Apparel industry model holds the key for India's job creation requirements

January 15, 2018

The Economic Times

Nothing explains India's job creation challenge better than a comparison between Reliance Industries (RIL) and Shahi Exports. While RIL is a familiar name to nearly all, most readers would not have heard of Shahi Exports. If we are to solve our jobs problem, this needs to change.

The RIL reports $110 billion in assets and 250,000 employees across its various ventures. Therefore, it employs five workers for each $2.2 million in assets. Shahi Exports, which is India's largest apparel exporter, has assets worth $185 million and employs 106,000 workers in its apparel factories. Therefore, it employs 1,260 workers for every $2.2 million in assets. For the same investment, Shahi Exports creates 252 times the jobs that RIL does.

Jobs that Shahi Exports creates are what India needs most today. Its factories can take someone with fifth-grade education and impart necessary training in just six weeks. On average, these workers earn Rs 15,000 a month. About 60% of Shahi Exports employees are women. If we could rapidly multiply what Shahi Exports does, we could begin expanding formal-sector jobs rapidly — especially for women.

Apparel requires modest investment per job and the demand for it is there. In 2015, the apparel export market was $465 billion. India exported $18 billion of it compared with China's $175 billion. High wages are now forcing China to withdraw from this market. From $187 billion in 2014, its apparel exports have fallen to $158 billion in 2016. India must take the space China is vacating.

To understand what needs to be done, we must ask why India has not done well in this sector to date. For decades, our policies reserved apparel for production by small-scale enterprises. These enterprises were too small and their product quality too low to succeed big in the export markets. Beginning in 1973, India's investment policy confined large firms and big industrialists to investing exclusively in a set of listed 'core' industries, which were all highly capital intensive.

As a result, over time, our big industrialists have become hardwired into believing that sectors such as apparel are not for them. Although the core industries regulation ended in 1991, and small-scale industries reservation was withdrawnmore than a decade ago, investment in apparel remains entirely off the radar screens of India's big industrialists and their children.

Grab That Garb 
One way to cut this Gordian knot is to encourage the global apparel firms exiting China to locate in India, instead of Bangladesh and Vietnam. These firms have the technology and management know-how to operate on large scale. They also have links to global markets. Once a few anchor firms locate in India, many more local Shahi Exports firms would emerge.

An important key to making India an attractive destination for global firms is to create greater labour market flexibilities. This is something that has characterised all successful exporters of labour-intensive products such as apparel. We need better balance between the interests of those who already have formal sector jobs, and those who seek them. When protection to existing formal sector workers is extra-high, the incentive to hire more of them turns low. Firms choose to stay small, operate informally and, thus, escape costly labour regulations.

Thus, consider, say, the minimum wage. If you live in Delhi, you are likely to think that a minimum wage of Rs 15,000 per month is only fair. And yet, such a wage will drive many labourintensive, formal sector firms out of business. Their employees would then end up in the informal sector. Reports that the Wage Code currently under consideration by Parliament may hike the national minimum wage to Rs 18,000 a month have left many formal sector firms very nervous.

Exports, especially in the apparel industry, face very tight just-in-time delivery schedules. Therefore, rapid movement of imported inputs into the country and of export products out of it are essential. This requires concerted effort at trade facilitation.

Unnecessary clearance requirements need to be eliminated and the turnaround time of ships at ports needs to be brought down to a few hours as in Hong Kong and Singapore. Coastal Employment Zones (CEZs) offer a convenient avenue to bringing about these changes expeditiously within limited geographical areas.

Competitiveness also requires that all indirect taxes paid by apparel exporters, including those on products outside the goods and services tax (GST) net, such as petrol, be expeditiously reimbursed in full. All competing countries follow this practice and the World Trade Organisation rules permit it as well.

The exchange rate has been a particularly sensitive issue for apparel exporters due to low profit margins on which they operate. Foreign investment and remittance inflows, which chase rupees, make them expensive.

Sew That's Hewed 
And an unduly expensive rupee makes Indian goods uncompetitive in the global marketplace. Therefore, the Reserve Bank of India (RBI) needs to manage foreign exchange inflows such that the rupee does not appreciate unduly.

While apparel is the major sector where formal sector jobs can be expanded rapidly, what I have said above applies to a wide range of light manufactures including footwear, furniture, toys, kitchen utensils, paper, stationery, umbrellas and numerous other items of daily use. Therefore, the scope for creating good jobs for workers with limited skills through increased share in the global markets for these products is very substantial. It is difficult to think what alternative paths could advance this objective more effectively.