India proposes to support manufacturing hubs in East Asia

India proposes to support manufacturing hubs in East Asia

Last May, India overwhelmingly elected Narenrda Modi as Prime Minster. While apparel factory owners thought he was “business friendly,” few showed much public support for his annual budget on 28 February. Buried in the fine detail, there’s a reason both they and their workers might also be annoyed.

Despite the importance of the garment and textile industries to the Indian economy (the growing, manufacturing and selling jobs they create employ over 100m people) neither industry was mentioned in the budget proposals.

There was no doubt Modi promised many changes. It’s important, though, to realise what he was elected to do.

  • His BJP party won 52% of the seats in the Lower House of India’s parliament. But it only has 19% of seats in the Upper House, which elects its members on a different cycle, so the BJP needs allies to get any controversial laws through.
  • The BJP’s 2014 manifesto scarcely mentions garments or textiles, and its “business friendly” reputation comes from Modi’s record as chief minister in Gujarat State between 2001 and 2014 – which was widely (though not universally) hailed as positive for the state’s textile industry.

The core of Modi’s textile record was his “5F” (“Farm to Fibre to Fabric to Fashion to Foreign”) programme. Garment owners’ belief in his “business friendliness” needs to be weighed against that programme, and the fact that he runs a party without an overall parliamentary majority.

Most garment-making business owners agree on about half a dozen things Modi ought to do.

  • Labour laws. Most big garment-makers have more separate and smaller factories than they’d like because Indian laws make adjusting workforces in larger units almost impossible. Modi’s replied that he’ll bring together all stakeholders to review those laws.

“Stakeholders” means unions as well as owners – which means listening to calls for higher, more frequently reviewed wages and an end to “contractualisaton,” the system of hiring workers on temporary contracts, now virtually illegal in China. The government’s first proposal for keeping unions on side has been to suggest a higher minimum wage.

  • Manmade fibres. Businesses want India to impose the same taxes on manmade fibres (which account for 70% of the clothes worn worldwide) as on cotton. Modi’s 5F programme was all about cotton, and an underlying preference for Indian industry to be self-sufficient whenever possible. His team seems perpetually deaf to calls for MMF parity.
  • Trade access. Garment businesses want India’s government to get free trade agreements with trading partners – especially with Europe, where Bangladesh and Pakistan (and probably Sri Lanka soon) get duty-free access. Modi’s government has shown little interest – and if it does, is going to have to offer better access to Europe’s car makers, retailers and insurance companies in return for its garment and textile makers getting better access to Europe. They’re not concessions India’s car makers and insurance companies – or its millions of small retailers – expected from the “business friendly” government they supported. The beneficiaries of Gujarat’s 5F programme, according to the Modi version of history, sold abroad without needing to make such concessions.
  • Basic infrastructure. The government’s February budget provided funds for an ambitious programme of motorways, upgraded rail services and reliable energy supply that nearly all businesses supported enthusiastically.

But few were delighted with accompanying cuts in many subsidies. Modi cut fuel subsidies just as world oil prices started falling – but some spinners still complained. The whole textile industry complained when the February budget cut the TUFS programme for subsidies on upgraded textile equipment. Many are unhappy that India is accepting WTO limits on subsidising its textile and apparel exporters from 2018.

  • Factory construction. Businesses want more affordable new premises – and applaud the dozens of partly government-subsidised textile parks announced during Modi’s first six months. In a country with over three times the US population, but less than one-third of its landmass, turning farmland into factories is legally difficult, and means millions of landowners need to be bought out and even more peasant farmers demanding compensation.

So the Modi government has announced a controversial system of issuing decrees to enforce plans for building industrial complexes. The legality of this is still being tested – and is unlikely to survive challenge in parliament’s upper house. At the very least, Modi will need to make substantial concessions to his opponents.

  • Interest rates. India has high base rates (government bonds are around 8%, compared with around 2% in Britain or the US), and weak balance sheets mean its banks charge higher margins. So businesses borrow working capital at double-digit interest rates - and want the government to reinstate the garment-export interest subsidies they used to get. The government seems deaf to those requests too.

What no-one in the industry asked for, though, was a taxpayer subsidy on building garment factories abroad. But that’s what the budget proposed: “A Project Development Company will set up manufacturing hubs in Cambodia, Myanmar, Laos and Vietnam” it said. Later, the Indian ambassador to Cambodia clarified that Modi’s government did indeed propose Indian taxpayers’ money should help Indian businesses open garment factories in Cambodia.

India didn’t elect a dictator in May 2014: Modi’s 171m voters probably didn’t want more foreign supermarkets, or laws making it easier to fire people or to be thrown off their ancestors’ land to make room for an oil refinery employing almost no-one.

Most of them, though, probably understand that India needs more tax revenue to reduce its scandalous levels of illiteracy and child malnutrition - so more successful businesses have to be helped to hire more people. And tax subsidies have to be cut and a political consensus has to be built for tackling obstacles like India’s inflexible labour laws.

Indian spinners and weavers might well be considering owning Cambodian garment factories for duty-free access to the EU and China. But they don’t need any help from Indian taxpayers – and they’ll lose any chance of good relations with their Indian workers if they do.

Building a consensus for economic change will take time. Tax subsidies that unions will inevitably describe as “encouraging bosses to export jobs” are an almost certain guarantee that consensus will never be built.