low applications for TUFS for weaving and processing is due to following reasons,

9,56921%Composite MillsIntegrated4,44210%Home Textiles & GarmentsStage 44,66210%ProcessingStage 34,97811%Weaving & KnittingStage 221,26747%Ginning, Pressing & SpinningStage 1

Disbursed(Rs Cr)% ShareName of StageStages

9,56921%Composite MillsIntegrated4,44210%Home Textiles & GarmentsStage 44,66210%ProcessingStage 34,97811%Weaving & KnittingStage 221,26747%Ginning, Pressing & SpinningStage 1

Disbursed(Rs Cr)% ShareName of StageStages

75%44,91759,601Total70%9,56913,634CompositeIntegrated78%4,4425,727Home Textiles and GarmentsStage 478%4,6625,992ProcessingStage 374%4,9786,759Weaving and KnittingStage 277%21,26727,490Ginning, Pressing and SpinningStage 1

Approval %Disbursed (Rs Cr)

Application (Rs Cr)Name of StageStages

75%44,91759,601Total70%9,56913,634CompositeIntegrated78%4,4425,727Home Textiles and GarmentsStage 478%4,6625,992ProcessingStage 374%4,9786,759Weaving and KnittingStage 277%21,26727,490Ginning, Pressing and SpinningStage 1

Approval %Disbursed (Rs Cr)

Application (Rs Cr)Name of StageStages

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a) Low profitability and losses of companies in the processing and weaving stage leading to difficulty in getting loans from Banks due to criteria such as three year’s profitability track record, b) Lack of documentation (which are required by Banks for processing loans) as a result of grey market operations of small scale players in the weaving and processing stage limiting loans from Banks, c) Limited ability of the small scale players to increase the scale of production, d) Delay in receiving TUFS benefits from Banks creating working capital problems for firms leading to low interest for availing TUFS and e) Lack of interest from Banks in promoting the TUFS scheme. The analysis of disbursement of funds under TUFS show that centralized approval by SIDBI (in its HO in Lucknow) is leading to delay of up to 2 years in distribution of funds. The approval at SIDBI needs to be decentralized at a regional level to ensure quick disbursal of funds.

Figure 3-15 : Disbursal Process of TUFS

Outdated Weaving Technology The shipment of shuttle-less looms from 1996 to 2005 was very low in India at 7,246 looms as compared to China at 246,943 looms. The shipment of shuttle-less looms to competing countries like Bangladesh and Pakistan was low as compared to India in absolute terms but was high as a percentage of total looms. Figure 3-16 : Shipment of shuttle-less looms from 1996-2005

Source: CRISIL Research

5,9337,246

3,928

22,528

0

5,000

10,000

15,000

20,000

25,000

Pakistan India Bangladesh Turkey

(Nos

.)

0

50,000

100,000

150,000

200,000

250,000

300,000

China

(Nos

).

246,943

Ministry of Textiles

Ministry of Textiles

The fund is channelled by Government of India through the Office of the Textile Commissioner, Ministry of TextilesThe fund is channelled by Government of India through the Office of the Textile Commissioner, Ministry of Textiles

Government of India

Government of India

The fund for TUFS is allocated by Government of India through the Annual Budgets or through notifications during the year The fund for TUFS is allocated by Government of India through the Annual Budgets or through notifications during the year

SIDBISIDBIThe Office of the Textile Commissioner, Ministry of Textiles has appointed SIDBI as nodal agency for releasing the subsidy under the TUFS scheme

The Office of the Textile Commissioner, Ministry of Textiles has appointed SIDBI as nodal agency for releasing the subsidy under the TUFS scheme

Primary LendingInstitutions (PLI)

Primary LendingInstitutions (PLI)

The PLIs are then required by SIDBI to identify their Nodal Branch. The PLIs are required to furnish the certificates for applicants seeking eligibility clearance of a proposal under TUFS

The PLIs are then required by SIDBI to identify their Nodal Branch. The PLIs are required to furnish the certificates for applicants seeking eligibility clearance of a proposal under TUFS

Applicant (Company)Applicant (Company)

The funds are then released by PLIs for interest reimbursement and Credit Linked Capital Subsidy (CLCS) under TUFS to the eligible companies

The funds are then released by PLIs for interest reimbursement and Credit Linked Capital Subsidy (CLCS) under TUFS to the eligible companies

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The percentage of shuttle less looms in India was low at 2% of total looms as compared to China at 22% and Indonesia at 12% in 2005. The details of weaving capacity as a capacity as a ratio of shuttle less looms vis-à-vis total looms is presented in the figure given below. Figure 3-17 : Weaving Capacity - Ratio of shuttle less looms vis-à-vis total looms in 2005

Source: CRISIL Research Government policies have an important bearing on the structure of the industry. The Central Excise Act allowed 100% excise exemption, if the turnover of the manufacturing company does not exceed Rs. 20 million in the immediately preceding year. The said limit was revised to Rs. 30 million in the Union Budget of 1995-96. Currently the limit for excise exemption is Rs. 40 million, as revised in Union Budget 2005-06. Although the objective of the same is to promote the SSI sector, this has encouraged the players to restrict their capacities, so as to avail of such exemption. To add to this, both weaving and processing are capital intensive businesses, and with high interest cost, huge capacities did not come up in this sector, thereby leading to fragmentation. This has resulted in poor economies of scale, and low capital productivity and profitability has prevented investments in technology up-gradation. Due to this, the Indian weaving and processing sector is unable to cater the demand from big manufacturers. Hence, the latter primarily depend upon imported fabrics. Thus, the order size for fabrics from the apparel and home textile manufacturers is low. This, in turn leads to low scale and poor margins – a vicious circle, in which our weaving and processing sector is badly trapped. The weaving and processing segment is stuck in the vicious circle of fragmentation as summarized in the figure presented below.

0

500

1,000

1,500

2,000

2,500

India China Pakistan Indonesia0%

5%

10%

15%

20%

25%

Shuttleless looms Shuttle looms Share of Shuttleless looms

(In 000)

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Final Report 35

Figure 3-18 : Weaving and Processing: Stuck in the vicious circle of fragmentation

Source: CRISIL Research Industry’s import dependence has been increasing Fabric imports (in value terms) comprised around 33% of all total imports for the industry in 2006, an increase from 14% in FY 2002. Rise in garment production (especially exports) has resulted in increased fabric imports to meet buyer specifications. Woven cotton and Man Made fibre fabrics and knitted fabric comprise around 60% of fabric imports. Silk and woollen fabric comprises additional 25%. Rising fabric imports owing to a) fragmentation in domestic weaving and processing facilities and use of outdated technologies, thereby impacting the ability to meet the delivery schedules and quality specifications set by the garmenting units and b) International buyer also nominates the mill from where fabric is to be purchased. Increasing import dependence points to the urgent need to invest in fabric and processing capacities.

Figure 3-19 : Import of Yarn and Fabrics by India

Source: CRIS Analysis

39% pa.

India’s fabric imports (Rs Cr.)

1038

1765

2443

3910

2886

2002 2003 2004 2005 2006

1173

1503 1417

20051863

2002 2003 2004 2005 2006

14% pa.

India’s yarn imports (Rs Cr.)

1173

1503 1417

20051863

2002 2003 2004 2005 2006

14% pa.

India’s yarn imports (Rs Cr.)

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Production of Textiles Machinery in India is skewed towards Spinning The Indian textile machinery industry, primarily, produces spinning machinery and some parts of preparatory machinery for spinning and weaving. A significant proportion of weaving, processing and knitting machines are imported into the country. Although the industry is quite fragmented, the organised players have a greater share of the market in value terms, as they focus on larger machinery that is looms and spinning machines. The unorganised players deal in parts (preparatory machines, for example, Pirn Winding machine) and accessories. The domestic industry also faces competition from imports of second hand machinery. The analysis of production of textiles machinery in value indicates that 77% of total textiles machinery produced in India in 2007-08 was for spinning and allied machinery. The value of spinning and allied machinery produced in India has also increased significantly at a CAGR of 10% from 1996-97 to 2007-08. The value of machinery produced for weaving was low at 4% in total production of machinery in 2007-08. Similarly, value of machinery produced for processing was low at 3% in total production of machinery in 2007-08.

Figure 3-20 : Production of Textiles Machinery by Value

Source: Textile Commissioner and CRIS Analysis The spinning industry has been the biggest beneficiary of TUFS. This has proved to be a boon for the domestic textile machinery industry, which primarily manufactures spinning machinery. Downstream industries like processing and weaving, received a relatively lower share of the funds. This has led to large capacity additions in the spinning sector without the requisite development in the downstream industries. Recognising the need to correct the skew in investments towards spinning, the government has lowered the interest subsidy on spinning from 5 per cent to 4 per cent. This will lead to a slower pace of capacity build up in spinning. Profitability of spinners to be affected by oversupply and high cotton prices CRISIL Research expects the global economic meltdown to have a severe impact on the Indian cotton yarn industry. The cotton yarn industry is highly export dependent, with export demand accounting for 45 per cent of total demand. With India’s main export markets - the US and the EU - bearing the brunt of the global economic meltdown, the country’s exports of cotton fabrics and made-ups will be negatively impacted. Further, on account of weak export demand, the cotton yarn that would have been exported will be diverted to the domestic market, thus leading to oversupply.

100%8%3,0091,0721,291Grand Total13%4%378288241Spares & accessories87%9%2,6317841,050Total1%NA1900Jute Machinery1%0%355636Hosiery machinery & needles1%2%442634Textile testing & controlling instruments3%1%1058392Processing machinery4%1%11578108Weaving & allied machinery

77%10%2,312541780Spinning & allied machinery

Share in Production

CAGR (1996-08)

2007-08

2001-02

1996-97Category (Figures in Rs Crores)

100%8%3,0091,0721,291Grand Total13%4%378288241Spares & accessories87%9%2,6317841,050Total1%NA1900Jute Machinery1%0%355636Hosiery machinery & needles1%2%442634Textile testing & controlling instruments3%1%1058392Processing machinery4%1%11578108Weaving & allied machinery

77%10%2,312541780Spinning & allied machinery

Share in Production

CAGR (1996-08)

2007-08

2001-02

1996-97Category (Figures in Rs Crores)

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Cotton fibre is the most important cost component for spinners, as it accounts for 55 per cent of operating income. The government's decision to hike the MSP of cotton by 47.8 per cent to Rs. 3,000 per quintal (long staple variety) has put a floor on Indian cotton prices (S-6 variety) in the range of Rs. 75 - 80 per kg. On account of this fact, domestic cotton prices, which have always been lower than international prices, are now much higher. It is now cheaper for companies to import cotton rather than buy it from the domestic market. Cotton arrivals generally peak during November-February, and unless domestic prices soften, companies will be covering their cotton requirements at high costs, which will put pressure on margins. With declining crude oil prices, polyester prices too are declining. High domestic cotton prices will encourage substitution of cotton by polyester, and spinners are likely to spin more blended yarn and polyester yarn. To mitigate the risk of being exposed to a commoditised market, established cotton yarn spinners have forward-integrated into the manufacturing of fabrics and home textiles. However, this has resulted in highly leveraged balance sheets, which has increased the financial risk of manufacturers. The inability of spinners to pass on the rising input costs is likely to put further pressure on their profitability. Capacity expansions undertaken by spinning companies have been debt funded (in order to take advantage of the TUF scheme), which is reflected in the high gearing levels. With capacity additions outstripping demand growth, the asset turnover of companies is showing a sharp decline. High interest costs and depreciation charges are putting intense pressure on the net margins of companies, leading to lower cash accruals and a worsening of the debt servicing indicators (interest coverage and net cash accruals to total debt ratios). Apparel exports to decline, margins of garment exporters will be under pressure The readymade garments industry is also facing the brunt of the global economic slowdown, given the high dependence on exports to the US and EU markets, which make up for 70 per cent of the industry in value terms. The domestic readymade garments market of India is however larger, and exports account for a little less than 35 per cent of the total market in value terms. Declining retail sales in the US and EU will lead to lower outsourcing of garments from India and other countries. The same - store sales of several leading retailers have dropped sharply in October 2008, as compared to the same period last year. The fall was steeper when compared to the decline in the year-till-date figures (January-October 2008) for same store sales. Declining retail sales will lead to a sharp fall in imports by the US, as retailers look to cut inventories. The impact of this will be more severe and visible in the data that would be released over the next few months. Retail sales in the EU have also been affected. Retailers in the EU-15 countries reported a sales drop of 0.3 per cent in September 2008 from the previous month and a decline of 1.5 per cent on a year-to-year basis. Apparel exports from India are expected to fall by around 5 per cent in 2008-09 and 2009-10. The market is also witnessing intense competition. Low cost producers like Bangladesh and Vietnam have gained market share at the expense of traditional players like India and China. Indian garment exporters are thus facing intense pricing pressure, while they also grapple with the challenge of an extremely volatile Rupee. Garment exporters have shown a sharp dip in their profitability over the last 2 quarters, due to losses on account of hedging and derivative contracts. While the Rupee appreciated sharply since July 2006, it has followed a reverse trend since May 2008 following the huge FII outflows in the wake of the credit crisis. Consequently, companies which had hedged their forex exposures have accounted for mark-to-market losses, resulting in a steep decline in the profitability and even losses for several garment exporters. While we expect the Rupee to appreciate over the next 18 months, the earnings of garment exporters will remain highly vulnerable to a volatile

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exchange rate scenario. Intense competition will put pressure on realisations and the profitability of garment exporters is likely to remain low over the next 18 months. In January-July 2008, India's average realisation [(per square metre (/sq m)] in the US market (at $3.58) was above the world average realisation of $3.16. Also in the European market, India's realisation at €16.6 per kg is higher than the world average of €14 per kg. India's realisation (/sq m) has dropped from $3.79 in 2006 to $3.53 in 2008, but it is still above the world average. Though realisation (/sq m) declined by 3.7 per cent in dollar terms in 2007, the fall was much sharper in Rupee terms (12 per cent) on account of its appreciation. However in 2008, realisation (/sq m) came down by a further 3.3 per cent, but the depreciating Rupee compensated partially for it, leading to a total drop of 2.7 per cent in Rupee terms. Pricing flexibility of garment exporters is likely to remain weak as buyers look to rationalise costs down the supply chain.

3.7 COMPETITIVE BENCHMARKING

The competitive benchmarking of India has been done with China, Bangladesh and Turkey to identify the areas where India has competitive advantages and disadvantages as compared to these countries. The exports of India have registered the lowest CAGR of 8% from 2000 to 2006 as compared to all the three competing countries. The exports of Bangladesh was USD 8.5 billion in 2006 registering a CAGR of 11% from 2000 to 2006 as compared to CAGR of 8% of India during the same period. The export of Bangladesh was around 42% of India’s exports in 2006 which is very high. The exports from Bangladesh has been increasing at a significant rate due to competitive advantages like low labour cost, better technology and benefits due to classification as a LDC by EU and US. The details of exports of competing countries have been presented in the table given below. Figure 3-21 : Exports of Textile and Garments by Competing Countries

Source: WTO and CRIS Analysis Comparison of Manpower Index and Labour Cost across Competing Countries

The difficulty of firing index is highest in India as compared to competing countries as per the Doing Business report for 2008 released recently. While the firing cost is lowest in India (56 weeks of salary) as compared to China (91 weeks of salary), Bangladesh (104 weeks of salary) and Turkey (95 weeks of salary), the difficulty in firing is a major issue impacting the competitiveness of textiles and garments industry in India.

7%530,004356,673World11%8,4474,555Bangladesh

11%19,47510,205Turkey

8%19,52112,177India

18%144,07152,206China

CAGR2006 (USD Mn)

2000 (USD Mn)Country

7%530,004356,673World11%8,4474,555Bangladesh

11%19,47510,205Turkey

8%19,52112,177India

18%144,07152,206China

CAGR2006 (USD Mn)

2000 (USD Mn)Country

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Figure 3-22 : Manpower Index of Competing Countries in 2008

Source: Doing Business 2008 and CRIS Analysis Export business being dependent upon orders, seasonal and contractual in nature, excess labour during lean order periods or during initial stages of developing export market(s), when order uncertainty is high, leads to financial difficulties – necessitating flexibility in contract labour laws. Units employing over 100 people currently fall under the purview of Industrial Disputes Act. The Act stipulates that employers must obtain necessary approvals to effect lay-offs. This proves to be a hindrance especially for small and medium enterprises. The average cost per operator hour is very low in Bangladesh and Pakistan as compared to India as per the Labour Cost Comparison Report of 2007 published by Werner International. The average cost per operator hour is high in India (USD 0.69/hour) as compared to competing countries like Bangladesh (USD 0.28/hour), Pakistan (USD 0.42/hour), and Indonesia (USD 0.65/hour). The average cost per operator hour in Inland of China is lower then India while it’s higher then India in Costal parts of China. Figure 3-23 : Manpower Average Cost/Operator Hour for Textiles & Garments Industry in 2007

Source: Werner International and CRIS Analysis Benefits to Competing Countries under Scheme of Generalised Tariff Preferences (GSP) European Union (EU) and United States provide duty benefits to developing countries under the Generalised System of Preference. The EU's GSP grants products imported from GSP beneficiary countries either duty-free access or a tariff reduction, depending on which of the GSP arrangements a country enjoys. The primary purpose of providing GSP benefits to developing countries is to increase trade with developing countries which will enhance their

7.77S. Korea

2.96Turkey

0.85China Coastal

0.69India0.65Indonesia

0.55China Inland

0.42Pakistan

0.28Bangladesh

Average Cost Per Operator Hour in USD

Country

7.77S. Korea

2.96Turkey

0.85China Coastal

0.69India0.65Indonesia

0.55China Inland

0.42Pakistan

0.28Bangladesh

Average Cost Per Operator Hour in USD

Country

1361298685Overall Rank951049156Firing cost (weeks of salary)

2204417Non-wage labor cost (% of salary)

42352430Rigidity of employment (0–100)

30404070Difficulty of firing index (0–100)

40202020Rigidity of hours index (0–100)

5644110Difficulty of hiring index (0–100)

TurkeyBangladeshChinaIndia Employing Workers

1361298685Overall Rank951049156Firing cost (weeks of salary)

2204417Non-wage labor cost (% of salary)

42352430Rigidity of employment (0–100)

30404070Difficulty of firing index (0–100)

40202020Rigidity of hours index (0–100)

5644110Difficulty of hiring index (0–100)

TurkeyBangladeshChinaIndia Employing Workers

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export earnings, promote their industrialisation and encourage the diversification of their economies. Tariff preferences provide an incentive to traders to import products from developing countries, and help them to compete on international markets. There are three preferential regimes under the EU's GSP scheme namely a) GSP, b) GSP+ and c) EBA (everything but arms). The GSP scheme provides preferential access for all 176 beneficiary countries and territories. Under the GSP scheme, duty free imports are allowed by EU for non-sensitive products and tariff reduction for sensitive products by specified amount. The products of three industries under the assignment are included in sensitive products. The GSP+ scheme provides additional benefits for countries implementing certain international standards in human and labour rights, environmental protection, and good governance. Under the GSP+ scheme, duty free imports are allowed by EU for 6,421 products. EBA scheme provides "duty-free and quota-free" access to the EU's market for all products except arms and armaments for Least Developed Countries (LDC). The details of three schemes are provided in the figure given below.

Figure 3-24 : European Union Scheme of Generalized System of Preferences (GSP)

Source: European Union and CRIS Analysis The preferential treatment under the GSP is provided to 176 developing countries and major exporters of textiles and garments industry like China, India, Bangladesh, Vietnam, Indonesia, etc are included in the list of 176 countries. Hence, India is neither having any competitive advantage or disadvantage under this scheme. 14 countries are included in under the GSP+ scheme and Sri Lanka which is one of the competitors of India benefits under this scheme. There are 50 LDCs which are provided preferential treatment under the EBA scheme. Bangladesh, one of the major competitors of India for textiles and garments industry benefits under this scheme and is one of the major causes of competitive disadvantage of India as compared to Bangladesh. Majority of the respondents met during primary survey also felt that Bangladesh has competitive advantage due to benefits under this scheme.

GSPGSP

GSP +GSP +

EBA (Everything but arms)

EBA (Everything but arms)

Standard preferential treatment to 176 developing countries Standard preferential treatment to 176 developing countries

For countries which are not classified as high income country & 5 largest sections cover more than 75% of total GSP imports

Follow international standards for human rights, labour standards, etc

For countries which are not classified as high income country & 5 largest sections cover more than 75% of total GSP imports

Follow international standards for human rights, labour standards, etc

50 Least Developing Countries (LDC)50 Least Developing Countries (LDC)

CriteriaCriteria

Duty free import for non-sensitive products or tariff reduction for sensitive products by specified amount below normal tariff rates for 6355 products

Duty free import for non-sensitive products or tariff reduction for sensitive products by specified amount below normal tariff rates for 6355 products

Duty free import for 6421 productsDuty free import for 6421 products

Duty free and quota free imports of all products except arms and armaments

Duty free and quota free imports of all products except arms and armaments

BenefitsBenefits

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Figure 3-25 : Countries falling under Generalized System of Preferences (GSP)

Source: European Union and CRIS Analysis Impact of Appreciation/Depreciation of Currencies with respect to USD Indian Rupee (INR) had appreciated by 12% from January, 2006 to February, 2008 versus USD. While the INR appreciated leading to reduction in revenues of exporters in India, the currencies of competitive countries like Bangladesh (5%) and Pakistan (4%) depreciated during the same period leading to increase in revenues of exporters in these countries. Hence, it can be concluded that the competitive advantage of India was reduced due to appreciation in INR vis-à-vis USD and depreciation of currencies of competing countries vis-à-vis USD. However, there has been a reversal in trend in recent months and INR has depreciated by 5% in September, 08 as compared to January, 2006 levels. The INR has fluctuated by around 25% versus USD (INR 39 to INR 49) in 2008 resulting in uncertainty for the exporters with respect to revenues and is one of the major factors impacting the textiles and garments industry in India.

Figure 3-26 : Currency Fluctuations of Competing Countries versus USD Source: OANDA and CRIS Analysis The discussions with the companies in Tirupur revealed that the companies have suffered huge losses in an attempt to hedge foreign exchange risk. The companies in Tirupur registered losses while hedging as they entered into forward contracts based on the advice from the local banks. For example, when 1 USD was around INR 42, companies entered into forward contract wherein they hedged 1 USD at INR 39 but since the INR depreciated versus USD, companies suffered huge losses. One of the primary reasons for losses

General ArrangementGeneral Arrangement

GSP +GSP +

EBAEBA

176 developing countries including China, India, Brazil, Thailand, Bangladesh, Vietnam, Indonesia, Malaysia, Pakistan, etc

176 developing countries including China, India, Brazil, Thailand, Bangladesh, Vietnam, Indonesia, Malaysia, Pakistan, etc

14 countries namely, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Mongolia, Nicaragua, Panama, Peru, Sri Lanka and Venezuela

14 countries namely, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Mongolia, Nicaragua, Panama, Peru, Sri Lanka and Venezuela

50 least developed countries like Bangladesh, Nepal, Bhutan, Myanmar, Mozambique, Zambia, Rwanda, Samoa, Yemen, Senegal, Guinea, Malawi, Sudan, etc

50 least developed countries like Bangladesh, Nepal, Bhutan, Myanmar, Mozambique, Zambia, Rwanda, Samoa, Yemen, Senegal, Guinea, Malawi, Sudan, etc

Name of Countries under each schemeName of Countries under each scheme

5%69.766.3 Bangladeshi Taka

4%62.259.8 Pakistan Rupee

-7%9173.19,817.6 Indonesian Rupiah

-11%1.21.3 Turkish New Lira

-11%7.28.1 Chinese Yuan Renminbi

-12%40.045.2 Indian Rupee -24%3141Thailand Baht

% ChangeFeb-08Jan-06CurrencyConversion of Dollar to Currencies of Countries

5%69.766.3 Bangladeshi Taka

4%62.259.8 Pakistan Rupee

-7%9173.19,817.6 Indonesian Rupiah

-11%1.21.3 Turkish New Lira

-11%7.28.1 Chinese Yuan Renminbi

-12%40.045.2 Indian Rupee -24%3141Thailand Baht

% ChangeFeb-08Jan-06CurrencyConversion of Dollar to Currencies of Countries

31%78.1 59.8 Pakistan Rupee

5%69.8 66.3 Bangladeshi Taka

5%47.3 45.2 Indian Rupee -3%9,505.7 9,817.6 Indonesian Rupiah

-5%1.3 1.3 Turkish New Lira

-15%6.9 8.1 Chinese Yuan Renminbi

-17%3441Thailand Baht

% ChangeSep-08Jan-06CurrencyConversion of Dollar to Currencies of Countries

31%78.1 59.8 Pakistan Rupee

5%69.8 66.3 Bangladeshi Taka

5%47.3 45.2 Indian Rupee -3%9,505.7 9,817.6 Indonesian Rupiah

-5%1.3 1.3 Turkish New Lira

-15%6.9 8.1 Chinese Yuan Renminbi

-17%3441Thailand Baht

% ChangeSep-08Jan-06CurrencyConversion of Dollar to Currencies of Countries

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suffered by companies was also the greed to make quick money as local Banks had assured companies in Tirupur that INR would further appreciate and many companies entered into forward contracts of more then the actual revenues. The foreign exchange risk was faced by the companies while the financial institutions earned fees for advising companies and faced no foreign exchange risk. There is a need of consolidation of foreign exchange risk of small and medium scale companies by a financial intermediary, which can charge fees and hedge the foreign exchange risk of small and medium players.

3.8 SUPPLY CHAIN COMPETITIVENESS OF TEXTILES & GARMENTS INDUSTRY

The supply chain index of the textiles and garments industry in India has been evaluated on a three point rating scale with parameters as Good, Average and Poor. The analysis of supply chain competitive of textiles and garments industry in India shows that the competitiveness of India is good in the first stage of the industry i.e. production of cotton as India has share of 21% in total production of cotton in the world in 2007-08. However, the competitive advantage of India is reduced in the second stage where yarn is created from cotton. The margins of the yarn producers have been impacted due to significant increase in price of raw materials due to increasing exports and inability of the companies to increase the prices of yarn in line with the increase in price of cotton. Though India produced 21% of total cotton in world in 2007-08 its share in total consumption of cotton in world was only 15%. Since majority of the spinning companies are standalone units and are not involved in weaving, knitting and manufacturing of readymade garments they are not able to absorb the increase in price of cotton in other stages of value chain. Moreover, due to higher labour cost of India as compared to competing countries like Bangladesh, Pakistan, China, etc. the margins of spinning companies in India is lower then competing countries.

Figure 3-27 : Supply Chain Competitiveness Index for Textiles and Garments Industry

The competitiveness of India is poor in the weaving, knitting and processing stages of the value chain. The outdated technology due to lack of shuttle-less looms for weaving and small scale nature of units is the major cause of competitive disadvantage for India as compared to competitive countries. The small scale nature of the companies involved in the

CottonCotton

AverageAverage

PoorPoor

PoorPoor

AverageAverage

GoodGood

YarnYarn

Weaving and Knitting

Weaving and Knitting

ProcessingProcessing

RMGRMG

Lack of skilled manpower and dependent on other countries for processed fabric Lack of skilled manpower and dependent on other countries for processed fabric

Outdated technology and lack of units leading to a gap in value chainOutdated technology and lack of units leading to a gap in value chain

Outdated technology and lack of knitting and weaving units leading to a gap in value chain Outdated technology and lack of knitting and weaving units leading to a gap in value chain

The margins have reduced due to significant increase in price of raw materialsThe margins have reduced due to significant increase in price of raw materials

21% share in total production of cotton in world21% share in total production of cotton in world

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weaving and processing stage leads to lack of standardisation for fabric which is used for manufacturing of ready made garments. The manufacturing of readymade garments (RMG) in India has been impacted by gap in the value chain of the industry caused by weaving, knitting and processing stage and the dependence of India on processed fabric imports has seen a significant increase in recent years. India is exporting cotton and importing processed fabric. The lack of flexibility in employing labour is another area of concern as export business is dependent upon orders, seasonal and contractual in nature, excess labour during lean order periods or during initial stages of developing an export market(s), when order uncertainty is high, leads to financial difficulties for the RMG companies.

3.9 ISSUES TO BE ADDRESSED FOR TEXTILES & GARMENTS INDUSTRY

The key issues to be addressed for the industry have been classified into three categories namely, a) Industry Level Issues, b) Location Specific Issues and c) Macro Level Issues. The objective of classifying issues into three categories is to have clarity as to which is the relevant agency for an issue and with which agency NMCC should liaison to remove the problems faced by the industry. The industry level issues are specific textiles and garments and the relevant agencies with which NMCC should liaison for resolving the issue is Ministry of Textiles. The location specific issues are common to all industries and are specific to a state and its districts. NMCC should liaison with State Governments and Industry Associations in resolving location specific issues. The macro level issues are economic policy issues and are common across industries. In resolving the macro level issues, NMCC would be required to work with central agencies like Reserve Bank of India, Ministry of Finance, Ministry of External Affairs, etc.

Figure 3-28 : Framework for Classification of Issues for Textiles and Garments Industry

The key issues to be addressed for the textiles and garments industry has been identified based on the findings from primary survey and validation through secondary data and

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

Specific to an IndustrySpecific to an Industry

Economic Policy Related IssuesEconomic Policy Related Issues

Location Specific Issues

Location Specific Issues

Common to all industries and is specific to state & sub state level

Common to all industries and is specific to state & sub state level

Ministry of TextilesMinistry of Textiles

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

State Governments and Industry AssociationsState Governments and Industry Associations

NMCC to play the role of enabler by interacting with different agenciesNMCC to play the role of enabler by interacting with different agencies

IssuesIssues Description of IssueDescription of Issue Relevant AgenciesRelevant Agencies

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analysis. The key issues to be addressed have been identified under the framework explained above.

Figure 3-29 : Classification of Issues for Textiles and Garments Industry The key industry level issues for the textiles and garments industry are a) High raw material prices impacting spinning players, b) Gap in value chain due to lack of weaving, knitting and processing units, c) Skew of TUFS towards Ginning and Spinning and d) Lack of flexibility in hiring labour. The major location specific issues which are impacting the competitiveness of the industry are lack of power supply and shortage of skilled manpower. The shortage of skilled manpower is more pertinent to the readymade garment units. The foreign exchange fluctuations is a major macro level issues which is a major concern for the textiles and garments industry. The foreign exchange rate of INR has fluctuated by 25% versus USD in 2008 and has led to great amount of uncertainness for the exporters. The preferential treatment provided to competing countries like Bangladesh and Sri Lanka in terms of duty free imports by EU and US is also impacting the competitiveness of the textiles and garments industry in India. Bangladesh has benefited immensely by classification as LDC (Least Developed Country) by EU while Sri Lanka has benefited by classification as GSP+.

3.10 RECOMMENDATIONS FOR TEXTILES AND GARMENTS INDUSTRY

Improvements in Existing Schemes like TUFS for Textiles & Garments The following are the two recommendations for improvements in Technology Up-gradation Funds Scheme for the textiles and garments Industry in India. Decentralization of TUFS: The disbursal of funds under the TUFS has been delayed from 2 month to 2 years creating working capital problems for the companies. The analysis of

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

High raw material prices impacting spinning players

Gap in value chain due to lack of weaving, knitting and processing units

Skew of TUFs towards Ginning and Spinning

Lack of flexibility in hiring labour

High raw material prices impacting spinning players

Gap in value chain due to lack of weaving, knitting and processing units

Skew of TUFs towards Ginning and Spinning

Lack of flexibility in hiring labour

No FTA and RTA with US and EU which are the major importers

LDCs benefiting under GSP scheme and impacting exports of India – Bangladesh, Sri Lanka

Foreign exchange fluctuations leading to uncertainty of revenues for exporters

No FTA and RTA with US and EU which are the major importers

LDCs benefiting under GSP scheme and impacting exports of India – Bangladesh, Sri Lanka

Foreign exchange fluctuations leading to uncertainty of revenues for exporters

Location Specific Issues

Location Specific Issues

Lack of skilled manpower impacting productivity and costs of production

Lack of power supply severely impacting the textiles and garments industry

Lack of skilled manpower impacting productivity and costs of production

Lack of power supply severely impacting the textiles and garments industry

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disbursement of funds under TUFS in the earlier chapter on textiles and garments shows that centralized approval by SIDBI (which is the nodal agency) in its Head Office in Lucknow may be one of the primary reasons for delay of up to 2 years in distribution of funds. The approval at SIDBI needs to be decentralized at a regional level to ensure quick disbursal of funds. Increased Focus for Weaving, Knitting and Processing Sector: The primary survey and secondary data and analysis has clearly shown that fabric imports of India has been increasing owing to a) fragmentation in domestic weaving and processing facilities and use of outdated technologies, thereby impacting the ability to meet the delivery schedules and quality specifications set by the garmenting units. Increasing import dependence points to the urgent need to invest in fabric and processing capacities. The analysis of approval percentage across the different stages of value chain of textile and garments show that the approval percentage is similar (ranging from 70% to 78% in different stages with average of 75% for the entire industry) across different stages of the value-chain of the textiles and garments industry. The low disbursal for the stages weaving, knitting and processing is linked to low applications for TUFS and not to low approval rates. The primary survey has revealed that the application of assistance for funds under TUFS is lower for weaving, knitting and processing stage due to difficulty in getting loans from Banks by small and medium scale companies. The primary reasons for difficulty in availing loans from banks is a) low profitability and losses of companies in the processing and weaving stage leading to difficulty in getting loans from Banks due to criteria such as three year’s profitability track record, b) lack of documentation (which are required by Banks for processing loans) as a result of grey market operations of small scale players in the weaving and processing stage limiting loans from Banks and c) Limited ability of the small scale players to increase the scale of production.

The GoI modified the scheme in July, 2007 by lowering the interest subsidy for spinning companies from 5 per cent to 4 per cent, while other parts of the value chain would continue to benefit from the 5 per cent interest subsidy. Interest subsidy for spinning reduced to correct the skew in investments under TUFS towards spinning, and providing more funds into weaving and processing. The existing TUFS scheme (analysed in details in the chapter on Textile and Garments) provides a) interest reimbursement to all stages in the value chain of textiles and garments industry or b) capital subsidy from 10% to 25% on some stage of the value chain like specified processing machinery, technical textiles and garmenting machineries, pre-loom and post loom operations, etc. It is recommended that GoI should explore the possibility increasing the capital subsidy under the TUFS scheme for weaving, knitting and processing stages from 50% to 75%. The increase in capital subsidy is recommended to fill the gap in value of the textiles and garments industry which has been caused by lack of weaving, knitting and processing companies in India. Exports of Value-Added Products Instead of Raw Material India is a major exporter of cotton which is the raw material for textiles and garments industry. The share of India in total production of cotton in world in 2007-08 was 21% but the consumption of cotton by India was low at 15%. The exports of cotton from India has increased a CAGR of 78% from 2003-04 to 2007-08. China produced 30% of total cotton in world but consumed 42% of cotton in 2007-08. The export of cotton from China was negligible at 10 million kg (0.1%) in 2007-08 as compared to 1,200 million kg by India which was 15% of total cotton exported in 2007-08. India is exporting cotton and yarn and importing processed fabric.

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The value addition in production of readymade garments can be 8-10 times higher than yarn and nearly twice as high as fabrics. India is exporting cotton and cotton yarn and importing processed fabric limiting the potential value addition which would create additional employment. India exported textiles comprising of cotton textiles, manmade textiles, silk textiles and made-ups of USD 9,330 in value terms and readymade garments of USD 10,192 in 2006 in value terms. The yarn producers should forward integrate into garments to improve their profitability and large garmenting companies should integrate backwards till the weaving stage. The Government agencies in India need to promote exports of value added products instead of raw materials. It is proposed that GoI should provide more incentives for developing the value-added products and should not try to reduce exports of raw materials by imposing duties or removing incentives already provided on exports. An attempt to reduce exports of raw materials by imposing duties or removing incentives is not recommended as it will reduce the incentive for farmers (in case of textiles and garments industry) to produce cotton if the realisations are not linked to the market and in trying to resolve one issue it will lead to another problem for the industry (in terms of shortage of raw materials in this case). The value addition in each stage of the textiles and garments industry is provided in the figure given below.

Figure 3-30 : Value Addition in Each Stage of the Textiles and Garment Industry Source: CRISIL Research Improvements in Scheme for Integrated Textiles Park for Textiles & Garments The garment industry is highly fragmented with a few organised players and a large number of unorganised players. Hence, the industry does not enjoy economies of scale. In case of investment in infrastructure, the weaving and processing stages are under-developed due to lack of adequate investments, which has resulted in limited supply of good quality processed fabric. The TUFS scheme has been skewed towards the spinning sector. This has forced several large domestic and export apparel manufacturer to depend on imported fabrics, which reduces the turnaround time and lowers competitiveness in the industry. As a solution to these problems, the Ministry of Textiles launched a scheme called Scheme for Integrated Textile Parks (SITP) in 2005. In this section, we take a closer look at the scheme and its present status with respect to implementation. The primary objective of the scheme is to

1 kg. Cotton Rs 50

4 sq. metres Processed

fabricRs 525

800 gms yarnRs 100

4 shirtsRs 1000

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provide the industry with world-class infrastructure facilities for setting up textile units. The scheme would facilitate textile units to meet international environmental and social standards. Each Integrated Textile Park (ITP) would normally have 50 units. The aggregate investment in land, factory buildings and plant and machinery by the entrepreneurs in a park shall be at least twice the cost of the common infrastructure proposed for the park. These parks would incorporate facilities for spinning, sizing, texturing, weaving, processing, apparels and embellishments and is based on the public private partnership (PPP) model. These parks would incorporate facilities for spinning, sizing, texturing, weaving, processing and apparels. The entrepreneurs need to come together and form a cluster. A minimum of five entrepreneurs are required to form a cluster. Identification of land is the next step. After which the entrepreneurs can float an SPV. During the Tenth Five Year Plan (2002-07), 30 projects were sanctioned in Andhra Pradesh (5), Gujarat (7), Maharashtra (5), Tamil Nadu (6), Rajasthan (3), Karnataka (1), Punjab (1), West Bengal (1), and Bihar (1). These parks will be set-up by 2009-10, with an additional investment of Rs. 169.5 billion. These parks will generate an annual production of Rs. 274 billion and will create more than half a million new jobs. While the government has through its yearly allocations in the Union Budget built-up a fund of Rs. 10.9 billion (which is close to the estimated GoI grant for the ongoing 30 parks), less than 25 per cent has been released, reflecting the slow progress of these parks. The Integrated Textile Park at Palladam in Tamil Nadu became operational in April, 2008. Two parks, Brandix India Apparel City Private Limited and Komarapalayam Hi- Tech weaving park are expected to be operational by end-2008. Six more parks are expected to become operational by March 2009. The commissioning of the remaining two-thirds of the 30 parks is being pushed beyond the announced deadlines and it is unlikely that these parks will be commissioned within the stipulated time of 2009-10. The details of fund allocation and disbursal under Scheme for Integrated Textiles Park are provided in the figure given below.

Figure 3-31 : Fund Allocation and Disbursal under Scheme for Integrated Textiles Park

Details of SITP Scheme Rs. Million Fund allocation by Government till date 10,890 Estimated project cost 30,460 Estimated GoI grant 10,569 GoI grant released 2,607

Source: CRISIL Research The progress of parks have been delayed on account of a) delay in statutory clearance for land use and environment and b) difficulty in getting funds by the companies from financial institutions. The GoI needs to consider the option of single window clearance for providing quick approvals to SITP. The difficulty in availing of financing by the weaving, knitting and processing units was also the primary reason for skewed allocation of funds under TUFS to spinning and ginning segments. While the endeavour for the SITP scheme was to create capacity for weaving, knitting and processing segments, the success of the scheme has been impacted by difficulty in availing of finance by weaving, knitting and processing segments as witnessed under the TUFS scheme.

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4 LEATHER AND FOOTWEAR INDUSTRY

4.1 LEATHER AND FOOTWEAR INDUSTRY IN INDIA AND WORLD Leather and Footwear Industry in India: The total size of leather and footwear industry in India in 2006-07 was USD 5 billion6. India is the largest livestock holding country with 21% large animals (cow and buffalo) and 11% small animals (goat and sheep). The leather and footwear industry ranks eight in terms of foreign exchange earnings for India with exports of around USD 3.2 billion7 in 2006-07. The total share of India in global leather trade during 2005 was around 3%. The industry employs 2.5 million workers out of which 30% are women. The Vision Document – 2010 for the industry projects exports of around USD 7 billion by 2011.

Export and Imports of Leather and Footwear from India: The exports of leather and footwear from India has increased from USD 2.3 billion in 2003-04 to USD 3.2 billion in 2006-07 growing at a CAGR of 11%. The mounting cost of production in Europe along with stricter environmental norms has led to the closure of large number of factories in Spain, Italy and other European countries and has resulted in growth in exports to European markets from India. The composition of exports of India has also seen a structural change in last three decades from exports of hides and skins in sixties to finished leather products in the last decade. The imports have increased from USD 0.3 billion in 2003-04 to USD 0.5 billion in 2006-07 registering a CAGR of around 25%. The imports have been growing steeply due to stagnant supply of hides and skins in the country.

Figure 4-1 : Amount and CAGR of Exports and Imports for Leather & Footwear Industry

European Union and USA are the major importers of leather and footwear from India. Germany is the largest export market for India with total exports of USD 337 million (14.1%) in 2005. The other major markets for Indian leather products are UK (12.6%), USA (11.8%), Italy (10.2%) and Hong Kong (9.9%). The details of major importers of leather and footwear are presented in the figure given below.

6 Source: Council of Leather Exports (CLE) 7 Source: Directorate General of Foreign Trade

Exports - Imports ($ Billions) of Leather and Footwear in India

2.32.6

2.93.2

0.3 0.4 0.4 0.5

0.0

1.0

2.0

3.0

4.0

2003-04 2004-05 2005-06 2006-07

Source: DGFT Exports Imports

CAGR of Exports - Imports of Leather and Footwear in India

28%

12% 10%12%

21%25%

0%

10%

20%

30%

2004-05 2005-06 2006-07

Source: DGFT Exports Imports

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Figure 4-2 : Major Importers of Leather and Footwear from India

Source: Council of Leather Exports (CLE) and CRIS Analysis The composition of the exports of the leather and footwear industry has undergone a structural shift from exports of hides and skins to exports of finished products. Leather footwear is the largest category of exports from India with a share of 32% (USD 688 million) in 2006-07. The other major sub segments of leather and footwear exports from India are finished leather (23%) and leather goods (23%).

Figure 4-3 : Exports of Leather and Footwear by Segments from India

Source: Council of Leather Exports (CLE) and CRIS Analysis

Global Trade of Leather and Footwear: The global trade in the leather and footwear segment has increased significantly from USD 76 billion in 2002 to USD 98 billion in 2005 growing at a CAGR of 8.8%. The global trade of leather and footwear is expected to further increase after the abolition of quota regime in January, 2005.

Figure 4-4 : Global Trade in Leather and Footwear Industry

Global Trade of Leather and Footwear Industry

7694 98

86

4%

10%

13%

1%0

45

90

135

2002 2003 2004 2005

Source: CLE

0%

4%

8%

12%

16%

Global Trade (USD Billions) Growth Rate

Major Importers of Leather and Footwear from India in 2005Germany

14.1%

Italy10.2%

Others22.5%

Portugal1.5%

UAE2.0%

Spain7.1%

France5.6%

Netherlands2.7%

USA11.8%

UK12.6%

Hong Kong9.9%

Exports by Segments of Leather and Footwear in 2006-07 from India

Finished Leather23%

Leather Garments

10%

Leather Goods23%

Saddlery and Harness

3%

Non-Leather Footw ear

2%

Leather Footw ear

32%

Footw ear Components

7%

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Major Exporters and Importers of Leather and Footwear in the world: China is the largest exporter of leather and footwear products with 26% (USD 26 billion) of total exports in 2005. Italy and Hong Kong are the other major exporters with 16% (USD 15 billion) and 11% (USD 11 billion) share in total exports. India exported goods worth USD 3 billion (3% market share) in 2005. USA is the largest importer of leather and footwear products with 23% (USD 24 billion) of total imports in 2005. Hong Kong and Italy are the other major importers of leather and footwear products with 10% (USD 10 billion) and 7% (USD 7 billion) share in total imports. The share of India in imports was low at around 0.4% of global imports in 2005. Hong Kong and Italy are both the major importers and exporters. Hong Kong and Italy import hides, skin and leather from other countries and export finished products like leather garments, footwear, etc.

Figure 4-5 : Major Exporters and Importers of Leather and Footwear Industry in the world

Source: Council of Leather Exports (CLE) Impact on Exports due to Financial Turmoil: As per compilation of export data by Council of Leather Exports, based on Customs Monthly Data, export of leather & leather products for the period April-October 2008 was USD 2,177 million as compared to USD 1,914 million in the corresponding period of last year, registering a positive growth of 14% in USD. In Rupee terms, the total export from India increased to Rs. 94,852 million in the period from April-October, 2008 as compared to Rs. 77,869 million in the period from April-October, 2007 growing at 22%. The above growth in exports of leather and footwear industry in both Rupee and USD in the first six months of FY 2008-09 shows that exports of the industry has not been impacted by financial turmoil in period from April-October, 2008. The impact of financial turmoil on the exports of leather and footwear industry is expected to be felt in the last two quarters of FY 2008-09.

4.2 VALUE CHAIN OF THE LEATHER AND FOOTWEAR INDUSTRY

The first stage in the value chain of the leather and footwear industry is to source raw materials in form of hides and skins of cattle, goats and sheep from dairy, draught animals or animals from slaughter houses. Leather tanning and finishing is the second stage were putrescible (decomposition of animal protein) skin is converted into non-putrescible leather. Heavy or light leather is produced after tanning and finishing of hides and skin. In the third stage of the value chain the products like leather footwear, leather garments, leather goods, industrial gloves, etc are produced from the heavy and light leather.

Major Exporters of Leather and Footwear in 2005

Italy16%

Hong Kong11%

Others29%

China26%

France4%

Germany4%

Brazil4%

Spain3%

India3%

Major Importers of Leather and Footwear in 2005

Others27%

Italy7%

Belgium2%

Spain3%

Hong Kong10%

China4%

Japan5%

UK6%

France6%

Germany7%

USA23%

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The leather and footwear industry in India has both integrated and standalone companies. The integrated companies operate in all the three stages of the value-chain namely a) collection of hides and skins, b) tanning and finishing of leather and c) manufacturing while the standalone companies operate in one of the three stages. The details of the value chain of the leather and footwear industry is presented in the figure given below.

Figure 4-6 : Value Chain of Leather and Footwear Industry Source: CRIS Analysis

4.3 MAJOR STATES IN THE INDIAN LEATHER AND FOOTWEAR INDUSTRY

Tamil Nadu is the leading state in India in terms of number of registered factories for leather and footwear industry. The state of Tamil Nadu had 37% (810) of total leather and footwear factories in India at the end of 2004-05. Uttar Pradesh is the second major state in India in terms of number of registered factories with 15% of total factories in India at the end of 2004-05. The states of Tamil Nadu and Uttar Pradesh together accounted for 52% of total factories in 2004-05. Punjab, West Bengal and Punjab are the other key states in India with significant number of registered leather and footwear companies. The details of the leather and footwear industry in terms of number of factories in operation, invested capital, total output, net value added and profit is presented in the table given below.

Cattle, Goats and Sheep

Hides and Skin

Tanning and Finishing

Heavy and Light Leather

Manufacturing

Leather Products

Distribution

Leather and Footwear Value Chain

Cattle, Goats and Sheep

Hides and Skin

Tanning and Finishing

Heavy and Light Leather

Manufacturing

Leather Products

Distribution

Leather and Footwear Value Chain

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Figure 4-7 : Share of States in Leather and Footwear Industry in 2004-05 in India Factories

In Operation8

Invested Capital9

Total Output10

Net Value

Added11 Profit State

Number Amount in Rs. Crore Tamil Nadu 810 1,756 4,846 430 73 Uttar Pradesh 331 1,168 2,673 335 123 Punjab 188 235 502 55 16 West Bengal 186 523 1,210 117 21 Delhi 165 279 735 77 24 Maharashtra 104 109 260 41 11 Andhra Pradesh 70 58 88 9 -3 Haryana 64 337 531 69 9 Kerala 58 18 42 4 0 Rajasthan 46 85 215 33 13 Madhya Pradesh 44 154 532 55 17 Karnataka 41 126 309 41 13 Puducherry 24 36 124 26 13 Gujarat 14 24 39 7 3 Himachal Pradesh 10 49 127 28 21 Bihar 8 16 69 14 -1 Chattisgarh 7 1 1 0 0 Uttaranchal 4 3 14 7 6 Jammu & Kashmir 2 2 2 0 0 Total 2,176 4,978 12,318 1,349 360

Source: Annual Survey of Industries and CRIS Analysis There are 9 leather and footwear clusters in the state of Tamil Nadu namely Chennai, Ambur, Ranipet, Vaniyambadi, Trichy, Dindigul, Erode, Vellore and Pernambut. Chennai is the largest cluster in the state of Tamil Nadu and total exports of members registered with Council of Leather Exports (CLE) in 2006-07 was USD 500 million. Ranipet located at a distance of 110 km from Chennai is the second largest cluster in the state of Tamil Nadu. The units registered with CLE in Ranipet reported exports of USD 224 million in 2006-07. Kanpur, Agra and Noida are three leather and footwear clusters in the state of Uttar Pradesh. Kanpur is one of the largest leather and footwear cluster in India and exported goods worth USD 663 million in 2006-07. The Agra cluster located at a distance of around 220 km from Delhi is the second largest cluster in the state of Uttar Pradesh. The companies registered with CLE in Agra reported exports of USD 256 million in 2006-07. Kolkata in West Bengal, Jalandhar in Punjab and Delhi are other large leather and footwear clusters in India. The companies registered with CLE in the Kolkata cluster reported exports of USD 506 million in 2006-07. 8 Factory is one that is registered under sections 2m (i) and 2m (ii) of the Factories Act, 1948. The sections 2m (i) and 2m (ii) refer to any premises including the precincts thereof (a) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on; or (b) whereon twenty or more workers are working or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on. 9 Invested capital is the total of fixed capital and physical working capital. 10 Total output comprises total ex-factory value of products and by-products as well as other receipts such as receipts from non-industrial services rendered to others. 11 Net value added is arrived by deducting total input and depreciation from total output.

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Figure 4-8 : Leather and Footwear Clusters in India

State Cluster Exports 2006-07 (USD Million)

Uttar Pradesh Kanpur 663 West Bengal Kolkata 506 Tamil Nadu Chennai 500 Uttar Pradesh Agra 256 Tamil Nadu Ranipet 224 Delhi Delhi 201 Tamil Nadu Ambur 165 Maharashtra Andheri 50 Karnataka Bangalore 47 Uttar Pradesh Noida 45 Tamil Nadu Vaniyambadi 39 Punjab Jalandhar 31 Tamil Nadu Erode 22 Puducherry Puducherry 21 Tamil Nadu Dindigul 7 Tamil Nadu Pernambut 7 Tamil Nadu Trichy 4 Tamil Nadu Vellore NA Haryana Faridabad NA Haryana Gurgaon NA Maharashtra Bhiwandi NA Maharashtra Kolhapur NA

Source: CLE and CRISIL Analysis

4.4 COVERAGE OF PRIMARY SURVEY The analysis for leather and footwear industry was also done through a combination of primary and secondary survey. The states covered for primary survey for leather and footwear industry in India was Tamil Nadu and Uttar Pradesh. Tamil Nadu and Uttar Pradesh are the two largest states in India in terms of production and exports of leather and footwear products. The state of Tamil Nadu has 9 leather and footwear clusters while the state of Uttar Pradesh has 3 leather and footwear clusters. The primary survey was done in two largest clusters of Tamil Nadu (Chennai and Ranipet) and Uttar Pradesh (Kanpur and Agra). The primary survey covered 6 companies in each of the four clusters. The survey covered 2 large, medium and small scale companies. The primary survey also covered the industry associations, export promotion councils and advisory bodies in both the states. The secondary survey was done to validate the major challenges and problems which were voiced by the people met during the primary survey and identify major players, segments, measures taken by government, global trade, major importers and exporters, etc in the industry. The secondary survey was through reports published by multilateral organizations, government agencies, industry associations, export promotion councils, advisory bodies, etc. The details of the primary and secondary survey are presented in the figure given below.

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4.5 FINDING FROM PRIMARY SURVEY FOR LEATHER AND FOOTWEAR INDUSTRY

The key issues and challenges which has been voiced during the primary survey has been classified into six categories namely, a) Infrastructure and Raw Materials, b) Manpower, c) Technology, d) Government policies, e) FTA and RTA and f) Competitive Benchmarking. The key issues and challenges detailed in this section represent the views and opinions of the companies and industry associations met during the primary survey. The issues and challenges voiced in the primary survey have been further checked through the secondary data and analysis. The main issues and challenges impacting the competitiveness of the industry have been firmed in the later sector based on the secondary data and analysis.

Reports by Multilateral Organizations like WTO, UNIDO, World Economic Forum, Doing Business, etc

Secondary Survey Reports by Government agencies like Council of Leather Exports, FICCI, NMCC, CII, Ministry of Commerce and Industry, etc

Reports by Industry agencies like,export promotion councils, advisory bodies, etc

Primary Survey

Tamil Nadu

Uttar Pradesh

Chennai Cluster

Ranipet Cluster

− 2 large scale companies

− 2 medium scale companies

− 2 small scale companies

− Industry associations

− Export promotion councils

− Advisory Boards

Kanpur Cluster

Agra Cluster

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Findings from Primary SurveyFindings from Primary Survey

Domestic availability of hides and skin is limited

Domestic market for hides and skin is highly unorganised

Inadequate water supply is a major concern. Leather processing is water intensive and ground water is depleting due to over exploitation. Access to river water is commercially infeasible for individual units.

Drainage facilities in the industrial clusters are poor. Channelling out partially treated water to CETP is a problem

Non-functioning ETPs are the major concern, increasing the risks of environmental pollution

Irregular power supply hampering production. Cost of back-up facilities increases production cost.

Access roads within the industrial clusters are poor due to low maintenance and encroachment in places like Ranipet and Kanpur

R&D expenditure at the industry level is minimal on pollution reducing chemicals primarily due to small scale companies

Domestic availability of hides and skin is limited

Domestic market for hides and skin is highly unorganised

Inadequate water supply is a major concern. Leather processing is water intensive and ground water is depleting due to over exploitation. Access to river water is commercially infeasible for individual units.

Drainage facilities in the industrial clusters are poor. Channelling out partially treated water to CETP is a problem

Non-functioning ETPs are the major concern, increasing the risks of environmental pollution

Irregular power supply hampering production. Cost of back-up facilities increases production cost.

Access roads within the industrial clusters are poor due to low maintenance and encroachment in places like Ranipet and Kanpur

R&D expenditure at the industry level is minimal on pollution reducing chemicals primarily due to small scale companies

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

Findings from Primary SurveyFindings from Primary Survey

High manpower cost increasing cost of production

Competition from other sectors and enforcement of child labour law created skill crunch

Number of training schools are less as compared to demand of skilled labours

Low productivity and indiscipline impacting margin, especially for the footwear industry

Living and working conditions are bad. Unhygienic conditions leading to health problems for the employees

High manpower cost increasing cost of production

Competition from other sectors and enforcement of child labour law created skill crunch

Number of training schools are less as compared to demand of skilled labours

Low productivity and indiscipline impacting margin, especially for the footwear industry

Living and working conditions are bad. Unhygienic conditions leading to health problems for the employees

Findings from Primary SurveyFindings from Primary Survey

Technical know-how among the workers are poor

Awareness of new technology is poor among the companies met

The adoption to improved technology especially for tanning is also low due to small scale nature of the industry

Technical know-how among the workers are poor

Awareness of new technology is poor among the companies met

The adoption to improved technology especially for tanning is also low due to small scale nature of the industry

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

Competitive BenchmarkingCompetitive Benchmarking

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Findings from Primary SurveyFindings from Primary Survey

Specialized chemicals are used for processing of leather. The chemicals available in the domestic market are of poor quality. Import duty on specialised chemicals is high and is in range of 25% to 40%

Difficulty in availing credit from the banking institutions especially in case of medium and small scale units

High corporate tax and excise duty rates

Taxation procedures is very cumbersome and time consuming and in some occasions not transparent

Security deposit of 25% on foreign exchange earning blocking working capital of exporters

Complex administrative procedures to get SSI status

Proposed Zero Liquid Discharge Law will create more pressure on the tanneries in Tamil Nadu

Specialized chemicals are used for processing of leather. The chemicals available in the domestic market are of poor quality. Import duty on specialised chemicals is high and is in range of 25% to 40%

Difficulty in availing credit from the banking institutions especially in case of medium and small scale units

High corporate tax and excise duty rates

Taxation procedures is very cumbersome and time consuming and in some occasions not transparent

Security deposit of 25% on foreign exchange earning blocking working capital of exporters

Complex administrative procedures to get SSI status

Proposed Zero Liquid Discharge Law will create more pressure on the tanneries in Tamil Nadu

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Competitive BenchmarkingCompetitive Benchmarking

Findings from Primary SurveyFindings from Primary Survey

FTAs/RTAs with developing countries are not helping the growth of the leather sector

FTAs with USA and EU will help in leather export

General awareness on FTAs/RTAs is poor among the manufacturers

FTAs/RTAs with developing countries are not helping the growth of the leather sector

FTAs with USA and EU will help in leather export

General awareness on FTAs/RTAs is poor among the manufacturers

FTA and RTAFTA and RTA

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

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4.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS The issues and challenges voiced during the primary survey have been further validated through secondary data and analysis. The final set of issues and challenges to be addressed for improving the competitiveness of industry has been firmed after taking into account both primary survey and secondary data and analysis. Shortage of Hides and Skins for the Industry in India The total share of India in live animals of cattle, goats and skin was 11.1% in world in 2005 and was next only to China (14.6% share in live animals). However, the competitive advantage of India is impacted in recovering of hides and skins. The share of India in recovery of hides and skins of cattle, goat and sheep was 5.5% in world as compared to China which was very high at 24%. The recovery of hides and skins in China is relatively high as compared to live animals in China. The share of India in population of live animals namely cattle, goats and sheep is high at 13.2%, 14.9% and 5.7% respectively but share in production in hides and skins of cattle, goats and sheep relatively low at 5%, 12.8% and 3.2% respectively. The low recovery of hides and skins of cattle in India can largely be attributed to ban on cow slaughter in many states in India. China’s higher rate of production of raw hides and skins is due to the fact that Chinese Government is jointly promoting livestock husbandry and the leather industry by keeping focus on the leather production. The focus of the new Chinese policy is on large-scale commercial animal farming, marketing on animal produces, improve the quality of animal

Findings from Primary SurveyFindings from Primary SurveyInfrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

FTA and RTAFTA and RTA

The cost of labour is lower in countries like Bangladesh, Pakistan, Indonesia as compared to India and productivity of India is low as compared to competing countries

Zero Duty Exports by Bangladesh to EU and US due to classification as Least Developed Countries (LDC) under Generalized System of Preferences

The fluctuation in exchange rates of INR and other countries is a major cause of concern for exporters

Starting a business in Hong Kong and Italy is easier as compared to India

The number of payments per year for taxes is highest in India at 60 as compared to Hong Kong and Italy which are 4 and 15 respectively

India has benefited in the footwear sector as EU extended anti-dumping tax of 16.5% on China and Vietnam in October, 2008

The cost of labour is lower in countries like Bangladesh, Pakistan, Indonesia as compared to India and productivity of India is low as compared to competing countries

Zero Duty Exports by Bangladesh to EU and US due to classification as Least Developed Countries (LDC) under Generalized System of Preferences

The fluctuation in exchange rates of INR and other countries is a major cause of concern for exporters

Starting a business in Hong Kong and Italy is easier as compared to India

The number of payments per year for taxes is highest in India at 60 as compared to Hong Kong and Italy which are 4 and 15 respectively

India has benefited in the footwear sector as EU extended anti-dumping tax of 16.5% on China and Vietnam in October, 2008

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breed and safeguard the ecology and environment, which are the key factors for producing high quality leather. The details of share of India and competing countries in live animals and recovery of hides and skins is presented in the table given below.

Figure 4-9 : Share of India and Competing Countries in Live Animas and Recovery of Hides and Skins

Source: FAO and CRIS Analysis India is dependent on other countries for supply of hides and skins despite being one of the leading countries in terms of population of goats, sheep and cattle. The details of imports of raw hides and skins and leather are presented in the table given below.

Figure 4-10 : Exports and Imports by India in different stages of Value Chain in FY2007-08 Source: CLE and CRIS Analysis Shortage of Hides and Skins is expected to Further Increase As per the estimates of Industry Leather Industry Foundation, the shortage for hides and skins is expected to increase from 465 million square feet in 2006-07 to 2,620 million square feet by 2010-11. The shortage of hides and skins is expected to be the maximum for cattle, which is expected to increase from 175 million square feet to 1,780 million square feet. The consolidation of leather industries in African, South American and other South Asian Market may also create supply crunch of the wet blue in the import market. The details of shortage for hides and skins are presented in the table given below.

100.0%100.0%100.0%World

52.6%43.1%68.4%Others

2.3%0.8%0.7%Turkey

2.3%0.8%1.0%South Africa

2.3%6.8%1.8%Pakistan

3.6%0.0%0.7%New Zealand

0.7%0.1%0.5%Italy

4.8%3.1%0.7%Iran

0.8%1.6%0.8%Indonesia

5.7%14.9%13.2%India

15.6%23.4%8.4%China

0.1%5.4%1.8%Bangladesh

9.2%0.1%2.0%Australia

SheepGoatsCattleCountry

100.0%100.0%100.0%World

52.6%43.1%68.4%Others

2.3%0.8%0.7%Turkey

2.3%0.8%1.0%South Africa

2.3%6.8%1.8%Pakistan

3.6%0.0%0.7%New Zealand

0.7%0.1%0.5%Italy

4.8%3.1%0.7%Iran

0.8%1.6%0.8%Indonesia

5.7%14.9%13.2%India

15.6%23.4%8.4%China

0.1%5.4%1.8%Bangladesh

9.2%0.1%2.0%Australia

SheepGoatsCattleCountry

100.0%100.0%100.0%World

46.0%29.3%64.2%Others

2.7%0.6%0.3%Turkey

1.0%0.1%1.1%South Africa

2.4%11.9%0.0%Pakistan

7.8%0.0%0.7%New Zealand

0.7%0.1%1.6%Italy

3.3%2.0%0.6%Iran

0.9%1.1%0.6%Indonesia

3.2%12.8%5.0%India

24.8%36.5%22.3%China

0.0%5.1%0.4%Bangladesh

7.2%0.6%3.2%Australia

SheepGoatsCattleCountry

100.0%100.0%100.0%World

46.0%29.3%64.2%Others

2.7%0.6%0.3%Turkey

1.0%0.1%1.1%South Africa

2.4%11.9%0.0%Pakistan

7.8%0.0%0.7%New Zealand

0.7%0.1%1.6%Italy

3.3%2.0%0.6%Iran

0.9%1.1%0.6%Indonesia

3.2%12.8%5.0%India

24.8%36.5%22.3%China

0.0%5.1%0.4%Bangladesh

7.2%0.6%3.2%Australia

SheepGoatsCattleCountryShare in Live Animals in 2005 Share in Hides & Skins in 2005

3477.5420.7Total

2710.60Manufacturing of Leather ProductsStage 3

766.90Finished LeatherStage 2B

0336.6LeatherStage 2A

084.1Raw Hides and SkinsStage 1

Exports (USD Mn)

Imports (USD Mn)Name of StageStages

3477.5420.7Total

2710.60Manufacturing of Leather ProductsStage 3

766.90Finished LeatherStage 2B

0336.6LeatherStage 2A

084.1Raw Hides and SkinsStage 1

Exports (USD Mn)

Imports (USD Mn)Name of StageStages

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Figure 4-11 : Shortage of Supply for Hides and Skins in Million Sq Ft in India by Category

Requirement Gap

Category 2006-07 2010-11 2006-07 2010-11

Cattle 1,480 3,085 175 1,780

Goat 575 1,000 190 695

Sheep 280 345 100 145

Total 2,335 4,430 465 2,620

Source: Industry Leather Industry Foundation and CRIS Analysis The take-off ratio of leather from the slaughter houses in India is low due to the practice of unscientific handling of animals, usage of out-of-date technologies, ban on cow slaughter in most the states in India preventing the establishment of modern slaughter houses/abattoirs in many places. The quality of hide/skin is affected by post-mortem defects, lack of animal health care. As a result of ban on cow slaughter in some states, hides are generally recovered from the fallen animals. As there is no incentive for the cattle owners to feed the cattle when they are not productive, they are underfed or stranded. As a result quality of the hide becomes inferior. Some hides from the fallen animals are not collected. The application of large dosage of salt for preservation and the long time period between collection of the hides and their use in tanneries create environmental problems, and involve many intermediaries in the supply chain and ultimately increase the supply price of skins and hides to tanneries. Infrastructure Problems due to non-functioning of CETP As per the latest estimates by UP Pollution Control Board, around 39% of ETPs are not functioning or closed. The detail of functioning of ETPs in Uttar Pradesh has been presented in the figure given below.

Figure 4-12 : Functioning of ETPs in Uttar Pradesh

Source: Uttar Pradesh Pollution Control Board The Government of Tamil Nadu has introduced Zero Liquid Discharge (ZLD) norm for tannery for prevention of environmental degradation. Under this norm the industries are not allowed to discharge any liquid to rivers, lakes, drains, canals, etc. To achieve ZLD norm, the tanneries have to set-up mechanisms for reverse osmosis plants in CETPs and to secure sanitary landfill facility to discharge the solid garbage. Installation of ZLD system is capital intensive and also involves substantial expenditure in Operation and Maintenance.

Status of ETPs in UP

ETPs functioning

61%

Closed 20%

ETPs not functioning

19%

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Government is providing financial assistance as 75% of the project cost as grant for development of CETPs. A SPV has been formed for developing CETPs in Tamil Nadu for meeting the ZLD norms by State Government. 75% of the cost (Rs. 120 crore) for development of CETPs will be paid as Grant out of which the share of GoI is 60% and share of Tamil Nadu State Government is 15% while the industry will provide remaining 25% of the capital cost. However, the major issue concerning the tannery owners in Tamil Nadu is the expenditure towards O&M of the ZLD system. On a rough estimate, O&M cost for ZLD system will range between Rs. 0.55 to Rs. 0.65 per square feet of leather. Any escalation of O&M will ultimately reduce the competitiveness of the leather industry in Tamil Nadu. High Import Tariff on Chemicals Specialised chemicals are used for the processing of raw leather. The chemicals available in the domestic market are of inferior quality forcing the manufacturers to rely on imports from countries in EU. The import duty on chemicals for leather and footwear industry ranges from 14.7% to 31.7% and is a major concern of the companies met during primary survey. The customs duty on chemicals for leather and footwear industry in China ranges from 5% to 10% and is lower as compared to India. The GoI can consider reduction in import duties on chemicals.

Figure 4-13 : Import Duties on Leather Chemicals and Auxiliaries after Budget 2008-09

Source: Council of Leather Exports and CRIS Analysis

Long Term Strategy for Leather and Footwear Industry One of the key factor which would aid the growth and development of the Indian leather industry is a conscious strategic decision on part of the Indian leather and footwear industry to focus on one of the segments of leather manufacturing business that is a) high value low volume production strategy as followed by Italy or b) high volume low value production strategy as followed by China.

Import DutyLeather chemicals & auxiliaries

31.70P.U. Chemicals for leather

28.64Wax Emulsions (38099390)

28.64Acrylic Binder

28.64Leather finishing auxiliary, fillers etc.

31.70Polyurethane films/foils for upgradation of leather

31.70Slip Agents falling under Heading No.32.08

31.70Lacquers/Lacquer emulsions of Heading No.32.08

28.64Fatty oil/pull-up oil

31.70pigments & preparation based on Titanium Dioxide

28.64Pigment finishes for leather

28.64Solvent soluble dyes

31.70Sulphated/oxidised/chlorinated fish oil or mixtures

14.71Sulphonated fish oil

28.64Formulations of TCMTB or PCMC or both

28.64Preservatives falling under Heading No.29.42

28.64Syntans

Import DutyLeather chemicals & auxiliaries

31.70P.U. Chemicals for leather

28.64Wax Emulsions (38099390)

28.64Acrylic Binder

28.64Leather finishing auxiliary, fillers etc.

31.70Polyurethane films/foils for upgradation of leather

31.70Slip Agents falling under Heading No.32.08

31.70Lacquers/Lacquer emulsions of Heading No.32.08

28.64Fatty oil/pull-up oil

31.70pigments & preparation based on Titanium Dioxide

28.64Pigment finishes for leather

28.64Solvent soluble dyes

31.70Sulphated/oxidised/chlorinated fish oil or mixtures

14.71Sulphonated fish oil

28.64Formulations of TCMTB or PCMC or both

28.64Preservatives falling under Heading No.29.42

28.64Syntans

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In the high value low volume production strategy the manufacturers would need to typically put more emphasis on the designs and related aspects of the leather goods, as is the approach followed by Italy. The focus would be more towards working extensively to produce new designs and would involve several tie ups by the manufacturers with designers, fashion experts etc. The key requirements for meeting high value low volume strategy would be to focus on creating leather institutes for creating skilled labour through Leather Training Institutes like Central Leather Research Institute (CLRI), Footwear Design and Development Institute (FDDI) and coordinate with fashion institutes like National Institute of Fashion Design (NIFD). In the high volume low value production strategy, the model would be typical of the Chinese production strategies wherein focus on evolving new designs is less whereas that on ensuring bulk production is more. The large production units, low rentals on factory spaces etc are a part of this strategy. The key requirements for following the high volume low value strategy is to increase supply of hides and skins through better recovery mechanisms and increase in slaughter houses.

4.7 COMPETITIVE BENCHMARKING The competitive benchmarking of India has been done with China, Italy and Hong Kong to identify the areas where India has competitive advantages and disadvantages as compared to these countries. The exports of India have registered CAGR of 9% from 2000 to 2005 as compared to 15% achieved by China. While the exports of India has registered a higher CAGR as compared to Italy and Hong Kong which are the other two major exporters of leather and footwear products, the analysis of the value of exports show that the share of India in total exports of leather and footwear in world is very low at 3%. The higher CAGR of India can also be attributed to lower exports in absolute terms in 2001 as compared to Hong Kong and Italy. In terms of value of export, China is way ahead of India with exports of USD 25,727 million as compared to exports of USD 2,778 million by India which was only around 11% of total exports of China in 2005.

Figure 4-14 : Exports of Leather and Footwear by Competing Countries Source: WTO and CRIS Analysis The labour productivity index of India is among the lowest in the Asian Countries at 0.94 in 2005 as per the study conducted by Asian Productivity Organisation (APO). National Productivity Council of India is one of the founder members of APO. Mongolia and China have the highest labour productivity index at 1.65 and 1.56 in 2005. The details of labour productivity index of Asian countries are presented in the table given below.

100%7%98,02675,349World3%9%2,7781,970India

11%4%10,9079,395Hong Kong

16%4%15,39313,125Italy

26%15%25,72714,692China

Share in 2005CAGR2005 (USD Mn)2001 (USD Mn)Country

100%7%98,02675,349World3%9%2,7781,970India

11%4%10,9079,395Hong Kong

16%4%15,39313,125Italy

26%15%25,72714,692China

Share in 2005CAGR2005 (USD Mn)2001 (USD Mn)Country

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Figure 4-15 : Labour Productivity Index of Asian Countries for Manufacturing

Source: Asian Productivity Organisation (APO) Labour productivity of India and China for the Leather and Footwear Industry The labour productivity in India is very low as compared to China in production of shoes, garments and leather goods. The pairs of shoes per employee per day in India are 20 pairs as compared to China which was at 40 pairs. Similarly, the pieces of leather goods per employee per day in India are low at 6-8 pieces as compared to China at 12-15 pieces. The labour productivity of India has been impacted due to rigid labour laws like lack of flexibility in contract labour laws. Units employing over 100 people currently fall under the purview of Industrial Disputes Act. The Act stipulates that employers must obtain necessary approvals to effect lay-offs. This proves to be a hindrance especially for small and medium enterprises.

Figure 4-16 : Comparison of Productivity in Leather & Footwear Industry between India & China Source: CLRI and CRISIL Research Measures by Government of China for Development of Leather and Footwear Industry Guidelines for the Industry in China: The key guidelines by Government of China for improving the leather and footwear industry in China are as follows; a) Promote the joint development of livestock husbandry and the leather industry, Improve the overall quality of the products by technological advances, strengthen management and readjust the leather industrial structure, c) Develop new chemical materials that are of high quality and cause less pollution, introduce foreign investment and advanced technologies, step up the process of technology innovation and d) Change the operational mechanism, pay attention to training qualified personnel, and improve.

0.51 0.82 Nepal

0.92 0.95 Sri Lanka

0.94 0.95 India1.05 0.90 Cambodia

1.06 0.96 Singapore

1.13 0.99 Philippines

1.14 0.96 Thailand

1.19 1.02 Vietnam

1.19 1.05 Bangladesh

1.20 1.27 Fiji

1.24 0.97 Japan

1.27 1.00 Indonesia

1.32 0.93 Malaysia

1.40 1.03 Korea

1.56 1.09 China

1.65 1.31 Mongolia

20052001Country

0.51 0.82 Nepal

0.92 0.95 Sri Lanka

0.94 0.95 India1.05 0.90 Cambodia

1.06 0.96 Singapore

1.13 0.99 Philippines

1.14 0.96 Thailand

1.19 1.02 Vietnam

1.19 1.05 Bangladesh

1.20 1.27 Fiji

1.24 0.97 Japan

1.27 1.00 Indonesia

1.32 0.93 Malaysia

1.40 1.03 Korea

1.56 1.09 China

1.65 1.31 Mongolia

20052001Country

Pieces/employee/day

Pieces/employee/day

Pairs/employee/day

Sq. feet/employee/month

Units

6-8

1.5-2

20

3,000

India

12-15

2.5-5

40

3,055

China

Leather Goods

Garments

Shoes

Leather (Hides)

Sector

Pieces/employee/day

Pieces/employee/day

Pairs/employee/day

Sq. feet/employee/month

Units

6-8

1.5-2

20

3,000

India

12-15

2.5-5

40

3,055

China

Leather Goods

Garments

Shoes

Leather (Hides)

Sector

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Measures to be adopted by Chinese companies to meet the guidelines: The following are the proposed measures to be adopted by companies in China for improving the leather and footwear industry in China; a) Strengthen the environmental protection so as to ensure a sustainable development of the leather industry, b) Foster the domestic and foreign leather market, expand new development space, c) Implement a famous-brand strategy, readjust products structure, and pay more attention to the quality of products and d) Implement the guideline for national rejuvenation through science and education, improve the overall quality of the leather industry. Additional Duties for Reducing Exports of Finished Leather and Promoting Value Added Products: The three government agencies in China namely The Ministry of Finance, State Administration of Taxation and China Customs has jointly announced that wet-blue skins would be subjected to regular import duties of 7% plus an additional 17% VAT if they are re-exported after conversion into finished leather. However, if the skins are subsequently converted into value added products such as footwear or other finished leather products and then re-exported, the tariff and VAT are exempted. It can be clearly seen from the above duties that the Chinese Government is promoting value-added products. Impact of Appreciation/Depreciation of Currencies with respect to USD The competitiveness of the leather and footwear industry has been impacted by fluctuation in INR and currencies of competing countries vis-à-vis the USD and the leather and footwear industry faces similar problems with respect to fluctuations in INR and currencies of competing countries vis-à-vis USD as faced by the textiles and garments industry. The impact of appreciation and depreciation of currencies of India and competing countries with respect to USD has been analysed in detail in the section on the textiles and garments industry and the analysis has not been repeated here as the issues of the leather and footwear industry with respect to currency fluctuations are similar to the textiles and garments industry. Difficulty in Starting Business and Paying Taxes The difficulty in starting business and high corporate and excise taxes were the two major concerns which was voiced by respondents during the primary survey. The comparison of India has been done for the above two parameters with competing countries like China, Hong Kong and Italy to ascertain the competitive advantage or disadvantage of India in the leather and footwear industry with respect to above parameters. As per the Doing Business Report of 2008, the overall rank of Hong Kong and Italy was 13 and 53 respectively as compared to 111 for India. The overall rank of India for starting a business was however better than China (ranked 135). The number of procedures to start a business in India was high at 13 as compared to 5 in Hong Kong and 9 in Italy. Similarly, the number of days to start a business in India was very high at 33 days as compared to 11 days in Hong Kong and 13 days in Italy. Similarly, the overall rank of India (ranked 165) for paying taxes was low as compared to Hong Kong (ranked 3) and Italy (ranked 122). The number of payments to be made in India with respect to taxes including direct and indirect taxes was the highest as compared to the other three countries. However, India has a competitive advantage in terms of overall tax rate as a percentage of profits as compared to China and Italy. The above analysis clearly shows that India has competitiveness disadvantage as compared to competing countries due to difficulty in starting business and high taxes. The details of the ranking of India, China, Hong Kong and Italy across different parameters are presented in the table given below.

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Figure 4-17 : Ranking of India with Competing Countries for Starting Business and Paying Taxes Source: Doing Business 2008 and CRIS Analysis

4.8 SUPPLY CHAIN COMPETITIVENESS OF LEATHER AND FOOTWEAR INDUSTRY

The supply chain index of the leather and footwear industry in India has been evaluated on a three point rating scale with parameters as Good, Average and Poor. The analysis of supply chain competitive of leather and footwear industry in India shows that the competitiveness of India is good in the first stage of the industry i.e. share in live animals. The total share of India in live animals of cattle, goats and skin is 11.1% in world in 2005 and is next only to China (14.6% share in live animals). However, the competitive advantage of India is poor in the second stage where hides and skins are recovered. The share of India in recovery of hides and skins of cattle, goat and sheep is 5.5% in world as compared to China which is very high at 24%. The recovery of hides and skins in China is relatively high as compared to live animals in China.

Figure 4-18 : Supply Chain Competitiveness of Leather and Footwear Industry in India

The competitiveness of India is poor in the tanning and finishing stages of the value chain. The outdated technology due to small scale nature of units is the major cause of competitive disadvantage for India as compared to competitive countries. The small scale nature of the companies involved in the tanning and finishing stage leads to limited ability in investments for CETPs and ETPs. The difficulty in availing credit from the banking institutions especially in case of medium and small scale units has also impacted the ability of leather and footwear companies to invest in technology. The competitiveness of India in manufacturing of leather and footwear products can be rated as average due to positive development like sourcing of leather and footwear products by several international brands like Tommy Hilfiger, Guess,

Live AnimalsLive Animals

AverageAverage

PoorPoor

PoorPoor

GoodGood

Recovery of Hides & Skins

Recovery of Hides & Skins

Tanning and Finishing

Tanning and Finishing

ManufacturingManufacturing

Lack of skilled manpower, low productivity and outdated technologyLack of skilled manpower, low productivity and outdated technology

Technology is outdated, lack of ETPs and CETPs and small scale in nature Technology is outdated, lack of ETPs and CETPs and small scale in nature

Share of only 5.5% in recovery/production of hides and skins and shortage of skins and hidesShare of only 5.5% in recovery/production of hides and skins and shortage of skins and hides

11.1% share in total live animals in world11.1% share in total live animals in world

1223168165Overall Rank

76.224.473.970.6Overall Tax Rate (% of profit)

36080872271Time (hours per year)

1543560Payments (number per year)

Paying Taxes5313135111Overall Rank

13113533Time (days)

951313Procedures (number)

Starting a businessItalyHong KongChinaIndia

1223168165Overall Rank

76.224.473.970.6Overall Tax Rate (% of profit)

36080872271Time (hours per year)

1543560Payments (number per year)

Paying Taxes5313135111Overall Rank

13113533Time (days)

951313Procedures (number)

Starting a businessItalyHong KongChinaIndia

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Hugo Boss, Versace, Clarks, Pierre Cardin, etc. and presence in major markets in Europe. However, the manufacturing units have been impacted by lack of skilled manpower, low productivity of labour and outdated technology.

4.9 ISSUES TO BE ADDRESSED FOR LEATHER AND FOOTWEAR INDUSTRY

The key issues to be addressed for the industry have been classified into three categories namely, a) Industry Level Issues, b) Location Specific Issues and c) Macro Level Issues. The objective of classifying issues into three categories is to have clarity as to which is the relevant agency for an issue and with which agency NMCC should liaison to remove the problems faced by the industry. The industry level issues are specific to leather and footwear industry and the relevant agencies with which NMCC should liaison for resolving the issue is Council of Leather Exports. The location specific issues are common to all industries and are specific to a state and its districts. NMCC should liaison with State Governments and Industry Associations in resolving location specific issues. The macro level issues are economic policy issues and are common across industries. In resolving the macro level issues, NMCC would be required to work with central agencies like Reserve Bank of India, Ministry of Finance, Ministry of External Affairs, etc.

Figure 4-19 : Framework for Classification of Issues for Leather and Footwear Industry in India

The key issues to be addressed for the leather and footwear industry has been identified based on the findings from primary survey and validation through secondary data and analysis. The key issues to be addressed have been identified under the framework explained above. The key industry level issues for the leather and footwear are shortage of hides and skins, high customs duty on import of chemicals, lack of Research and Development for production

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

Specific to an IndustrySpecific to an Industry

Economic Policy IssuesEconomic Policy Issues

Location Specific Issues

Location Specific Issues

Common to all industries and is specific to state & sub state level

Common to all industries and is specific to state & sub state level

Council of Leather ExportsCouncil of Leather Exports

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

State Governments and Industry AssociationsState Governments and Industry Associations

NMCC to play the role of enabler by interacting with different agenciesNMCC to play the role of enabler by interacting with different agencies

IssuesIssues Description of IssueDescription of Issue Relevant AgenciesRelevant Agencies

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of low pollution chemicals, lack of flexibility in hiring labour and outdated technology for tanning and manufacturing. As per the estimates of Industry Leather Industry Foundation the shortage for hides and skins is expected to increase from 465 in 2006-07 million square feet to 2,620 million square feet by 2010-11. The major location specific issues which are impacting the competitiveness of the industry is lack of Effluent Treatment Plants (ETP) and Common Effluent Treatment Plants (CETP) and bad drainage facilities in channelling out the solid wastes due to tanning. The bad condition of access roads in the clusters visited during the primary survey is also an area of concern. The foreign exchange fluctuation is a macro level issue which is a major concern for the leather and footwear industry. The INR has fluctuated by 25% versus USD in 2008 and has led to great amount of uncertainty for the exporters. Another major issue impacting the competitiveness of industry is that India has no FTA/RTA with the major importers of leather and footwear products.

Figure 4-20 : Classification of Issues for Leather and Footwear Industry in India

4.10 RECOMMENDATIONS FOR LEATHER AND FOOTWEAR INDUSTRY

Reduction in Excise Duty for Leather and Footwear Industry The central excise duty on footwear for maximum retail price (MRP) exceeding 750 is very high at 14%. The central excise duty has been reduced from 16% to 14% in the Budget of 2008-09 on footwear of MRP exceeding Rs. 750. However there is a need to further reduce the excise duty for the footwear segment. For example, the readymade garment sector falls in the optional excise duty regime. The manufacturers of cotton-based readymade garment have the option either to pay 4 per cent excise duty and avail CENVAT credit on duty paid on inputs or pay no excise duty (no CENVAT credit for duty paid on inputs allowed). Similarly, the manufacturers of non-cotton-based readymade garment products have the option either to pay 8 per cent excise duty and avail CENVAT credit on duty paid on inputs or pay no excise duty (no CENVAT credit for duty paid on inputs allowed). The growth in the domestic and exports market for readymade garments are attributed to optional excise duty

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

Shortage of hides and skins and need for animal husbandry for rearing of sheep, cattle and goats

High customs duty on import of chemicals

Lack of R&D in identification of low pollution chemicals

Lack of flexibility in hiring labour

Outdated technology for tanning and manufacturing

Shortage of hides and skins and need for animal husbandry for rearing of sheep, cattle and goats

High customs duty on import of chemicals

Lack of R&D in identification of low pollution chemicals

Lack of flexibility in hiring labour

Outdated technology for tanning and manufacturing

No FTA and RTA with US and EU which are the major importers

Foreign exchange fluctuations leading to uncertainty of revenues for exporters

No FTA and RTA with US and EU which are the major importers

Foreign exchange fluctuations leading to uncertainty of revenues for exporters

Location Specific Issues

Location Specific Issues

Lack of ETP and CETPsBad drainage facilitiesBad condition of access roads in places like Ranipet

Lack of ETP and CETPsBad drainage facilitiesBad condition of access roads in places like Ranipet

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regime. Similarly, there is a need to reduce the excised duty for the footwear segment as well to make it more competitive. The central excise duty has been reduced by GoI as part of the economic stimulus packages announced on December 7, 2008. The central excise duty on footwear of MRP between Rs. 250/pair to MRP Rs. 750/pair has been reduced from 8% to 4% and for footwear of MRP exceeding Rs. 750/pair has been reduced from 14% to 10% as part of the economic stimulus package. In the stimulus package announced on February 24, 2009, there has been reduction in the general rate of central excise duty from 10 per cent to 8 per cent. The excise duty on footwear of MRP exceeding Rs. 750/pair has now been further reduced from 10% to 8% in the third stimulus package after being reduced from 14% to 10% in the first fiscal stimulus package. CRIS recommends that GoI should consider extending the reduction in excise duties for leather and footwear industry beyond FY 2008-09. The existing excise duty for the footwear based on the MRP is presented in the table given below.

Figure 4-21 : Applicable Excise Duty based on MRP of Footwear in India

MRP of Footwear

Central Excise Duty before

Stimulus Packages

Central Excise Duty after Stimulus Packages

Footwear of MRP less than Rs.250/pair Nil Nil Footwear of MRP between Rs.250/pair to Rs.750/pair 8% 4% Footwear of MRP exceeding Rs.750/pair 14% 8% Source: CRIS Analysis Institutional Framework for setting CETP for Leather Industry The Common Effluent Treatment Pant (CETP) offers best solution to small and medium scale companies which are involved in the leather tanning. The CETP provides the benefits of economies of scale through sharing of common infrastructure. However, the key aspect for successful implementation of CETP is to have a well defined institutional framework with guidelines on design, installation and distribution of operations and maintenance cost of CETP among the players. The Department of Industrial Policy and Promotion (DIPP) has proposed a Central Allocation of Rs. 1,300 crore for the leather sector during the Eleventh (11th) Five Year Plan (2007-12). Out of the outlay of Rs. 1,300 crore, Rs. 240 crore have been allocated for up-gradation / installation of infrastructure for environmental protection in the Leather sector in which projects will be funded with 60% Grant from Central Govt, 15% grant from State Govt and balance 25% from the industry. However, key to successful development of infrastructure for environmental protection like CETP is dependent on formulation of model contract document for setting up the infrastructure. There is a need to have a model document like model concession agreement which has been formulated by National Highways Authority of India for development, maintenance and management of National Highways in India. For successful development and implementation of CETP there is a need for model contract document which provides guideline on issues related to transaction structure like equity holding, exit clause, management, developer procurement, etc and the success of these options is dependent on successful intermediation by industry associations to consolidate the requirement of small scale companies in the leather and footwear.

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For example, a SPV has been formed for developing CETPs in Tamil Nadu for meeting the ZLD norms by State Government. 75% of the cost (Rs. 120 crore) for development of CETPs will be paid as Grant out of which the share of GoI is 60% and share of Tamil Nadu State Government is 15% while the industry will provide remaining 25% of the capital cost. However, the major issue concerning the tannery owners in Tamil Nadu is the expenditure towards O&M of the ZLD system. Promote Traditional Tanning Process followed in Rajasthan

Vegetable tanning12 employs the use of plant produce such as bark, roots, leaves, fruits, etc. of several plant species, which contain a variety of tannins. Soaking these plant products in water gives liquor containing various tannins. The immersion of hides/skins in this liquor after suitable preparation gives leather. This process is age old and is carried out by the craftsmen in Rajasthan. The leather produced by this process has very good flexibility and is used for a variety of products. The effluents are also less as compared to that of the chemical tanning process. It has the unique characteristics to absorb any colour. Vegetable tanning produces relatively dense leather, one that is firm and solid and yields a high weight of leather per unit of raw stock. The relative benefit of vegetable tanning as compared to chemical tanning which is used by majority of the companies is that vegetable tanning causes less pollution as compare to chemical tanning. The main drawbacks of the vegetable tanning process are a) the leather produced through vegetable tanning process has little water resistance and tends to catch fungus in the monsoon season, b) the process is very time consuming, c) process is labour intensive and d) leather produced through vegetable tanning is high on fibre content and cannot be split by the splitting machine. Given the environmental constraints caused by chemical tanning process it is proposed that vegetable tanning process should be promoted in India. However, the above drawbacks of vegetable tanning process needs to be addressed like developing machines that can be developed for the splitting of vegetable tanned leather, which will make the production easier, quicker and more viable. Similarly, the vegetable tanned leather needs to be treated for increasing water resistance. It is recommended that studies should be conducted by Central Leather Research Institute (CLRI) to identify the machines/technologies which needs to be developed to address the drawbacks of vegetable tanning process so that vegetable tanning can be used by tanneries across other states in India. Joint Development Board for Leather and Animal Husbandry As per the estimates of Industry Leather Industry Foundation the shortage for hides and skins is expected to increase from 465 in 2006-07 million square feet to 2,620 million square feet by 2010-11. The shortage of hides and skins is expected to by maximum for cattle which is expected to increase from 175 million square feet to 1,780 million square feet. The GoI should consider setting-up a common platform for Animal Husbandry and Leather Tanneries to work out possible solutions for the common problems of both the industries. China’s higher rate of recovery of raw hides and skins is due to the fact that Chinese Government is jointly promoting livestock husbandry and the leather industry with focus on increasing recovery of hides and skins to increase leather production and be self-sufficient as far as raw materials is concerned. The focus of the policy in China is on large-scale commercial animal farming, marketing of animal produces, improving the quality of animal breed and safeguarding the environment, which are the key factors for producing high quality leather.

12 Source: World Bank Report on Leather Tanning

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Department of Industrial Policy and Promotion (DIPP) have proposed a Central Allocation of Rs. 1,300 crore for the leather sector during the Eleventh (11th) Five Year Plan (2007-12). Out of the outlay of Rs. 1,300 crore, Rs. 300 crore have been allocated for setting of leather complexes or parks with maximum assistance of Rs. 40 crore for each leather complexes or parks. The possibility of setting slaughter houses along with the leather parks and complexes also needs to be considered as it will provide a definitive source of raw material (hides and skins) which will go as input in production of leather. Reduction in Customs Duties on Leather Chemicals The specialised chemicals are used for the processing of raw leather. The chemicals available in the domestic market are of inferior quality forcing the manufacturers to rely on imports from countries in EU. The import duty on chemicals for leather and footwear industry ranges from 14.7% to 31.7% and is a major concern of the companies met during primary survey. The customs duty on chemicals for leather and footwear industry in China ranges from 5% to 10% and is lower as compared to India. The GoI can consider reduction in import duties on chemicals as it is impacting the competitiveness of the leather and footwear industry in India as compared to that of China. Exports of Value-Added Products Instead Of Raw Material The Government of China has taken measures to reduce exports of leather from China. The three government agencies in China namely the Ministry of Finance, State Administration of Taxation and China Customs has jointly announced that wet-blue skins would be subjected to regular import duties of 7% plus an additional 17% VAT if they are re-exported after conversion into finished leather. However, if the skins are subsequently converted into value added products such as footwear or other finished leather products and then re-exported, the tariff and VAT are exempted. It can be clearly seen from the above duties that the Chinese Government is promoting value-added products. India also needs to adopt similar strategy for both the textiles and garments industry and leather and footwear industry. Similarly, India exported finished leather of USD 767 million in value which constituted of 22% of total value of leather exports in 2006-07.

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5 FOOD AND AGRO PROCESSING

5.1 FOOD AND AGRO INDUSTRY IN INDIA AND WORLD The Indian Food & Agro processing industry is a sunrise sector in view of its large potential for growth and likely socio economic impact specifically on employment and income generation. It is also expected to play a significant role in terms of ensuring food security and contributing to India’s share in Global Trade. Traditionally, India has been an agriculture driven economy and a thrust on food processing would be a step further in the value chain and make the Indian economy robust. One estimate suggests that in developed countries, up to 14% of the total work force is engaged in food & agro processing sector directly or indirectly. However, in India, only about 3% of the work force finds employment in this sector revealing its underdeveloped state and vast untapped potential for employment. With proper impetus this sector has the potential to propel India as a major player at the global level for marketing and supply of wide range of processed plant and animal products.

Food Processing encompasses products of fruits and vegetables, dairy, meat, poultry, fishery, consumer food, grains, alcoholic drinks, aerated water and soft drink. It involves all types of value addition to agricultural or horticultural produce and includes processes such as grading, sorting, and packaging which enhance shelf life of food products. The Ministry of Food Processing, GoI lists the following segments within the food processing industry.

Segments Products

Dairy Whole milk Powder, Skimmed milk powder, condensed milk, Ice Cream, Butter & Ghee, Cheese

Fruits & Vegetables

Beverages, Juices, Concentrates, Pulps, Slices, Frozen and dehydrated products, potato wafers/chips etc.

Grains & Cereals Flour, Bakeries, Starch Glucose, Cornflakes, Malted Foods, Vermicelli, Beer & Malt extracts, Grain based Alcohol

Fisheries Frozen & Canned products mainly in fresh form Meat & Poultry Frozen and packed – mainly in fresh form

Consumer Foods Snack food, Namkeens, Biscuits, Ready to eat food, Alcoholic and Non alcoholic beverages

Source: Ministry of Food Processing, GoI The initial point of value chain of food processing starts from the agriculture produce and the value chain moves forward in terms of increasing value add to the agricultural produce. The food and agro processing is primarily required because of the three factors namely, a) seasonality of agricultural produce, b) geographic dispersion of agricultural produce and c) convenience in consumption. Agricultural produce are mostly perishable and hence they have limited life within which they need to be consumed. Hence, one of the objectives of food processing is to increase the shelf life of agricultural produce. Agricultural produce are also regional in nature and depending on available biotic conditions one agricultural produce may be abundantly grown in one region than another. As agro processing increases the shelf life of produce, they can be consumed in different geographies. Essentially creating convenience of consuming the produce at different places which otherwise would not have been available.

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Major Exporters of Agricultural Products: Though the agricultural products also include non-food items like cotton, rubber, etc. the major importers and exporters of agricultural products have been identified to analyse the share of India in global trade as compared to other countries. The data on major exporters and importers of food and agro processing products is not provided separately by internal organisations like WTO, FAO, etc. Hence the exports and imports of agricultural products have been used as a proxy to ascertain the major exporters and importers of food and agro processing related products. European Union consisting of 25 countries was the largest exporter of agricultural products in 2006 with share of 43% in total exports. United States (11%), Canada (7%), and Brazil (6%) are other major exporters of agricultural products. Thailand with share of 2% has witnessed significant growth in agricultural products from 2000 to 2006 (CAGR of 10%). The share of India in exports of agricultural produce was low at 1.5% with exports of USD 14.5 billion in 2006.

Figure 5-1 : Major Exporters of Agricultural Products in the world Source: WTO and CRIS Analysis Major Importers of Agricultural Products: European Union is also the largest importer of agricultural products in 2006 with total share of 47% (USD 437 billion) in 2006. United States (11%), Japan (7%), and China (6%) are other major importers of agricultural products. The import of India was low at 0.8% with total imports of USD 7.8 billion in 2006. The major importers of agricultural products in world are presented in the table given below.

Figure 5-2 : Major Importers of Agricultural Products in the world Source: WTO and CRIS Analysis

100%9%944.5552.3World

30%11%286.6156.3Others

2%10%21.612.2Thailand

2%5%22.216.4Australia

3%12%32.516.4China

4%17%39.515.5Brazil

5%4%44.234.8Canada

10%4%92.771.4United States

43%10%405.2229.3European Union (25)

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

100%9%944.5552.3World

30%11%286.6156.3Others

2%10%21.612.2Thailand

2%5%22.216.4Australia

3%12%32.516.4China

4%17%39.515.5Brazil

5%4%44.234.8Canada

10%4%92.771.4United States

43%10%405.2229.3European Union (25)

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

100%9%923566Total

22%8%203125Others

2%6%1913Korea, Republic of

3%17%239Russian Federation

3%8%2415Canada

6%18%5220China

7%1%6662Japan

11%7%10469United States

47%9%434252European Union (25)

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

100%9%923566Total

22%8%203125Others

2%6%1913Korea, Republic of

3%17%239Russian Federation

3%8%2415Canada

6%18%5220China

7%1%6662Japan

11%7%10469United States

47%9%434252European Union (25)

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

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AGRO

Farmer

Food & Agro

Processing Value Chain

AGRO

Farmer

Food & Agro

Processing Value Chain

5.2 VALUE CHAIN OF THE FOOD AND AGRO INDUSTRY The value chain of food processing at a broad level is illustrated below. As can be observed the food & agro processing industry has a long and intricate value chain. The different components of the value chain play varied role in the process before the end product reaches the final consumer. The paragraphs below elaborate the various components of the value chain.

Grower and Farmers: Growers or farmers are at the base of the value chain. They are engaged in production of the base inputs for food & agro processors. Farmers in turn depend upon their own sets of suppliers. These suppliers to farmers provide base inputs like seeds, fertilizers and agricultural equipments and machinery.

Suppliers to Farmers: This category includes manufacturers of fertilizers, seeds and agricultural equipments. R&D institutions engaged in developing better quality seeds, agricultural equipments, fertilizers, etc. are also included in this category.

Figure 5-3 : Value Chain of Food and Agro Processing Industry Food Processors: This category includes entities who are engaged in making value addition to the farm produce. Few of the prominent operators in this category of value chain are: a) Entities engaged in warehousing solutions: Since agricultural produce have limited shelf life under normal atmospheric conditions, these entities create conducive environment for storage of food produce, b) Entities engaged in logistic solutions: Agricultural produce have to move from one place to another. These movements are necessary as end consumers are dispersed and located at different market locations and c) Entities engaged in food processing: These entities use the base farm produce and process them further to create ease of use for the end users. Essentially, food processing is undertaken to increase shelf life, create convenience of use and create greater market for the product.

Broker / Distributor: Brokers / Distributors help in creating a wide market in the processed food industry. These entities create the necessary infrastructure for procuring bulk output of the food processors and then distributing them across markets. They help in creating liquidity for the food processors, as the off-take of the food processors’ output is ensured by these brokers / distributors.

Retailer: Retailers are the interface for the consumers bringing the processed food from the distributors to the consumers. These entities provide convenience of place. They act as last mile connectivity between the food processors and the end consumers.

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5.3 MAJOR STATES IN THE INDIA IN FOOD AND AGRO INDUSTRY

Andhra Pradesh is the leading state in India in terms of number of registered factories (6,402) in operation and second in terms of total output for food and agro processing Industry in India. Tamil Nadu is the second placed state in terms of number of factories (3,736) in operations and is ranked fifth in terms of the total output. Maharashtra is the third major state in terms of number of factories (2,238) in operations and leading in terms of total output. The average invested capital per registered factory for the food and processing industry was Rs. 3.3 crore per factory in 2004-05. The average invested capital per registered factory was low in Andhra Pradesh and Tamil Nadu at Rs. 1.5 crore and Rs. 1.7 crore respectively. The average invested capital per registered factory was highest in the state of Uttar Pradesh at Rs. 8.2 crore per factory followed by Maharashtra with average invested capital of Rs. 7.2 crore per registered factory in 2004-05.

Figure 5-4: Share of States in India in Food and Agro Processing Industry Factories

In Operation13

Invested Capital14

Total Output15

Net Value

Added16 Profit State

Number Amount in Rs. Crore Andhra Pradesh 6,402 9,676 27,275 2,583 1,198 Tamil Nadu 3,736 6,319 14,181 1,503 455 Maharashtra 2,238 16,055 28,679 2,692 -201 Uttar Pradesh 1,719 14,023 24,549 2,552 676 Punjab 1,628 4,186 11,604 1,298 594 Karnataka 1,390 6,275 11,270 1,658 584 Gujarat 1,307 6,625 26,018 1,228 363 West Bengal 1,147 2,910 7,563 532 105 Kerala 1,059 2,018 6,787 613 69 Assam 897 1,626 4,183 477 177 Haryana 564 3,202 6,160 669 182 Chattisgarh 561 1,086 3,206 5 -82 Orissa 535 1,046 2,190 75 -31 Madhya Pradesh 517 2,965 13,289 446 105 Rajasthan 506 1,674 6,246 513 283 Uttaranchal 274 1,272 2,315 194 14 Bihar 191 915 1,209 124 -8 Jharkhand 108 117 302 40 15 Delhi 103 586 3,442 208 100 Himachal Pradesh 97 394 716 71 29 Jammu & Kashmir 93 270 519 11 -22 Goa 80 410 806 185 129

13 Factory is one that is registered under sections 2m (i) and 2m (ii) of the Factories Act, 1948. The sections 2m (i) and 2m (ii) refer to any premises including the precincts thereof (a) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on; or (b) whereon twenty or more workers are working or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on. 14 Invested capital is the total of fixed capital and physical working capital. 15 Total output comprises total ex-factory value of products and by-products as well as other receipts such as receipts from non-industrial services rendered to others. 16 Net value added is arrived by deducting total input and depreciation from total output.

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Factories In

Operation13

Invested Capital14

Total Output15

Net Value

Added16 Profit State

Number Amount in Rs. Crore Puducherry 55 198 972 219 183 Tripura 50 46 89 19 13 Daman & Diu 28 79 176 47 22 Chandigarh (U.T.) 27 39 156 15 4 Nagaland 16 8 31 2 0 Meghalaya 13 44 61 -21 -25 Manipur 12 7 24 1 0 Dadra & Nagar Haveli 10 18 241 100 95 Andaman & Nicobar Islands 4 4 5 2 1 Total 25,367 84,094 204,267 18,061 5,027

Source: Annual Survey of Industries and CRIS Analysis

5.4 COVERAGE OF PRIMARY SURVEY The analysis for food and agro processing industry was also done through primary and secondary survey. The primary survey in Maharashtra was done in two clusters - Pune for processed food and fruits and Mumbai/Thane for meat products and processed food. The survey in West Bengal was done in Calcutta cluster and 24 Paraganas cluster. Though the state of West Bengal is not among the largest states in India for agro and food processing in terms of number of factories and total output, the primary survey was done in West Bengal to get a stakeholders perspective from the eastern region of the country, which was not covered by surveys for textiles and garments and leather and footwear industries. The details of primary and secondary survey are presented in the figure given below.

Reports by Multilateral Organizations like WTO, UNIDO, World Economic Forum, Doing Business, etc

Secondary Survey Reports by Government agencies like Ministry of Food Processing,FICCI, NMCC, CII, Ministry of Commerce and Industry, etc

Reports by Industry agencies like,export promotion councils, advisory bodies, etc

Primary Survey

Maharashtra

West Bengal

Mumbai/Thane Cluster

Pune Cluster

− 2 large scale companies

− 2 medium scale companies

− 2 small scale companies

− Industry associations

− Export promotion councils

− Advisory Boards

Calcutta Cluster

24 Paraganas Cluster

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The primary survey covered 6 companies in each of the four clusters. The survey covered 2 large, medium and small scale companies. The primary survey also covered the industry associations, export promotion councils and advisory bodies in both the states. The secondary survey was done to validate the major challenges and problems which were voiced by the people met during the primary survey and identify major players, segments, measures taken by government, global trade, major importers and exporters, etc in the industry. The secondary survey was done through reports published by multilateral organizations, government agencies, industry associations, export promotion councils, advisory bodies, etc.

5.5 FINDING FROM PRIMARY SURVEY FOR FOOD AND AGRO INDUSTRY

The key issues and challenges which has been voiced during the primary survey has been classified into six categories namely, a) Infrastructure and Raw Materials, b) Manpower, c) Technology, d) Government policies, e) FTA and RTA and f) Competitive Benchmarking. The key issues and challenges detailed in this section represent the views and opinions of the companies and industry associations met during the primary survey. The issues and challenges voiced in the primary survey have been further checked through the secondary data and analysis. The main issues and challenges impacting the competitiveness of the industry have been firmed in the later section based on the secondary data and analysis.

Findings from Primary SurveyFindings from Primary Survey

Inadequate agricultural infrastructure acts as a hurdle to the development of agro-industry. The agriculture segment is characterized by very high degree of wastage and value destruction due to absence of infrastructure to transport and store perishable products.

Lack of cold storage. Moreover, existing refrigerated vans are inadequate which affects the quality of the produce by the time it reaches processing companies.

Lack of power supply. Cost of arranging alternate power/fuel source eats in to food processors margins. Altering fuel sources also impacts the quality of their output leading to scenario where contract manufacturers have their output rejected.

Uncertainty about realization for farm produce affects supply. Farming is not viewed as lucrative while food processing is relatively lucrative due to value addition.

Inadequate agricultural infrastructure acts as a hurdle to the development of agro-industry. The agriculture segment is characterized by very high degree of wastage and value destruction due to absence of infrastructure to transport and store perishable products.

Lack of cold storage. Moreover, existing refrigerated vans are inadequate which affects the quality of the produce by the time it reaches processing companies.

Lack of power supply. Cost of arranging alternate power/fuel source eats in to food processors margins. Altering fuel sources also impacts the quality of their output leading to scenario where contract manufacturers have their output rejected.

Uncertainty about realization for farm produce affects supply. Farming is not viewed as lucrative while food processing is relatively lucrative due to value addition.

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

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Findings from Primary SurveyFindings from Primary Survey

Unskilled farming leads to buyers’ refusal in terms of grade, size, firmness, color and other characteristics of the produce.

Farm producers need to be educated as to what characteristics make a good input for food processing. Food processors also face the problem of inadequate skilled manpower.

Food processors have shown concerns that in most instances the farm producers have limited awareness in terms of grade of farm produce that can be used as an input for food processing. This leads to considerable loss of resources at the food processors end and also result in to losses to the farm producers.

Unskilled farming leads to buyers’ refusal in terms of grade, size, firmness, color and other characteristics of the produce.

Farm producers need to be educated as to what characteristics make a good input for food processing. Food processors also face the problem of inadequate skilled manpower.

Food processors have shown concerns that in most instances the farm producers have limited awareness in terms of grade of farm produce that can be used as an input for food processing. This leads to considerable loss of resources at the food processors end and also result in to losses to the farm producers.

ManpowerManpower

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

TechnologyTechnology

Findings from Primary SurveyFindings from Primary Survey

Using traditional technology compromises quality and consistency leading to product rejection by large procurers.

Lack of financing options - NABARD is amongst the only financer available at the nation level. NABARD funds a wide spectrum of activities and hence there is no special focus on food processing.

Farm practices in India are still traditional. Farm mechanization is largely absent except in wheat based cropping. Farmers level of awareness needs to be updated with continuous education.

Sector is fragmented and small units do not have access to financial resources readily. Small units largely have limited product portfolio, hence technology up gradation is unlikely to be remunerative.

Using traditional technology compromises quality and consistency leading to product rejection by large procurers.

Lack of financing options - NABARD is amongst the only financer available at the nation level. NABARD funds a wide spectrum of activities and hence there is no special focus on food processing.

Farm practices in India are still traditional. Farm mechanization is largely absent except in wheat based cropping. Farmers level of awareness needs to be updated with continuous education.

Sector is fragmented and small units do not have access to financial resources readily. Small units largely have limited product portfolio, hence technology up gradation is unlikely to be remunerative.

TechnologyTechnology

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

ManpowerManpower

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5.6 VALIDATION THROUGH SECONDARY DATA AND ANALYSIS The issues and challenges voiced during the primary survey have been further validated through secondary data and analysis. The final set of issues and challenges to be addressed for improving the competitiveness of industry has been firmed up after taking into account both primary survey and secondary data and analysis. Level of Processing is Low in India The level of food and agro processing in India varies from 1.3% to 21% in different product segments. The level of processing in India for fruits and vegetables is low at 1.3% as compared to countries like USA (70%), France (70%), Malaysia (80%) and Thailand (30%). It is ironical that even though India ranks second in terms of vegetables and fruits produced in the country, nearly 20-25% of the production is lost in spoilage in various stages. The level of processing across different products is presented in the figure given below.

Figure 5-5 : Level of Processing in India across segments in 2005-06 Source: Department of Agriculture and Co-operation, GoI It is pertinent to note that scale is an important factor in the processing industry. Similar to land holding sizes, 90% of the food processing units are also small in scale and as such they are unable to exploit the advantages of economies of scale. These figures clearly outline that

8%Marine Products

6%Poultry

21%Buffalo Meat

13%Milk/Milk Products

1.3%Fruits/Vegetables

% of ProcessingProducts

8%Marine Products

6%Poultry

21%Buffalo Meat

13%Milk/Milk Products

1.3%Fruits/Vegetables

% of ProcessingProducts

Findings from Primary Survey Findings from Primary Survey

Most of these regulations favor large food processors and there is limited scope for small scale players.

There should be different tax structure for farm producers and food producers as there is a viability pressure for the farm producers.

Most of the promotion scheme favors large food processors and there are limited incentives to the farm producers.

The current Comprehensive Crop Insurance Scheme is complicated and does not cover all crops. It has a complex system for loss assessment which is not readily acceptable to farmers.

Lack of proper packaging reduces the shelf life of the processed food. Different taxation for branded and unbranded processed foods – branded foods attract higher rates of sales tax.

Most of these regulations favor large food processors and there is limited scope for small scale players.

There should be different tax structure for farm producers and food producers as there is a viability pressure for the farm producers.

Most of the promotion scheme favors large food processors and there are limited incentives to the farm producers.

The current Comprehensive Crop Insurance Scheme is complicated and does not cover all crops. It has a complex system for loss assessment which is not readily acceptable to farmers.

Lack of proper packaging reduces the shelf life of the processed food. Different taxation for branded and unbranded processed foods – branded foods attract higher rates of sales tax.

ManpowerManpower

TechnologyTechnology

FTA and RTAFTA and RTA

Government PoliciesGovernment Policies

Competitive BenchmarkingCompetitive Benchmarking

Infrastructure & Raw MaterialsInfrastructure & Raw Materials

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there is need for more large scale units to achieve the potential in this sector. At the same time creating supply chain infrastructure is equally important. There is a pressing need for cold storage chain to provide post harvest facilities to agricultural produce. This would entail maintaining the quality of the produce and hence the quality of the processed output. The level of processing for fruits and vegetables in different countries is presented in the figure given below.

Figure 5-6 : Level of processing for fruits & vegetables in countries in 2005-06

Source: Department of Agriculture and Co-operation, GoI

Low Capacity for Cold Storage is leading to Low Level of Processing The key value proposition of cold chains is the storage and uninterrupted distribution of products maintained at controlled temperatures that helps reduce wastage and spoilage, thereby maintaining quality. The services primarily provided by cold chains comprise temperature controlled warehousing (TCW), temperature controlled transportation (TCT) and value-added services such as sorting, grading, packing etc. Cold chain players operate either as integrated cold chain and trading business operations or as third party service providers earning fees/rentals for providing services/facilities. Cold chain companies have high degree of operating leverage as over 50 per cent of the operating costs are fixed in nature. Hence, profitability is acutely vulnerable to changes in utilisation levels, and varies significantly across players. Low penetration of cold storage facilities is one of the primary reasons for low level of food processing in India. Out of total capacity of 23.3 million tons for cold storage, potato alone accounted for 78% of total share (18.3 million tons) in 2006-07. According to different estimates the wastage of agricultural produce is between 20-35% in India due to lack of cold storage. The agricultural losses in India are around Rs. 50,000 crore per annum.

Figure 5-7 : Capacity of Cold Storage by Commodities

Source: Indiastat, Agmarket and CRIS Analysis Growth in cold chains is closely linked to the growth in the export of perishables and the food processing, retailing and food service industries. However, the extent of both exports and food processing in India is significantly lower than other countries despite it

1.3%India 30%Thailand80%Malaysia70%France 80%USA

% of ProcessingCountry

1.3%India 30%Thailand80%Malaysia70%France 80%USA

% of ProcessingCountry

8.7%23.3268.3Total

NA4.7NAMulti-purpose & Others

0.1%0.197.1Milk and Milk Products

2.1%0.28.9Meat and Fish

11.3%18.3162.3Fruits and Vegetables

% of Cold Storage

Cold Storage (Mn Tons)

Production (Mn Tons)Commodity

8.7%23.3268.3Total

NA4.7NAMulti-purpose & Others

0.1%0.197.1Milk and Milk Products

2.1%0.28.9Meat and Fish

11.3%18.3162.3Fruits and Vegetables

% of Cold Storage

Cold Storage (Mn Tons)

Production (Mn Tons)Commodity

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being a leading producer of fruits (contributed 8 per cent of the global production) and second largest producer of vegetables (contributed 15 per cent of the global production). The penetration through which signifies the percent of produce passing through cold chains was low at 15% in India as compared to over 80% in countries like France, Germany, Italy, UK and US. The wastage of agricultural produce is low in developed countries at less than 5% as compared to 20-35% in India. A comparison of India has been made with other countries in world with respect to parameters like infrastructure, exports, organised retail, penetration through cold chain and percentage of wastage in the figure given below.

Figure 5-8 : Comparison of Cold Chain Adoption Spectrum across Countries

Source: CRISIL Research

India has a tropical climate and a variety of fruits and vegetables are grown during different seasons and in different regions of the country, with marine products being procured from the coastal regions. These perishables have to be procured and distributed to different parts of the country. Hence, the inherent need for cold chains remains. The food service and food processing industries require a constant supply of frozen/perishable products. Hence, the requirement of cold chains becomes critical for the continuous supply of the same. However, the percent of produce that passes through cold chain is less than 15%. The low penetration through cold chain in India can be attributed to the following factors.

• Power supply: Low voltage and irregular power supply affects quality, thereby, leading to higher cost.

• Low utilisation levels: Lack of awareness and perception of cold chain products not being fresh has led to relatively low demand and depressed returns in the past.

• Fuel cost: Any rise in fuel costs directly impacts the profitability of the refrigerated transportation players as the same accounts for around 55 per cent of the operating expenses.

• Operational challenges: TCW players that have a trading business model, require the ability to manage the source, i.e. farmers of fruits and vegetables, thereby overcoming the cartel of commission agents and managing consistency in quality of the produce. TCT players face bottlenecks while transporting meats in states such as Gujarat and Madhya Pradesh, adversely impacting the reefer transportation industry.

• Skilled manpower: Lack of skilled manpower to manage cold chains.

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Policies for developing the Infrastructure for Food and Agro Processing Industry The GoI has launched numerous policies for development of infrastructure for food and agro processing industry in India. The details of various policies launched by GoI have been discussed in the following paragraphs. Integrated Cold Chain Facility Scheme: The primary objective of the scheme is to provide integrated and complete cold chain and preservation infrastructure facilities from the farm gate to the consumer. The cold chain and preservation infrastructure can be set up by individuals or group of entrepreneurs. One of the main criteria for eligibility of scheme is to provide integrated and complete cold chains without any break from the farm gate to the consumer. Standalone facilities are not considered under the scheme. The financial assistance (grant-in-aid) of 50% of the total cost of plant and machinery and technical civil works in general areas and 75% for NE region and difficult areas subject to maximum of Rs. 10 crore during the 11th Five Year Plan (2007-12) is provided under the scheme. The approval committee comprising of member of Ministry of Agriculture, APEDA and Planning Commission sanctions the financial assistance and monitors the project. During the 10th Five Plan (2002-07), 20 projects have been approved for assistance. Food Parks: The objective of setting up of food parks is to provide common facilities like cold storage, food testing, effluent treatment plant, common processing facilities, power, water, etc. The grant from Government is 75% of the project cost in general areas and 90% in difficult areas limited to Rs. 50 crore. Under the Scheme, 2 Food Parks were funded during 8th Five Year Plan (1992-97), 39 under the 9th Five Year Plan (1997-02) and 15 under the 10th Five Year Plan (2002-07). As discussed during the presentation to the NMCC on the final report, the significant changes in the scheme for Food Parks under the Eleventh Five Year (2007-12) as compared to the earlier scheme under the Tenth Five Year Plan is presented in the table given below.

Figure 5-9 : Proposed Changes in the Scheme for Food Parks under Eleventh Five Year Plan

Scheme under Tenth Five Year Plan Scheme under Eleventh Five Year Plan

Stand alone (no backward and forward linkages)

Strong backward and forward linkages and reliable and sustainable supply chain

No Project Management Agency (PMA)

PMA to handhold from concept to commissioning

No financial closure and targeting small & medium enterprises with a minimum of 20 units for a 30 acre park

Financial closure to be ensured by the PMA and no restriction on the number of units but restriction can be on the quantity of material to be handled

Activities confined to park alone

Complementary activities can take place out side the central park by creating the required infrastructure in a well-defined Zone to be finalized after a feasibility study.

No stake holder participation

To be implemented on PPP mode, SPV involving stakeholders to manage the Park- Private entrepreneurs holding a minimum of 51% equity

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Scheme under Tenth Five Year Plan Scheme under Eleventh Five Year Plan

Financial Incentives, 25% limited to Rs 4 crore, inadequate to create the appropriate infrastructure

Higher scale of assistance to meet 75% of the project cost with a ceiling of Rs 50 crore per park (Scale of assistance to be 90% in difficult areas)

Source: Ministry of Food Processing, GoI The above analysis of the proposed scheme under Eleventh Five Year Plan for Food Parks clearly shows that proposed scheme has been better structured with new provisions like possibility of forward and backward linkages, appointment of project management agency for assistance in commissioning and financial closure, implementation of Food Parks on PPP mode and higher assistance from Government. It is expected that the proposed scheme will drive the growth of Food Parks in Eleventh Five Year Plan which has witnessed a very slow progress in previous Five Year Plans. Packaging Centres: The objective of the scheme is to provide facilities for packing which may help in enhancement of shelf life of food products and make them internationally acceptable. Assistance of 25 % of the project cost in general areas and 33.33 % in difficult areas subject to a maximum of Rs. 2 crore is provided under the scheme. The assistance of Rs 1.45 crore has been sanctioned till now to 1 packaging centre in J&K. Value Added Centres: The financial scheme for value added centres is intended to enhance value addition leading to enhanced shelf-life, higher total realisation and value addition to the agricultural produce. The assistance for 25% of the project cost in general areas and 33.33 percent in difficult areas subject to a maximum of Rs. 75.00 lakh is provided under the scheme. 5 projects have been sanctioned till now with total assistance of Rs. 1.5 crore. Benefits for Small Scale Companies: The benefits to small scale units are provided under section 80-IB (11) and (11A). An undertaking deriving profit from the a) business of setting up and operating a cold chain facility or b) from the business of processing, preservation and packaging of fruits or vegetables or c) from the integrated business of handling, storage and transportation of food grains are eligible for incentives under the sections 80-IB (11) and (11A). The entities are eligible for 100% deduction of its profit and gains for first five years and 25% (30% in case of company) for the next five years in a manner that the total period of deduction does not exceed ten consecutive assessment years beginning from the initial assessment year and subject to other specified conditions. Scheme of Technology Up-gradation and Modernization and Expansion for Small Scale Companies: The assistance available under Scheme is 25% of the cost of plant and machinery and technical civil works subject to a maximum of Rs.50 lakh in general areas and 33% up to Rs. 75 lakh in difficult areas. The Budget Estimates for total outlay for the scheme in 2007-08 was Rs. 80 crore while the total assistance provided was Rs. 67.7 crore to 288 units. The outlay is low and disbursal is even lower for Scheme for Infrastructure Development for Large Scale Operations: While the companies met during primary survey feel that incentive for development of infrastructure is provided primarily for large scale companies, the analysis of Government policies shows that the incentives have been provided for both large and small scale companies. On the contrary, the funds allocated for the small scale companies have been disbursed, but the percentage of funds disbursed to large scale companies is very low. The plan outlay for the infrastructure development and technology up-gradation for food and agro processing for both large and small scale

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companies is relatively low (around Rs. 150 crore/annum) as compared to others sector like textiles and garments (Rs. 5,000 crore on an annual basis from 1999 to 2008) and leather and footwear. SIDBI is nodal agency for Technology Up-gradation, Modernization and Expansion Scheme while a committee comprising of members of APEDA, Planning Commission and MoA approves loans for Scheme for Infrastructure Development. The disbursal of funds under the scheme Technology Up-gradation, Modernization and Expansion for which SIDBI is the nodal agency is more then 90% but the disbursal of funds by committee comprising of members of APEDA, Planning Commission and MoA for Scheme for Infrastructure Development is low. The scheme for infrastructure development includes a) Food Park, b) Packaging Centre, c) Integrated Cold Chain facilities, d) Irradiation Facilities, e) Value added Centres and f) Modernized Abattoirs. The detail of budget estimates and actual expenditure for infrastructure development scheme is presented in the figure given below. Figure 5-10 : Budget Estimates (B.E) and Actual Expenditure for Infrastructure Development Source: Ministry of Food Processing and CRIS Analysis Multi-level supply chain leads to higher wastage, increased costs and commissions The supply chain for both fruits and vegetables and staples forms several layers in India. As a result, distribution costs increase, as the various entities along the chain are paid commission. Also, the movement of goods across different states or regions, sometimes arising out of differential tax rates, leads to high wastage, due to inadequate transportation and cold storage facilities. In the fruits and vegetables segment, losses can be as high as 20-35 per cent, compared to less than 5 per cent in countries with a significant share of organised retail. Warehousing further adds to costs along the supply chain. All these factors push up the final retail prices paid by the consumer, which are around 2.5 times the prices paid to the farmer. Consequently, average farm realisations are only 35-40 per cent of the retail price. This is very low, as compared with farm realisations of 65 per cent, in countries with high organised-retail penetration. The figure presented below shows the difference in supply chain for organised and unorganised retailing. The dotted lines in red in the figure given below indicate the procurement channel of unorganised retailers while the dashed lines in blue indicate the procurement of organised retailers. The organised retailing removes the multiple layers of wholesaler, semi-wholesaler, and small buying agents resulting in supply chain leading to reduced distribution costs.

82.19

13.24

Actual 2006-07

87.30

19.80

B.E 2006-07

69.66

14.47

Actual 2005-06

49.00

49.00

B.E 2005-06

Actual 2007-08

B.E 2007-08

Category (in Rs Crores)

67.7072.00Technology Upgradation, Establishment & Modernization

6.3890.00Scheme for Infrastructure Development

82.19

13.24

Actual 2006-07

87.30

19.80

B.E 2006-07

69.66

14.47

Actual 2005-06

49.00

49.00

B.E 2005-06

Actual 2007-08

B.E 2007-08

Category (in Rs Crores)

67.7072.00Technology Upgradation, Establishment & Modernization

6.3890.00Scheme for Infrastructure Development

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Figure 5-11 : Supply Chain for Organised and Unorganised Retailing for Fruits and Vegetables Source: CRISIL Research Organised retailing segment can benefit the agro-processing and agriculture sector in various ways. Currently, the average realisation of the farmer is only 35-40 per cent of the retail price. This is very low when compared to the 60-65 per cent farm realisations in the developed countries, with high organised-retail penetration. Better supply chain management can result in fewer layers and greater efficiencies. Technology can help through better information access along the chain. Also, off-take uncertainties are removed as sales are assured through contracts and minimum purchase commitments. The organised retail, with its better supply chain management, will lead to lower wastages and costs. With lower costs and increasing competition, goods will be available to the final consumers at fair and competitive prices. Thus, organised retail will help in lowering consumer inflation. Restrictive procurement through Agricultural Produce Marketing Committees Act (APMC) lengthens supply chain and prohibits the development of organised retailing and food and agro processing Agricultural markets, in most parts of the country, are regulated under the State APMC (Agriculture Produce Market Committee) Acts. The geographical area within each state is divided into market areas, wherein the markets are managed by the Market Committees constituted by the state governments. No person or agency is allowed to freely conduct wholesale marketing activities. APMCs were established to protect the interests of farmers, and set a Minimum Support Price, which today serves as a reference price. However, these regulated wholesale markets prevented the development of a competitive marketing system in the country, thereby restricting direct marketing, organised retailing, smooth supply of raw materials to agro-processing industries, and the adoption of innovative marketing systems and technologies. The APMC regulations have prevented companies from directly sourcing fruits from farmers. States like UP and MP has waived these regulations to allow retailers to have access to farmers. While this regulation may encourage co-operatives to a large extent, retail outlets that cannot easily reach the co-operatives face difficulty in sourcing their requirements. As

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per the Report of the Working Group on Food Processing Sector, in most states in India the APMC Act did not allow transactions outside the mandi. Even in states that allow transactions outside the mandi, the Act stated that while procurement may be direct, companies needed to pay a mandi tax even if the mandi infrastructure is not utilized. The APMC Acts of different states become a stumbling block for markets seeking to scale up operations. Hypermarkets seeking to source bulk quantities of food and grocery have to work through intermediaries in APMC markets, and cannot deal with the farmer directly. The Report of Task Force on Agricultural Marketing Reforms proposed the following amendments in State APMC Acts for reforming the agricultural marketing in states in India. Promotion of Agricultural Markets’ in Private or Cooperative Sector: Under the present Acts, State Governments alone are empowered to initiate the process of setting up of regulated agricultural markets. As a result private sector cannot take initiative in setting up markets equipped with best facilities. High investments with entrepreneurial skills required for creation and managing the market infrastructures have to come from private sector. In order to encourage private sector to make massive investments required for development of alternative marketing infrastructure and supporting services, provisions of the APMC Act would need modification to create a lawful role for the private sector in market development. Direct Marketing: Direct marketing encourages farmers to undertake grading of farm produce at the farm gate and obviates the necessity to haul produce to regulated markets for sale. Direct marketing enables farmers and processors and other bulk buyers to economize on transportation costs and to considerably improve price realisation. In South Korea, for instance, as a consequence of expansion of direct marketing of agricultural products, consumer prices declined by 20 to 30 percent and producer-received prices rose by 10 to 20 percent. This also provided incentive to large-scale marketing companies to increase their purchases directly from producing areas. Contract Farming: The following changes have been proposed for contract farming.

In case of violation of contract, from either side, farmers as well as the company should be in a position to approach an organization or institution, which can mediate and settle the dispute.

There should be an institutional arrangement to record all contractual arrangements, may be with the local market committee or panchayat or some Government machinery. This will promote and strengthen confidence building between the parties and also help solve any dispute, arising out of violation of contract.

The contract farming should have a provision for both forward and backward linkages. Unless both input supply and market for the produce are assured, small farmers will not be in a position to participate in contract farming.

There should be bank finance to small and marginal farmers on easy terms. As the payments for contractual produce are made through the bank, the recovery of such loans will be easier.

The contracts should be managed in a more transparent and participatory manner so that there is greater social consensus in handling contract violation from either side without getting involved in costly as well as lengthy process of litigation. Also the contract need to be drawn in a more comprehensive and flexible manner.

There should be a contract farmers association or cooperatives at the plant level which will improve their bargaining power vis-à-vis the company and promote

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equality of partnership for ensuring smooth functioning of any contract farming arrangement.

The most important thing for the sustainability of contract farming is the selection of appropriate plant genotype. Unless the plant material is of good quality and high yielding and less prone to pests and diseases, the contract farmers may lose confidence and discontinue the cultivation of contract crop in question.

The proposed contract crop should have a distinct advantage in terms of relative yield and profit, which will provide higher income to the contract farmers on stable basis.

In many parts of the country, agricultural tenancy is legally banned, although concealed tenancy exists. Tenants who do not enjoy security of tenure cannot participate in contract farming. Hence, legalization of tenancy would be a precondition for enabling the tenant farmers to benefit from contract farming. Although different forms of land tenants including share-croppers can be adopted to maintain the contract farming, security of tenure would be necessary.

As assured market for the farm produce motivates a farmer to enter into contract with a company, a similar market prospect should exist for the processed products of the company. Ultimately, it is the success of the company's product in national and or international market, which decides whether contract farming for any particular crop or commodity would sustain.

Rationalization of Market Fee: The present system of levy of fee at multiple points for the same commodity at different stages of transaction needs to be replaced, by single point levy of market fee in the entire process of marketing in the State.

Status of Marketing Reforms in APMC Act by States in India: While some states in India have amended the above provisions as suggested by Report on Task Force on Agricultural Marketing Reforms, there are many states in India which have amended the act but not adopted the provision like Uttar Pradesh, Haryana, West Bengal, Jharkhand, etc. It is very important that all the states in India adopt the provision which have been suggested by the Report of Task Force on Agricultural Marketing Reforms. The status of market reforms in the APMC Act as on June, 2008 is presented in the table given below.

Figure 5-12 : Status of market reforms in APMC Act as on June 30, 2008

Stage of Reforms Name of States/Union Territories

States/Union territories where reforms to APMC Act have been carried out as suggested.

Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Nagaland, Orissa, Rajasthan, Sikkim and Tripura.

States/Union territories where reforms to APMC Act has been done partially a) by amending APMC Act/ resolution or b) by executive order

Haryana, Punjab, Chandigarh and NCT of Delhi

States/Union territories where there is no APMC Act and hence no need for reforms.

Bihar, Kerala, Manipur, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu, and Lakshadweep.

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Stage of Reforms Name of States/Union Territories

States/Union territories where APMC Act already provides for the reforms.

Tamil Nadu

States/Union territories where administrative action is initiated for the reforms

Mizoram, Meghalaya, J&K, Uttrakhand, West Bengal, Puducherry, Jharkhand and Uttar Pradesh.

Source: Ministry of Agriculture, GoI

The states in India like Andhra Pradesh, Gujarat, Madhya Pradesh, Karnataka, Maharashtra, Orissa, Rajasthan, etc. which have implemented amendments in APMC Act have benefited through assured sales for farmers due to demand led production, better pricing due to fixed contracts, technological advancement due to participation of private players and more concentration of super markets and hyper markets. The states in India like Uttar Pradesh, West Bengal, Jharkhand, Uttarkhand, etc. which have not implemented the amendments in APMC Act faces more losses/wastages by framers due to supply-led production, higher pricing with little co-ordination across value chain between farmers, wholesalers and consumers and limited technological advancement. The changes in the supply chain of the food and agro processing industry which has been brought about in states in India due to implementation/non-implementation of APMC Act is summarised in the table given below.

Figure 5-13 : Potential Benefits to Farmers due to APMC Act Amendments States which have not adopted

amendments in APMC Act States which have adopted amendments

in APMC Act Supply-led. The farmers sell what they produce

Demand-led. The farmers produce what is demanded

Prices set in open markets, with little co-ordination across the chain

Price set by contracts, with more co-ordination across the chain

Government dependent - Limited dependence on new technology, R&D and information

Private sector initiative - High dependence on new technology, R&D and information

Food retail by small firms/traditional formats

Retail concentration in super markets and hypermarkets

Opposition to reforms by vested interests is common - some organised retail players were forced to shut down their food and grocery format stores in Uttar Pradesh on grounds that big retailers would have an adverse effect on the farmers as well as local traders. Another player met with a similar fate in West Bengal, where its fresh produce format stores faced opposition from the “Agricultural Marketing Board”. Since the reforms to the APMC Act have not been fully implemented in states of Uttar Pradesh and West Bengal, entrants from the organised retail industry were forced to shut down their food and grocery stores. The largest retailing vertical in India is food and grocery segment with 67% share in total market of Rs. 13,008 billion. The segment includes the sale of fresh fruits and vegetables, milk and milk products, staples, cereals, grains, pulses, processed food, ready-to-cook and ready-to-eat meals, spices, and other eatables. The largest opportunity in organised retail exists in food. In spite of being the vertical with the largest share of consumer's wallet, food retail is the most unorganised and penetration of the organised retail in food and beverage segment is low at 1.3%. The Indian food market is characterised by small retailers and food service operators. The proposed marketing reforms in the APMC act needs to be

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implemented by all states in India to promote the share of organised retailing in the food and agro processing segment. Though the penetration of organised retail in food and beverages segment is low, a positive development for the food and agro processing industry in India is that the number of stores of organised retailers have seen a significant growth in states like Maharashtra, Punjab, Andhra Pradesh, etc. where the marketing reforms in the APMC act of the State have been carried out. The category wise share and penetration of organised retailing across different product categories is presented in the table given below.

Figure 5-14 : Organised Retailing – Category-wise Share and Penetration

Source: CRISIL Research Case Study on SAFAL Market in Karnataka The SAFAL market was set up by the National Diary Development Board in 2003 which is an alternate system of wholesale markets. The SAFAL market operates out of the preview of the APMC Act as allowed by State Government of Karnataka. The SAFAL market operates through backward linkages through farmer associations and forward linkages in form of cash and carry semi-wholesale and retail stores. Currently the SAFAL market has capacity of around 1,600 metric tones of fresh fruits and vegetable which is around 30% of total requirement of Bangalore17. The SAFAL market has formed 250 Horticultural Farmers Associations in which there are around 20,000 farmers as members for the purpose of backward linkage. There are 40 collection centers which are equipped to meet the specific or special requirements of buyers in terms of quality, packing and weight, etc. The logistics support in terms of packaging and transportation of produce is arranged by the associations and collection centers on behalf of the farmers. The farmers have benefited immensely from the backward linkages through reduction in cost of marketing, higher profit realizations and timely payments from the buyers. The forward linkages have been created through auction markets where the wholesalers participate in auctions. The wholesalers find it an added advantage in coming to the SAFAL terminal market, where all the produce is auctioned at the same place rather than at fragmented four product-specific wholesale markets in Bangalore. The forward linkages have also been created through cash and carry stores at 10-12 strategic locations to cater to the needs of retailers. Four distribution centers have also been set-up for meeting the requirements of the institutional buyers. The auctions markets also provide cold storage facilities on payment basis. The wholesalers have benefited from assured availability of

17 Report by ICRIER on SAFAL Market in Karnataka

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quality and quantity of fruits and vegetables, easy handling and transportation and graded and quality checked products. The SAFAL market in Karnataka is an example of efficient supply chain involving producer, wholesaler and consumer which ensures availability of good quality and adequate quantity of fruits and vegetables at low costs. Similar model needs to be followed by other states in India to reduce the problem of agricultural wastages and increasing the level of food processing in India.

5.7 COMPETITIVE BENCHMARKING The exports of Thailand and Malaysia for agricultural products were around USD 21.6 and 15.6 billion respectively in 2006 as compared to USD 14.4 billion of India. Though the exports of India has registered a higher CAGR as compared to Thailand and Malaysia, the exports of Thailand and Malaysia was around 150% and 108% respectively of India’s exports in 2006. Malaysia also has significant oil and rubber exports apart from the food and agro processing products.

Figure 5-15 : Exports of Agricultural Products by Competing Countries Source: WTO and CRIS Analysis Initiatives by Food and Agro Processing Industry of Thailand Policy Incentives Provided by Government of Thailand: The Thai Government supports the agro-industry as a national strategic sector. The Board of Investment offers the following attractive incentives to investors Non Tax Incentives like a) Land ownership rights for foreign investors, b) Permission to

bring in foreign experts and technicians and c) Work permit and visa facilitation Tax Incentive like a) Corporate income tax holidays of 8 years, b) Import duty

exemptions on machinery, c) Exemption of import duty on raw materials for up to 5 years and d) Double deduction from taxable income of utility and transport costs for up to 10 years in Zone 3

Joint Liability Groups Concept for Agricultural Credit: Bank for Agriculture and Agricultural Cooperatives (BAAC) of Thailand extended credit to farmers under Joint Liability Model without the requirement of mortgaging land. BAAC covers 5.53 million farms household representing 95% of all Thai farm households. Groups vary in size from 5 to 30 members with average of 12 to 15 farmers. Group members accept liability not only for their individual loans but also for loans taken by other members of the group.

100%9.4%944.5552.3World

1.5%14.5%14.46.4India

1.6%11.7%15.68.0Malaysia

2.3%9.9%21.612.2Thailand

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

100%9.4%944.5552.3World

1.5%14.5%14.46.4India

1.6%11.7%15.68.0Malaysia

2.3%9.9%21.612.2Thailand

% Share in 2006

CAGR (2000-06)

2006 (USD Bn)

2000 (USD Bn)Country

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Tallad Thai Market18: Tallad Thai Market is a PPP model where fruit, vegetable and other growers from surrounding 150 km radius, bring their agri, dairy and marine produce every day. The marketing infrastructure created by the Government takes care of the produce from the stage of unloading to export by air/shipment after value creation through processes of washing, pre cooling, grading, packaging, labelling and bar coding. Kitchen of the World Project: The project was started by Government of Thailand in 2003 to develop the Thai Food Industry under the Farm to Table concept. The Centre for Thai Kitchen of the World (CTKW) is the government agency which proactively works as "One-stop-service strategic consultant for Thai food business" to promote the sustainable expansion of Thai food business and connect all government and private agencies to encourage the development of food and agro processing industry in Thailand. The Centre encourages opening of Thai restaurants in foreign countries and provides support in the forms of training, information and finance. The restaurants hires Thai staff and cooks are also recruited from Thailand and order all ingredients like rice, fish sauce, coconut milk and processed food from Thailand for serving in the restaurants in foreign countries. Food and Agro Processing Industry of Netherlands

The agricultural sector is one of the mainstays of the economy of Netherlands. The Netherlands is both a major producer and international trader of flowers, meat and meat products, fruit and vegetables, beer, dairy products, chocolate, starch derivatives and seed. Netherlands is one of the smallest countries in the EU comprising of 41,500 square km of area. The total population of the country is low at 1.6 crore. However, the country is one of the largest processor and exporter of processed foods in the world. The total GDP of Netherlands in 2006 was USD 668 billion. The share of agricultural processing in total GDP of Netherlands was 9.4% in 2005 which was very high as compared to share of food and agro processing in total GDP of India which was low at 2% in 2006-07. The total exports of agricultural products of Netherlands were USD 71 billion in 2006 which was equivalent to 17% of total exports. The total import of agricultural imports by Netherlands was USD 41 billion representing 11% of total imports in 2006. Netherlands imports raw materials for food and agro processing and exports value added products. Netherlands has an “agricultural complex” which houses various agricultural and poultry fields as well as agro-processing and service sector units. The agri-food industry also relies heavily on imported agricultural products. The services of trading, distribution, supply etc. have grown to a large extent in Dutch agricultural complex and contribute to the value addition by agricultural complex to a large extent. The factors contributing to success of Dutch Agricultural complex are given below.

• Connectivity: The agricultural complex enjoys excellent last mile connectivity to state-of-the-art ports and airports through excellent road and waterways connectivity. Port of Rotterdam is one of the largest container transhipment ports in the world and is very well connected to every other container port of the world. Amsterdam is capital of Netherlands is connected to all major cities in the world. As per the report on Dutch-Agri Sector by Ministry of Agriculture, Nature and Food Quality most transport, from feed manufacturer to farm, from farm/horticulture business to auction, trader or processor and from there to buyers at home and abroad goes by road: thus one in every three trucks on the road carries agricultural products.

18 Source: E.V Murray Report, College of Agricultural Banking

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• Reliance on imported raw materials: Agri-food processing industry in Netherlands relies heavily on the processing and re-exports of imported food products. This enables the Dutch companies to garner a higher share in export markets though domestic agricultural produce is limited. It is also a good risk mitigation strategy as the reliance of processing units on domestic farm produce is reduced.

• Capturing of export markets: Excellent connectivity to destinations across the globe makes the export cost effective as well as quick. Netherlands is among the largest exporter of food products in the world.

• Services contributing to the growth of food processing industry: Sizable share of Dutch agricultural gross value added is on account of services like logistics, storage and trading services. The presence of these services has boosted the agricultural processing industry in Netherlands.

• Key Elements of Government’s Policy for Food Processing Industry in Netherlands19: The following are the key measures which have been adopted and promoted by Government of Netherlands for development of food and agro processing industry in India

– Sound, sustainable agriculture: An agricultural sector that meets the demands and requirements of society, that is varied and diverse, serves various purposes, thus contributing to the spatial quality of our countryside, and a sector that can compete internationally;

– Food quality: Food that is sound, wholesome and safe, of guaranteed quality and

which meets a wide range of consumer demands and is the result of well-functioning business chains.

– Knowledge and innovation: Development of a knowledge infrastructure that

contributes to such challenges as innovation. To this end the government has set up an innovation platform and made extra resources available for knowledge and innovation.

– An eye on the international context: Participation in various forms of cooperation, in

such areas as production, marketing, the economy, ecology and nature as well as the generation, application and exchange of knowledge. On more than 40 locations all over the world employees of the agricultural offices are trained to assist Dutch agricultural small and medium-sized enterprises in their activities on foreign markets. The Ministry of Agriculture, Nature and Food Quality targets a list of countries and provides assistance to reduce unofficial transaction costs like differences in traditions and trade practices, language, difficulty accessing local networks, and the cost of maintaining relations at a distance. The current focus of the Ministry of Agriculture, Nature and Food Quality in Netherlands is to target new EU member states in central Europe and is providing assistance through thematic programs to exporters to reduce unofficial transaction costs.

– Agri-focused business climate: To reduce the quantity of regulations, to resolve

problems, and simplify policy - the Netherlands harmonises standards and requirements, improve logistic processes for import and export, take the one-stop shop approach and try to resolve agri-logistic problems where possible.

19 Source: Report on Dutch-Agri Sector by Ministry of Agriculture, Nature and Food Quality of Netherlands

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Key Learning: The key learning from the case study on food and agro processing industry in Netherlands is that in spite of low agricultural production, Netherlands is one of the major exporters of agricultural products in world due to a) good transportation infrastructure and b) active involvement of Government (in measures like innovation, food quality, outreach programs, etc) in development of food and agro processing industry. High Excise and Sales Tax in Food and Agro Processing Industry in India The excise and sales tax in food and agro processing industry in India is high as compared to the competing countries. While the primary agricultural products are exempted from excise and sales taxes, the central excise tax in India on food and agro processing ranges from 0% to 16% while the sales tax or local authorities tax applied by different states in India vary form 8% to 28%. In countries like UK, Ireland, USA and Malaysia there is no excise and sales tax on food and agro processing industry.

Figure 5-16 : Comparison of Excise and Sales Tax by India and Competing Countries

Country Central Excise

Tax/ Central Government Tax

Sales Tax/ Local Authorities Tax

India 0-16% 8-28% UK 0% 0% Ireland 0% 0% Thailand 0% 7% USA 0% 0% Malaysia 0% 0%

Source: Report of the Working Group on Food Processing Sector

5.8 SUPPLY CHAIN COMPETITIVENESS OF FOOD AND AGRO INDUSTRY

The supply chain index of the food and agro processing industry in India has been evaluated on a three point rating scale with parameters as Good, Average and Poor. The analysis of supply chain index of food and agro processing industry in India shows that competitiveness of India in the first stage of the value chain which is agricultural production is good as India is the largest or second largest producer for majority of agricultural (fruits, vegetables, etc) and other food products (meat, fish, milk, etc) in the world which are the raw materials for food and agro processing industry in India.

The competitiveness of India in the food and agro processing industry has been impacted by wastage of agricultural produce due to lack of transportation and storage facilities of the agricultural production. The storage capacity in India as a percentage of agricultural production is relatively less as compared to countries like USA, Thailand, Netherlands, etc. Moreover, out of the total storage capacity in India, potatoes alone accounted for 78% of total storage capacity in 2006-07.

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Figure 5-17 : Supply Chain Competitiveness Index of Food and Agro Processing Industry in India

The level of food processing in India is low with level of food processing varying from 1.3% to 21% across different food products. The level of food processing in India has been very low for fruits and vegetables at 1.3% as compared to USA (80%), France (70%), Malaysia (80%), etc. The low level of food and agro processing can also be attributed to low outlay for food and agro processing as compared to other industries and disbursal percentage which has been even lower. The competitiveness of stage distribution and retail in the food and agro processing sector is average. While the exports are low due to poor quality of packaging and branding, organised retailing has been increasing (which provides a good platform for food and processing industry) in domestic market with various retail chains establishing outlets, especially in the southern states. The growth of organised retail is expected to drive further improvements in the supply chain.

5.9 ISSUES TO BE ADDRESSED FOR FOOD AND AGRO INDUSTRY

The key issues to be addressed for the industry have been classified into three categories namely, a) Industry Level Issues, b) Location Specific Issues and c) Macro Level Issues. The objective of classifying issues into three categories is to have clarity as to which is the relevant agency for an issue and with which agency NMCC should liaison to remove the problems faced by the industry. The industry level issues are specific to food and agro processing industry and the relevant agencies with which NMCC should liaison for resolving the issue is Department of Food Processing. The location specific issues are common to all industries and are specific to a state and its districts. NMCC should liaison with State Governments and Industry Associations in resolving location specific issues. The macro level issues are economic policy issues and are common across industries. In resolving the macro level issues, NMCC would be required to work with central agencies like Reserve Bank of India, Ministry of Finance, Ministry of External Affairs, etc.

Agricultural Production

Agricultural Production

AverageAverage

PoorPoor

PoorPoor

GoodGood

Transportation & Storage

Transportation & Storage

Food Processing

Food Processing

Distribution & Retail

Distribution & Retail

The exports are low due to poor quality of packaging & branding but the organised retailing has been increasing in domestic market

The exports are low due to poor quality of packaging & branding but the organised retailing has been increasing in domestic market

The level of food processing is low in India ranging from 1.3% to 21% across products The level of food processing is low in India ranging from 1.3% to 21% across products

Cold storage capacity is relatively very low and around 78% is only for potatoesCold storage capacity is relatively very low and around 78% is only for potatoes

India is the largest or second largest producer for majority of agricultural & food products in WorldIndia is the largest or second largest producer for majority of agricultural & food products in World

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Figure 5-18 : Framework for Classification of Issues for Food and Agro Processing Industry in India

The key issues to be addressed for the food and agro processing industry have been identified based on the findings from primary survey and validation through secondary data and analysis. The key issues to be addressed have been identified under the framework explained above. The key industry level issue for the food and agro processing industry are as follows. The outlay has been low for infrastructure development for cold storage and the disbursal percentage has been even lower as compared to other industries in India. The food and agro processing sector contributed to about 13% of manufacturing GDP as compared to textiles and garments industry which contributed to 12% of manufacturing GDP. The plan outlay for food and agro processing has been increased from Rs. 523 crore in Tenth (10th) Five Year Plan (2002-07) to Rs. 5006 crore in Eleventh (11th) Five Year Plan (2007-12) but is relatively very low as compared to textiles and garments industry for which the plan outlay is Rs. 24,134 crore during the Eleventh (11th) Five Year Plan (2007-12). The actual expenditure was even lower at 74% with disbursal percentage varying from 46% to 88% across different schemes. The other important industry level issues for the food and agro processing sector are bad quality of packaging, lack of insurance and finance facilities to the farmers and lack of implementation of marketing reforms in APMC Act. While many states have amended the APMC Act in line with recommendations suggested by Task Force on Agricultural Marketing Reforms they have not adopted the provisions as yet. The key location specific issues are lack of cold storage and refrigerated vans for transportation of agricultural produce to processing units leading to wastage of agricultural produce. According to different estimates the wastage of agricultural produce is between 25-30% in India due to lack of cold storage. The agricultural losses in India are around Rs. 50,000 crore. The other important location specific issue is lack of understanding at the farm producers as to what quality and variety of product is needed for food and agro processing units. The important macro level issues in the food and agro processing is similar to the textiles and garments and leather and footwear industry in India. The lack of FTA and RTA with major importers of food and agro processing products and fluctuation in INR with respect to USD are the major issues which are impacting the competitiveness of the industry.

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

Specific to an IndustrySpecific to an Industry

Economic Policy IssuesEconomic Policy Issues

Location Specific Issues

Location Specific Issues

Common to all industries and is specific to state & sub state level

Common to all industries and is specific to state & sub state level

Ministry of Food ProcessingMinistry of Food Processing

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

Reserve Bank of India, Ministry of Finance and Ministry of External Affairs

State Governments and Industry AssociationsState Governments and Industry Associations

NMCC to play the role of enabler by interacting with different agenciesNMCC to play the role of enabler by interacting with different agencies

IssuesIssues Description of IssueDescription of Issue Relevant AgenciesRelevant Agencies

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Figure 5-19 : Classification of Issues for Food and Agro Processing Industry in India

5.10 RECOMMENDATIONS FOR FOOD AND AGRO INDUSTRY Increasing Plan Outlay and Disbursal for Food & Agro Processing The plan outlay for food and agro processing sector for both large and small scale companies was relatively low in the Tenth (10th) Five Year Plan at Rs. 105 crore per annum as compared to others sector like textiles and garments where the disbursal under TUFS was Rs. 5,000 crore on an annual basis from 1999 to 2008. The food and agro processing sector contributed to about 13% of manufacturing GDP as compared to textiles and garments industry which contributed to 12% of manufacturing GDP. However, the plan outlay for food and agro processing is comparatively very low as compared to the textiles and garments industry. In view of India’s leading position in many agricultural items, the low level of processing leading to high wastage and the significant potential for the generation of income, exports and employment from the food and agro processing industry, increased funding support to the industry appears to be essential. The actual expenditure was even lower at 74% with disbursement percentage varying from 46% to 88% across different schemes. The scheme for infrastructure development which is aimed at providing integrated cold chain facilities witnessed low disbursals at 61% of budgeted expenditure during the Tenth (10th) Five Year Plan. The scheme for Technology Up-gradation, establishment and Modernization of Food Processing Industries which is targeted at small scale companies has a high disbursal at 88% of planned expenditure during the Tenth (10th) Five Year Plan (2002-07). However, the companies met during the primary survey pointed out that disbursal of funds under the Technology Up-gradation scheme are lower. The above analysis shows that lower plan outlay is primary reason for low disbursal of funds under the Technology Up-gradation scheme. The detail of plan outlay and actual expenditure is presented in the table given below.

Industry Level Issues

Industry Level Issues

Macro Level Issues

Macro Level Issues

Outlay has been low for food and agro processing as compared to other sectors and disbursal percentage has been even lowerQuality of packaging is bad leading to reduction in shelf life of the processed product Lack of insurance and finance facilities for farmersImplementation of marketing reforms in Agricultural Produce Marketing Committees Act (APMC) in all states of India

Outlay has been low for food and agro processing as compared to other sectors and disbursal percentage has been even lowerQuality of packaging is bad leading to reduction in shelf life of the processed product Lack of insurance and finance facilities for farmersImplementation of marketing reforms in Agricultural Produce Marketing Committees Act (APMC) in all states of India

No FTA and RTA with US and EU which are the major importers

Foreign exchange fluctuations leading to uncertainty about export revenues

No FTA and RTA with US and EU which are the major importers

Foreign exchange fluctuations leading to uncertainty about export revenues

Location Specific Issues

Location Specific Issues

Lack of understanding at farm producers level w.r.t. to quality and variety of product needed for processing Lack of cold storage and refrigerated vans during transportation of agricultural produce to processing unitsWastage of agricultural produce due to seasonal nature

Lack of understanding at farm producers level w.r.t. to quality and variety of product needed for processing Lack of cold storage and refrigerated vans during transportation of agricultural produce to processing unitsWastage of agricultural produce due to seasonal nature

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Figure 5-20 : Financial Target and Expenditure under various Schemes during Tenth Five Year Plan

Scheme Total

Budgeted Expenditure (Rs. Crore)

Total Actual Expenditure (Rs. Crore)

Actual Expenditure

%

Scheme for Infrastructure Development 124.0 75.3 61%

Scheme for Technology Up-gradation, establishment and Modernization of Food Processing Industries

223.4 196.3 88%

Scheme for backward and Forward Integration and other Promotional Activities 38.0 19.2 51%

Scheme for Quality Assurance, Codex Standards and Research and Development 46.0 39.2 85%

Scheme for Human Resources Development 52.1 40.1 77%

Scheme for Strengthening of Institutions 39.8 18.2 46%

Total 523.3 388.3 74%

Source: Report of the Working Group on Food Processing Sector SIDBI is nodal agency for Technology Up-gradation, Establishment and Modernization Scheme for which the disbursal percentage is higher (88%) while a committee comprising of members of APEDA, Planning Commission and MoA (Ministry of Agriculture) approves loans for the Scheme for Infrastructure Development for which the disbursal percentage is relatively lower (61%). The plan outlay has been increased from Rs. 523 crore in Tenth (10th) Five Year Plan (2002-07) to Rs. 5006 crore in Eleventh (11th) Five Year Plan (2007-12) but is relatively very low as compared to textiles and garments industry for which the plan outlay is Rs. 24,134 crore during the Eleventh (11th) Five Year Plan (2007-12). There is a need to ensure that the budgeted expenditure is fully disbursed during the plan period. Reducing Infrastructure Constraints for Food & Agro Processing Address transport limitation in accessing market by crop producers through Fruits and Vegetables (F&V) Route: There needs to be a direct linkage between the crop producers and the users. The users may be consumers and agro-processing industries. The lack of economies of scale on the farmers/producers side means the cost of transporting to end users will be a high percentage of the value of the produce. Therefore economies of scale need to be created in transportation. This can be done through the Fruit and Vegetable routes. The F&V route is a predefined road network along which the storage and collection of F&V will happen. The farmers will bring their produce to the nearest road head on the F&V route and deposit in the storage / collection chambers identified. The reefer/control temperature vans will then move along these predefined routes collecting the produce along the way. In this way they will be able to achieve the economies of scale in transportation of the produce.

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Figure 5-21 : F&V routes along roads with high concentration of fruit and vegetable production

The F & V routes will be identified along the paths where there is a high concentration of the production of fruits and vegetables. The produce thus collected will be used either for processing industries or for selling for exports or markets in towns and cities. Value addition to the collected produce can further be enhanced by making available adequate cold storages and temperature controlled warehouses through PPP. The idea is to strategically time the entry into the market thereby realizing maximum value. Depending upon the arrivals in the market of fruits and vegetables, the buffer in the cold storages will be tapped for maximizing realisations. Target Chain Retailers: Organised retailing plays an important role in the development of fruit industry. Retailers have two types of impact- First, since majority of the costs are in sourcing of their products; they focus on improving the procurement system. Second, they catalyse the industry by creating markets. The retailers require facilities like Cold chain, temperature controllers and assortment facilities and provide information directly to growers on trends in market and suggest changes required in the methods of cultivation. The development of modern retailers in Indonesia had a significant impact on efficiencies of both the distribution and procurement systems, thereby lowering costs and reducing wastage in the chain. Retailers like Wal Mart and Price Venture, developed contacts with the local farmers and provided them details on variety and requirement of produce besides helping them on seeding techniques. Target Large Scale Integrators: Large integrated processors establish joint ventures with farmers and provide marketing support, access to credit and extension services. The advantage of inviting huge investments for large-scale integration is the elimination of intermediaries in the fruit trading chain and establishment of efficient communication systems with the supplier. In Indonesia, larges scale integrators employ six lakh workers at a cost of about USD 107 million per year. Integrators perceive change in food habits, income levels and customer demands through systematic estimation techniques. Sr. No. Services provided Benefits

1 Storage and Handling systems Large employment generation

2 Standardized Grading systems Growth of subsidiary industries like Bottling Plants, Packaging units, Plastic Processing units etc.

3 Information of Customer needs Faster communication systems between customer and supplier

4 Feedback on the supplies Centralized logistics management systems

5 Transport facilities from production to sale counters Customer satisfaction

Farmer

Farmer FarmerFarmer

Road Head 1

Road Head 2

Road Head 3

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Sr. No. Services provided Benefits 6 Pesticides and Fertilizer Information Reduction in wastages 7 Training on Farming Practices Increase in Yields

Implementation of Proposed Amendments in APMC Act: While some states in India have adopted the provisions suggested by Report on Task Force on Agricultural Marketing Reforms for Direct Marketing which enable chain retailers and large scale integrators to directly interact with the farmers, there are many states in India which have amended the act but not adopted the provisions. It is very important that all the states in India adopt the provisions for direct marketing which have been suggested by the Report of Task Force on Agricultural Marketing Reforms and has been discussed in detail in the section on food and agro processing. Promote Contract Farming: Contract farming helps introduction of farming technologies and methods leading to substantial yield improvements. It encompasses the entire vertical chain of value addition that includes input supply such as credit, fertilizer, pesticides, seeds, etc. on one hand and share in profit or loss of retailer on the other hand. It is a natural extension of the concept of cooperation across the vertical value chain. Contract farming has been successfully practiced by Japanese corporate sector (known as Keiretsu). Through contract farming, Punjab has registered high yields growth in tomatoes of over 350% and in sunflowers of over 200%. The increase in yield has been attributed to introduction of better farm practices. The tomato growers in Punjab were taught the technique of deep chiselling by Retailers’ Training Programs. This enabled them to plant the seeds below the tough crust that had formed over the fields and which was preventing essential nutrients from reaching the plants. They were also taught the benefits of harvesting the crop according to the degree of ripeness of the produce, rather than harvesting the entire crop in a single lot (which was the earlier practice). Close links between the processors and the farmers helped them matching the processing requirement to the ripening of tomatoes. Thus different quantities of tomatoes were planted on different days so as to ensure the right match between the quantity of vegetable that would be picked on a certain day and the quantities of produce that would be processed the same day. This enabled the farmers to increase their income levels by over 200%. The case study on contract farming in India has been presented in the figure given in the next page. Several companies in India like Hindustan Lever (HLL), ITC, and Vijay Mallya controlled UB group, PepsiCo and Escorts are increasingly becoming involved in the contract farming of agri-products to ensure better quality and minimise cost. Even players like Ahmedabad-based textile major Arvind Mills are in the process of identifying locations to start a contract farming project to grow cotton.

Fixed quantity of produce

At end of every fixed period

Without fluctuations in price or quantity

Fixed quantity of produce

At end of every fixed period

Without fluctuations in price or quantity

Advantage to Buyers

Advantage to Buyers

Fixed price and quantity assurance

Protection from demand fluctuation

Access to training and technology

Fixed price and quantity assurance

Protection from demand fluctuation

Access to training and technology

Advantage to FarmersAdvantage to Farmers

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Implementation of Proposed Amendments in APMC Act for implementation of Contract Farming: While some states in India have adopted the provisions suggested by Report on Task Force on Agricultural Marketing Reforms for Contract Farming, there are many states in India which have amended the act but not adopted the provisions. It is very important that all the states in India adopt the provisions for contract farming which have been suggested by the Report of Task Force on Agricultural Marketing Reforms and has been discussed earlier in detail in the section on food and agro processing.

Figure 5-22 : Case Studies on Contract Farming in India

E-Choupal is an initiative of ITC to link directly with rural farmers for the procurement of agricultural/aquaculture produce like soya, coffee, and prawns. E-Choupal was conceived to tackle the challenges posed by the unique features of Indian agriculture like fragmented farms, weak infrastructure and involvement of numerous intermediaries. Traditionally, these commodities were procured in ‘mandis’. ITC has now established computers and Internet access in key rural areas where the farmers can directly negotiate the sale of their produce with ITC. The PCs and Internet access at these centres enable the farmers to obtain information on mandi prices, good farming practices and place orders for agricultural inputs like seeds and fertilizers. This helps farmers in improving the quality of produce, and also helps in realizing a better price.

Pepsi Foods Ltd. (‘PepsiCo’ hereafter) entered India in 1989 by installing Rs. 22 crore state of-the-art tomato processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed pastes and purees for the international market. However, before long, the company recognized that investment in agro-processing plants would not be viable unless the yields and quality of agricultural produce, to be processed, were up to international standards. Until then, tomato had never been cultivated in Punjab for high yields and other desirable agro-processing characteristics such as colour, viscosity and water binding properties. PepsiCo adopted the contract farming method, where the grower plants the company’s crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of crop and advisory services on crop management. The company focused on crops that had a market, on regions where conditions are conducive for those crops, and supplemented it with extensive extension services. It, therefore, brought about a drastic change in the Punjab farmers’ production system thereby ensuring supply of right produce at the right time in required quantities to its processing plant.

Rallis Kisan Kendra Piparya Project at Pipariya in Hoshangabad district of Madhya Pradesh started catering to farmers with their wish list of quality seeds, pesticides, and other vital inputs for farming. All these were financed by the ICICI Bank. HLL (Hindustan Liver Limited) also pitched in the project with assurances to purchase all the produce at the best available market price. Farmers enter into a contract with Rallis for the sake of both pre and post-harvest financial security. Rallis gets the advantage of an assured sale of its products, and a commission from HLL for the service provided, besides a fee from the farmers for the extension of support services. HLL, on the other hand, gets the required quality and quantity of wheat on a platter, and is saved the bother of involving itself in grain market operations. The company can then concentrate on marketing of two, five, and 10 kg wheat flour bags. ICICI gets the advantage of advancing to the priority sector (agriculture) without risking bad debt etc. that is so peculiar to the industry.

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Increased Focus on Certification in Food and Agro Processing In order to capture international markets for processed foods, following specific standard procedures on production methods and processes is a pre-requisite. There are various certification schemes and regulations in the International market that specify standard procedures to be followed viz. HACCP and ISO 9000 certifications. The HACCP concept had its origin in the USA and stands for "Hazard Analysis Critical Control Point”. This regulation states that food is to be produced in a way so that there are no negative modifications possible during the production, handling, storage and transport. This certification involves detail checking of the processing methods, equipments used, chemicals added, preservatives usage, etc. of the unit. This certification also provides that the working conditions of the unit are clean and tidy and health conditions of the workers are monitored. India has recognized these certifications and the Ministry provides subsidy and assistance to industries undertaking this certification. Schutzgemeinschaft Der Fruichtsaft (SGF)-Germany and International Raw Material Assurance (IRMA) are standards for the European market today. SGF is a no profit no loss organization which was initiated by fruit juice manufacturers as a Voluntary Control System (VCS) to ensure that fruit juice supplied to customers is unadulterated, conforms to specifications laid down in the prevalent food laws and produced hygienically following Good Manufacturing Practices (GMP). It carries out at least one annual audit of a running plant. Control samples are taken during the audit and a total analysis is carried out before granting a clearance. International Raw Material Assurance (IRMA) ensures that the raw material that goes into production of fruit juices like fruits, purees, concentrates, etc. is produced as per food laws of the importing country using Good Manufacturing Practices.

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6 COMMON RECOMMENDATIONS FOR ALL SECTORS

This chapter outlines some common problems affecting all the three industries covered by the assignment like the supply of power and skilled manpower, restrictions imposed by labour laws in India and the limited access to and awareness of measures to hedge foreign exchange risk among small and medium size exporters have been covered. These are by way of preliminary suggestions that can be developed for implementation.

6.1 SPECIALISED INTERMEDIARY FOR CONSOLIDATION OF FOREX RISK EXPOSURE

It is proposed that GoI encourage the establishment of a dedicated nodal agency for managing the foreign exchange risk of small and medium sized companies covering all industries in India. The essential concept would be for the nodal agency to educate small and medium sized companies that are engaged in exports about hedging of foreign exchange risks, consolidate the small exposures of such companies and enter into forward contracts or other hedging mechanisms for the large, consolidated foreign exchange exposure so created in the market and share the likely benefits in terms of better pricing on account of the larger size of the hedging transactions with the small and medium companies that form its clientele. The nodal agency would thus address the fact that many small and medium sized exporters lack an understanding of foreign exchange risk management and/or access to hedging instruments through existing channels. It is not suggested that a new entity be created to act as the nodal agency – rather, the possibility of a large nationalised bank such as State Bank of India taking on this role can be explored. To start with, the bank can provide this service through a select set of branches located in or near major exporting clusters like Tirupur, Moradabad, etc. A key feature of the nodal agency’s operations should be free access to the services and facilities provided for all small and medium sized exporters rather than restricting the same to only those who are existing customers of the bank. Use of a standard and simple set of documents for such transactions should also be explored and good connectivity between the bank branches offering the service and the bank’s centralised treasury operations has to be ensured.

6.2 CHANGE IN LABOUR LAWS APPLICABLE TO ALL THREE INDUSTRIES

The primary survey and secondary data and analysis shows that the competitiveness of India in the three industries covered by the assignment has been impacted due to rigidity in labour laws and lack of flexibility faced by companies in India to meet the seasonal requirements. Accordingly, changes in labour laws need to be considered in order to make the industries more competitive and possible changes which can be considered by GoI have been provided below. Extension of Working Hours: The Government needs to consider the demand of labour intensive sections of the textile industry such as made-ups and garmenting to amend the Factories Act, 1948 to permit increase in the weekly working hours limit from 48 to 60 hours and the daily working hours limit from 8 to 10 hours, subject to adequate compensation, in order to cater to peak season requirements of customers as well as to compensate for lower labour productivity.

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Allow Adjustments in Workforce: There is a need for relaxing the norms of the Industrial Disputes Act Chapter V (B) by keeping units employing up to 1,000 people (presently 100) outside its purview. For example, Malaysia regards the right to hire, assign work, reward, promote, transfer, and adjust work-force as managerial rights. The GoI can consider allowing workforce adjustment (in line with ILO Convention on Termination of Employment) at the instance of employer due to structural and other changes. Similarly, the Government can consider amending the Industrial Employment Act to facilitate job transfers intra-enterprise or inter-enterprise, fixed term employment. Permit Contract Labour: The Government can consider amending Section 10 of the Contract Labour (Regulation and Abolition) Act, 1970. The Government can consider exclude a) textile and garments units, b) leather and footwear units and c) food and agro processing units from the purview of the Act, provided the units so exempted provide the contract labourers employment for a fixed tenure of 150 days, as well as protection of the rights of these labourers in terms of their health, safety, welfare, social security, etc. For example, China, Bangladesh and Sri Lanka have allowed contract labour in the textiles sector. Similarly, The Andhra Pradesh Government had taken the lead in the country by allowing contract labour in the Apparel Exports Park in Gundlapochampally. The women workers are allowed to work in three shifts and no flash strikes are allowed since units set up in the Apparel Park are declared as public utility service. Similarly, the states of Gujarat and Uttar Pradesh in India have complete relaxation in labour laws in SEZs in the state. The states of Uttar Pradesh20 and Gujarat had enacted SEZ laws before the central law was passed in 2005 to provide a simpler labour law dispensation within the duty-free areas. However, in recent past the proposals of relaxation of labour laws by State Governments have been rejected by the Central Government. For example, a proposal from the Andhra Pradesh Government to provide labour law flexibility within a petrochemicals and petroleum investment region (PCPIR) in Kakinada and proposal from the Maharashtra Government for labour law relaxation under its SEZ law was rejected by the Central Government. The Government can permit contract labour on a pilot basis in selective clusters and/or states and see the impact of the abolition of contract labour in selective clusters and states before making the national level change. Legal Compliance: For units complying with international labour norms through SA 8000, ISO 9001-2000, ISO 18000 or any other international certification, the industrial units may be exempted from inspection by the Government Departments. Employees State Insurance Scheme: The GoI can also consider providing exemption to units from adopting the Scheme whenever the employers and employees make a request to exempt from the provisions of the ESI Act at a time when the organization is providing better insurance and medical facilities. For example, the employers in Chennai and Ranipet clusters are incurring expenses towards Employee Insurance Scheme (ESI). However there are no ESI hospitals except for a few clinics which have been developed, thus forcing the companies to shell out additional expenses on labour welfare apart from ESI. Income Security Scheme: The GoI can consider developing an income security scheme to pay unemployment benefits to workers, retrain and assist them in a job search. Ideally, the scheme should cover workers in both organised and unorganised manufacturing.

20 Source: Business Standard

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6.3 DEDICATED POWER SUPPLY ARRANGEMENTS FOR CLUSTERS

Options of Sourcing Power by Industrial Units The options of sourcing power supply for the industrial units have been analysed to suggest the recommended power supply arrangements to remove the problem of power shortage which is currently faced by companies in three industries covered by the assignment. The power supply arrangements available to the industrial units are a) Own captive power plant, b) Captive power plant on BOO, c) Group captive power plant, d) State utilities and e) Capacity tie-ups. The benefits and problem with respect to different power supply options has been presented in the figure given below.

Captive Power Plant on BOO

Captive Power Plant on BOO

Own Captive Power Plant

Own Captive Power Plant

No license requiredReduces dependency for power on GridReliable source of power

No license requiredReduces dependency for power on GridReliable source of power

High TariffNon Core Business of CompaniesRisk of tripping of units

High TariffNon Core Business of CompaniesRisk of tripping of units

Benefits Problems

No license requiredReduces dependency for power on GridMore efficient then own captive power plant due to efficiency of third party

No license requiredReduces dependency for power on GridMore efficient then own captive power plant due to efficiency of third party

Requires large scale operations for setting up the captive power plant on BOO but most of the companies in the three industries are small scale in natureDefault by the developer

Requires large scale operations for setting up the captive power plant on BOO but most of the companies in the three industries are small scale in natureDefault by the developer

Group Captive Power Plant

Group Captive Power Plant

No license required

Reduces dependency for power on Grid

Reliable source of power and efficient due to professional management

No license required

Reduces dependency for power on Grid

Reliable source of power and efficient due to professional management

Transaction structure like equity holding, exit clauses, etc.

Acquisition of land for setting up of the plant, etc.

Transaction structure like equity holding, exit clauses, etc.

Acquisition of land for setting up of the plant, etc.

State UtilityState Utility

No effort required like managing a captive power plant

No effort required like managing a captive power plant

Power reliability is weakQuality of power in terms of frequency & voltage is a critical issueHigher tariff for industrial consumers due to cross-subsidy

Power reliability is weakQuality of power in terms of frequency & voltage is a critical issueHigher tariff for industrial consumers due to cross-subsidy

Open access policy supports both transmission and distribution

Reliability of power through capacity tie-ups is better then Grid

Open access policy supports both transmission and distribution

Reliability of power through capacity tie-ups is better then Grid

Regulatory approval for open access

Transmission corridor and availability

Central and State Transmission Charges

Capacity tie-ups difficult for the small scale nature of companies of the three sectors under study

Regulatory approval for open access

Transmission corridor and availability

Central and State Transmission Charges

Capacity tie-ups difficult for the small scale nature of companies of the three sectors under study

Capacity Tie-ups

Capacity Tie-ups

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Recommended Option for Sourcing Power by Industrial Units The option of owned captive plant or captive power plant on BOO is not feasible for the companies in three industries due to small scale operations of the companies leading to a) high fuel cost (due to low fuel linkages and dependence on diesel) and b) low efficiency (due to lack of experience in operating power plants). The power shortage is faced by companies due to shortage of power supply from State Utility. Hence, state utilities as an option for enhancing power supply is also ruled out. The options of group captive power plant or capacity tie-ups seem more feasible in terms of cost and efficiency as compared to owned captive plant and captive power plant through BOO. However, group captive power plant or capacity tie-ups requires intermediation from state industrial bodies like Maharashtra Industrial Development Corporation (MIDC), Gujarat Industrial Development Corporation (GIDC), etc for finalization of transaction structure issues like equity holding, exit clause, management, developer procurement and the success of these options is dependent on successful intermediation to consolidate the requirement of small scale companies in the three industries. For example, Maharashtra Industrial Development Corporation (MIDC) has plans to set up several group captive plants. It has planned four gas-based plants of 100 MW capacities, each to be set up in industrial estates like Ranjangaon and Hinjewadi in Pune, and Ambarnath and Tarapur in Thane district. About 100 acres of land has been allocated to each of these plants. The 300 MW group captive power projects being set up by Vidarbha Industries Power (VIPL), a special purpose vehicle formed by Reliance Power at Butibori near Nagpur in Maharashtra will soon enter the construction phase. This is one of the first major power project to be set up under the group captive concept. Reliance Power has ensured coal linkages from Western Coalfields, whereas MIDC has allotted land and committed to supply water from the Wadgaon dam near Nagpur for the project. The project is expected to be commissioned by 2010. Wardha Power Company Private Ltd (WPCPL) is a 2 X 135 MW (phase I) coal based group captive power plant in Maharashtra, led by the KSK group. The project plans to supply power to a group of industrial players within that region. The land allotted to WPCPL is in the industrial area under MIDC, Warora. The fuel supply tie-up has been placed with Gujarat Mineral Development Corporation (GMDC), while the water requirement has been confirmed by MIDC. The project is likely to be commissioned in 2009. Similar structure needs to be explored by industrial bodies of other states in India for development of group captive plants. The industrial bodies will be responsible for finalization of transaction structure issues and for covering multiple industries to ensure financial feasibility of group captives in their respective states.

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7 PRIORITISING OF RECOMMENDATIONS BY NMCC

This chapter outlines five key recommendations that have been prioritised as having the maximum impact in enhancing the competitiveness of the three industries covered. It is recommended that NMCC should focus on these recommendations on a priority basis. Improvements in TUFS and SITP schemes for Textiles and Garment Industry The primary survey and secondary data and analysis has clearly shown that fabric imports of India has been increasing owing to a) fragmentation in domestic weaving and processing facilities and use of outdated technologies, thereby impacting the ability to meet the delivery schedules and quality specifications set by the garmenting units. Increasing import dependence points to the urgent need to invest in fabric and processing capacities. The analysis of approval percentage across the different stages of value chain of textile and garments show that the approval percentage is similar (ranging from 70% to 78% in different stages with average of 75% for the entire industry) across different stages of the value-chain of the textiles and garments industry. The low disbursal for the stages weaving, knitting and processing is linked to low applications for TUFS and not to low approval rates. The difficulty in availing loans from banks is on account of a) low profitability and losses of companies, b) lack of documentation and c) limited ability of the small scale players to increase the scale of production. It is recommended that GoI should explore the possibility increasing the capital subsidy under the TUFS scheme for weaving, knitting and processing stages from 50% to 75%. The increase in capital subsidy is recommended to fill the gap in value of the textiles and garments industry which has been caused by lack of weaving, knitting and processing companies in India. While the government has through its yearly allocations in the Union Budget built-up a fund of Rs. 10.9 billion, less than 25 per cent has been released, reflecting the slow progress of these SITP scheme. The progress of parks have been delayed on account of a) delay in statutory clearance for land use and environment and b) difficulty in getting funds by the companies from financial institutions. The GoI needs to consider the option of single window clearance for providing quick approvals and clearances to SITP. While the endeavour for the SITP scheme was to create capacity for weaving, knitting and processing segments, the success of the scheme has been impacted by difficulty in availing of finance by weaving, knitting and processing segments as witnessed under the TUFS scheme. Institutional framework for settings up of CETPs for Leather and Footwear Industry The Common Effluent Treatment Pant (CETP) offers the best solution to small and medium scale companies which are involved in the leather tanning. The CETP provides the benefits of economies of scale through sharing of common infrastructure. However, the key aspect for successful implementation of CETP is to have a well defined institutional framework with guidelines on design, installation and distribution of operations and maintenance cost of CETP among the players. However, key to successful development of infrastructure for environmental protection like CETP is dependent on formulation of model contract document for setting up the infrastructure. There is a need to have a model document like model concession agreement which has been formulated by National Highways Authority of India for development, maintenance and management of National Highways in India. For successful development and implementation of CETP there is a need for model contract document which provides guideline on issues related to transaction structure like equity holding, exit clause, management, developer procurement, etc and the success of these

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options is dependent on successful intermediation by industry associations to consolidate the requirement of small scale companies in the leather and footwear. Increasing plan outlay and disbursement for the Food and Agro Processing Industry The plan outlay for food and agro processing sector for both large and small scale companies was relatively low in the Tenth (10th) Five Year Plan at Rs. 105 crore per annum as compared to others sector like textiles and garments where the disbursal under TUFS was Rs. 5,000 crore on an annual basis from 1999 to 2008. The food and agro processing sector contributed to about 13% of manufacturing GDP as compared to textiles and garments industry which contributed to 12% of manufacturing GDP. However, the plan outlay for food and agro processing is comparatively very low as compared to the textiles and garments industry. In view of India’s leading position in many agricultural items, the low level of processing leading to high wastage and the significant potential for the generation of income, exports and employment from the food and agro processing industry, increased funding support to the industry appears to be essential. The actual expenditure was even lower at 74% with disbursement percentage varying from 46% to 88% across different schemes. The plan outlay has been increased from Rs. 523 crore in Tenth (10th) Five Year Plan (2002-07) to Rs. 5006 crore in Eleventh (11th) Five Year Plan (2007-12) but is relatively very low as compared to textiles and garments industry for which the plan outlay is Rs. 24,134 crore during the Eleventh (11th) Five Year Plan (2007-12). There is a need to ensure that the budgeted expenditure is fully disbursed during the plan period. Implementation of proposed amendments in APMC Act by States in India for Food and Agro Processing Industry APMCs were established to protect the interests of farmers, and set a Minimum Support Price, which today serves as a reference price. However, these regulated wholesale markets prevented the development of a competitive marketing system in the country, thereby restricting direct marketing, organised retailing, smooth supply of raw materials to agro-processing industries, and the adoption of innovative marketing systems and technologies. As a first step towards achieving this, the APMC Act has undergone a change in some states to facilitate competition, encourage private participation and investment (owning, establishing and operating markets), develop efficient marketing systems and promote agri-processing and exports. While some states in India have adopted the provisions suggested by Report on Task Force on Agricultural Marketing Reforms for Direct Marketing which enable chain retailers and large scale integrators to directly interact with the farmers, there are many states in India like Uttar Pradesh, Uttrakhand, West Bengal, Jharkhand, etc. which have amended the act but not adopted the provisions. It is very important that all the states in India adopt the provisions for direct marketing which have been suggested by the Report of Task Force on Agricultural Marketing Reforms and has been discussed in detail in the section on food and agro processing. Promoting dedicated power supply arrangements for industrial cluster The option of owned captive plant or captive power plant on BOO is not feasible for the companies in three industries due to small scale operations of the companies leading to a) high fuel cost (due to low fuel linkages and dependence on diesel) and b) low efficiency (due to lack of experience in operating power plants). The options of group captive power plant or capacity tie-ups seem more feasible in terms of cost and efficiency as compared to owned captive plant and captive power plant through BOO. However, group captive power plant or capacity tie-ups requires intermediation from state industrial bodies like Maharashtra Industrial Development Corporation (MIDC), Gujarat Industrial Development Corporation (GIDC), etc for finalization of transaction structure issues like equity holding, exit clause,

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management, developer procurement and the success of these options is dependent on successful intermediation to consolidate the requirement of small scale companies in the three industries. For example, MIDC and GIDC plan to set up several group captive plants. The structure followed by MIDC and GIDC (which has been explained in detail in section on common recommendations) needs to be explored by industrial bodies of other states in India for development of group captive plants. The industrial bodies will be responsible for finalization of transaction structure issues and for covering multiple industries to ensure financial feasibility of group captives in their respective states. Apart from co-ordinating with the relevant industries, NMCC may also explore the possibility of taking on pilot projects and detailed studies for the implementation of the recommendations, such as: • Development of CETP on PPP basis for a leather cluster, including model project

agreement • Detailed study of dedicated power supply arrangements for wider dissemination of best

practices • Study on the impact of APMC Act amendments in a sample of states • Case studies of a sample of TUFS/SITP beneficiaries to identify process improvement

measures

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Final Report 1

ANNEXURE – List of People Met During Primary Survey Leather and Footwear Industry

S.No Name of Company/Association Name of the Contact Person Location

1 Dawar Footwear Mr. Puran Dawar, Managing Director and Owner Agra

2 AT Exports Mr. Rajiv Wasan, Proprietor Agra

3 JRD Exports Mr. Komal Srivastav, Accounts Manager Agra

4 Liener Shoes Mr. Shashi, Manager Export Agra

5 Nouva Shoes Mr. Rais Alam, General Manager Agra

6 Manufex India Mr. Romy Luthra, Proprietor Agra

7 Agra Footwear Manufacturers & Exporters Chamber Col. R.K. Khindri (Retd.), Manager-Admin. Agra

8 Mount Exports PVT. LTD. Mr. N. Jayaraman, Managing Director Chennai

9 Anchor Leathers Mr. S.T Kurian, Managing Partner Chennai

10 Alpha Leather Products Mr. Irshad Akhtar, Managing Partner Chennai

11 C.Kalyanam & Co. Mr. C.S. Rajavelan, Managing Partner Chennai

12 Aisha International Garments Mr Mohammed Nomauh, Managing Partner Chennai

13 Hides & Skins India Pvt Ltd Mr. Balachandar R, Executive Director Chennai

14 Taurus GKK Leathers Pvt. Ltd. Mr. K. Anand, Manager- Imports and Exports Chennai

15 Farida Shoes Pvt. Ltd. Mr. Rafeeq Ahmed, General Manager Chennai

16 Presidency Kid Leather Ltd. Mr. Zackria Sait, Chairman and Managing Director Chennai

17 Indian Leather Products Association Mr. G. Raju, Regional Director- South Chennai

18 Council of Leather Exports Dr. K Elangovan, Executive Director Chennai

19 Model Exim (Sultant Tanners) Mr. Ravi Shukla, Financial Controller Kanpur

20 KCK Exports Mr. Vikas Agarwal, Financial Controller Kanpur

21 Suri Shoes Mr. Anuj Gupta, CA Kanpur

22 S.K. Exports Mr. A.N. Kundu, Financial Manager Kanpur

23 Cresent Tanners Mr. Sashi Singh, Finance Manager Kanpur

24 Makhdoom Tanners Mr. Naiyer Jamal, Partner Kanpur

25 U. P. Leather Association Mr. Maqsood Alam, Chairman Kanpur

26 Small Tanners Association Mr. Naiyer Jamal, Secretary Kanpur

27 G.E. Pelli & Co. Mr. Elangovan, Managing Partner Ranipet

28 Bachi Shoes (India) Pvt. Ltd. Mr. H. H .Venkatesha, Finance Manager Ranipet

29 Nag Leather Private Ltd. Mr. S.Chockalingam Pillay, Managing Director Ranipet

30 Durga Leathers Mr. L Gandhi Jyoti Ranipet

31 KH Leathers Mr. Aslam, Production Manager Ranipet

32 Saalim Shoes (P)LTD. Mr. A.MD. Saalim, CEO Ranipet

33 Arsababu Associates Mr. Pugazheanthi Ranipet

34 Tannery Treatment Development Mr. Zaffurallah, Managing Director Ranipet

35 SIDCO Finished Leather Effluent Treatment Company Ltd R. Amrithakatesan, Managing Director Ranipet

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Enhancing Competitiveness of Indian Manufacturing Industry: Assistance in Policy Making

Final Report 2

Textiles and Garments Industry

S.No Name of Company/Association Name of the Contact Person Location

1 Bhopali Group Mr. Altaf Bhopali, Director Bhiwandi

2 Energy Fabrics Mr. Ejaz Muqri, Managing Director Bhiwandi

3 Bhiwandi Textile Manufacturers Association Ltd Mr. D K Karve, Vice President Bhiwandi

4 Jayant Warping Works Mr. Harakhchand M. Dodhia, Proprietor Bhiwandi

5 Gold Mohar Textiles Mr. Bharat Shah, Partner Bhiwandi

6 Ganesh Textiles and Ambe Textiles Mr. Virendar Seth, Proprietor Bhiwandi

7 Khemi Processing Mr. H. P Tibrewal Bhiwandi

8 Sri Kannapiran Mills Ltd Mr. KMG Ganaesh, Assistant General Manager Coimbatore

9 Harshni Textiles Ltd. Mr. A Alwar, Manager Finance Coimbatore

10 Harshni Textiles Ltd. Mr. A.N. Chokkalingam, Head - Marketing Coimbatore

11 Precot Meridian Ltd. Mr. R. Vijaya Kumar, Senior Officer - Finance Coimbatore

12 Precot Meridian Ltd. Mr. R. Murali, Senior Officer - Finance and Accounts Coimbatore

13 The Lakshmi Mills Co. Ltd. Mr. N. M Ananthapadmanabhan, Vice President Coimbatore

14 Lakshmigraha Apparels Pvt Limited Mr. G.R.Gopikumar, Managing Director Coimbatore

15 The Southern India Mills Association Dr. K.Selvaraju, Secretary General Coimbatore

16 Gangotri Textiles Mr. Manoj Kumar Tibrewal, Managing Director Coimbatore

17 Super Spinning Mills Ltd. Mr. K R Seethapathy, Managing Director Coimbatore

18 Mundra Life Style Mr. Mahesh K. Poddar, Company Secretary Mumbai

19 Raymonds Textiles Mr. S.K.Singhal, President Textiles Mumbai

20 The Synthetic & Rayon Textiles Export Promotion Council Mr. K.Vijay Mani, Executive Director Mumbai

21 International Homtex Limited Mr. Vineet Agarwal Mumbai

22 Prathibha Syntex Mr. P.Pitambaran, Company Secretary Mumbai

23 GTN Textiles Mr. MP Gajaria, Adviser Mumbai

24 Alder Trading Co.Pvt Ltd, Mr. Prem Mallick, Chairman Mumbai

25 General Textiles Mr. Baskaran S, General Manager Tirupur

26 Poppys Knitwear Pvt. Ltd Mr. M. Natarajan, General Manager Tirupur

27 Tirupur Exports Association Mr. S. Sakthivel, Executive Secretary Tirupur

28 Stallion Garments Mr. Sivabalan Thangavelu, Management Representative Tirupur

29 Salona Cotspin Mr. Shanmughavelu, General Manager Tirupur

30 Styleman Textile Pvt. Ltd Mr. P. Vidhya Prakash, Director Tirupur

31 Jai Hind Mills Mr. Arunachalam, General Manager Tirupur

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Final Report 3

Food and Agro Processing Industry

S.No Name of Company/Association Name of the Contact Person Location

1 Arambbag Hatcheries Limited Mr. Abhijeet Loony, Director Kolkata

2 Priya Food Products Limited Mr. Kalyan Roy, Director Kolkata

3 Jay Shree Tea & Ind Ltd. Mr. D P Maheshwari, Managing Director Kolkata

4 Jay Shree Tea & Ind Ltd. Mr. Atul Pandey, General Manager Kolkata

5 Keventer Agro Limited Mr. Mayank Jalan, General Manager Kolkata

6 MPS Foods Pvt. Limited Mr. P N Manna, Manager Kolkata

7 Alpha Food Pvt. Ltd. Mr. Rajbir Singh, Director Kolkata

8 Biswas Agro Pvt. Ltd Mr. Munzil Hoque, Manager Kolkata

9 Shreya Food Products Pvt. Ltd. Mr. Gunjan Bayanwala, General Manager Kolkata

10 Crusher Fruit Juice Company Mr. Surinder Kumar Budhraja, Head Marketing Kolkata

11 Goodricke Group Ltd. Mr. D P Chakravarti, General Manager Kolkata

12 Tata Tea Limited Mr. Kiran N Desai, Head Marketing Kolkata

13 IFB Agro Industries Ltd. Mr. Abhijeet Banerjee, Marketing Manager Kolkata

14 Dept. of Food Processing Industries Mr. P K Paramani, Director Kolkata

15 Dept. of Food Processing Industries Mr. P K Mukherjee, DGM Kolkata

16 Dept. of Food Processing Industries Mr. R S Mukherjee DGM Kolkata

17 Parle Agro Pvt Ltd. Mr. Krishnan S, DGM taxation Mumbai

18 Parle Agro Pvt Ltd. Mr. Manoj Sawant, DGM Exports Mumbai

19 Parle Agro Pvt Ltd. Mr. S. Rajagopal, Head - Accounts, Taxation and Legal Mumbai

20 Parle Agro Pvt Ltd. Mr. Nikhil Bhatt, DGM Legal Mumbai

21 Parle Agro Pvt Ltd. Mr. Vinay Lele, Head Purchase Mumbai

22 Shri Mahila Griha Udyog Mr. Irene Almeida, Admin In Charge Mumbai

23 Universal Starch-Chem Allied Ltd. Mr. Chandrashekhar Vaidya, Head - Marketing Mumbai

24 Ion Exchange Enviro Farms Limited Mr. Sameer Sawant, Head – Farm Operations Mumbai

25 The Maharashtra Agro Industries Development Corporation Limited Mr. Moreshwar Hardas, DGM (Accounts) Mumbai

26 The Maharashtra Agro Industries Development Corporation Limited Mr. Pradeep Gangrediwar, Manager Marketing Mumbai

27 The Maharashtra Agro Industries Development Corporation Limited Mr. Moreshwar Hardas, Deputy Manager Projects Mumbai

28 Konkan Diary Cooperation Mr. Vijay Kulkarni Mumbai

29 Mahananda Dairy Mr. Abhey Avalkar, Managing Director Mumbai

30 Capital Foods Pvt Ltd Mr. Omprakash Verma Mumbai

31 Shangi Foods Mr. Samir Shangloo, Proprietor Mumbai

32 Royal Foodstuffs Mr. S. H. Sakkargi, Partner Mumbai

33 SAMS Fruit Products Pvt Ltd Mr. Rajesh Singh, Managing Director Mumbai

43 All India Food Processors Association Mr. C.K. Basu, President New Delhi

34 Pranav Agro Industries Ltd Mr. Ravindra A. Sathe, Technical Adviser Pune

35 Tasty Bite Eatables Limited Mr. Balaji Radhakrishnan, Controller Finance Pune

36 Hi-Tech Manufacturing Systems Mr. Abhishek Sukale, Proprietor Pune

37 Varada Engineers Mr. Yogesh Londhe, Manager Pune

38 Sanskruti Foods Mr. Chetan Pal, Proprietor Pune

39 Desai Brothers Mr. Syed Fasihuddin – GM Projects Pune

40 Kamdhenu Pickles & Spices. Industries Pvt. Ltd. Mr. Kalekar, Manager - Accounts & Marketing Pune

41 Mandar Food Products Mr. S. V. Malpure, Proprietor Pune

42 Venkateshwara Hatcharies Mr. Nitin Nerlekar Pune

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Page 124: NATIONAL MANUFACTURING …s3.amazonaws.com/zanran_storage/ manufacturing competitiveness council enhancing competitiveness of ... 4 leather and footwear industry ... the indian leather

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