Facing the challenges of a saturated buyers market, these economies are coming under pressure from their textile lobbies seeking subsidies, fiscal incentives, cuts in taxes and utility tariffs. It is feared that this may cause some haemorrhage in a few economies.
And based on these subsidies and cuts in utility tariffs, market analysts say China is reported to have offered up to 60 per cent cut in prices of selected products to get a foothold in the first quota-free year 2005.
According to local textile industry, the same concessions, incentives and cuts in tariffs continue to boost Chinese exports. India too is reported to be offering 20 to 25 per cent cut in price. Bangladesh enjoys a special status in the EU and USA that gives it edge in competition.
Pakistan could offer hardly 10 per cent reduction in prices of apparels and trailed far behind in race of grabbing share from increasing demand of textile products. Its per unit export prices in EU and US have come down drastically in last 18 months. Only volumes are keeping the exports afloat. Big volumes mean big production which, in turn, warrants big investment. Can exporters afford it?
Investment remained feasible when interest rates ranged between six and seven per cent in the years 2001, 02 and 03. Now interest rates are in double digit and the cost of investment is getting prohibitive.
The government offered a six per cent rebate for research and development (R and D) to the readymade garments and knitwear in the 2005-06 budget These rebates are country and region specific and were given to the exporters. In the same period, more than Rs5.50 billion were given as rebate to the exporters. But not a paisa was spent on research and development. “We gave away all this amount of rebate to our buyers in Europe’’, Aziz Memon, a readymade garment exporter lamented.
About 150 to 200 knitwear units were forced to close down in last one year as price war threw them out of the business, the exporters say. Threatened by the tough competition, the industry turned to the ministry of textiles for support of a hefty package.
A Rs50 billion package was prepared. It sought export refinance, subsidised loans for industry and a reduction of utility tariffs.
The textile exporters also want cut in customs duty and other levies on import of machinery, electric power generators and other equipments. Their argument is that China has outmatched all other competitors in western and other markets in almost all items across the board. They need support to compete.
The magic behind Chinese business success is not all that secret. China’s production capacities of all goods that include high and low value textiles are of mega size. This takes care of the production cost. And don’t forget Chinese yuan remains under- valued. But the talk about subsidies, cut in utility tariffs and other concessions have never been substantiated.
Facing a big unemployment problem, India has recently taken up a programme to build textile industry at a cost of Rs1.40 trillion by 2010. Under a Technology Up-gradation Fund Scheme (TUFS) textile projects worth over Rs320 billion have been approved and subsidy of about Rs90 billion is said to have been given. There are a lot more concessions on tax on income, customs duty on imports and in other areas.
“I don’t care how much it costs public exchequer, my task is to generate 10 million jobs by the year 2010’’ the Indian industry minister is quoted to have said in Chennai last month when asked why textiles is being pampered so much.
Bangladesh enjoys a special status in EU because of its less developed status and is eligible for a 15 per cent concession under GSP. It enjoys some concessions in USA market also. Labour cost in Bangladesh are said to be lowest in South Asia and it still offers and tax concessions and incentives to its readymade garment exporters.
Labour cost is so low in Bangladesh that last month militant workers attacked more than 14 readymade garment units and set on fire a few of them.
Pakistan’s textile exporters’ plea is that they are being denied an even playing field when it comes to competition with exporters from India, Bangladesh and China in the world market.
How can there be an identical business environment when Pakistan’s economic growth is achieved with a high inflation rate whereas high economic growth in China, India and Bangladesh is with low inflation, argues a leader of engineering industry. He is convinced that the government simply cannot afford to offer any subsidy to textiles from the budget. ‘
‘Banks are now in private hands and are in business as much as textile exporters are and want to earn profit’ he said. Why should these banks give credit on easy terms to the textiles?
The present textile outlook will change in the next one or two years and then there will be business as usual. As one of them, Majyd Aziz says “the fittest will survive this price war’’ but at the same time he pleads, “the wars are fought with the help of the people and support of the government’’- an argument for getting subsidies and other concessions.
The USA and EU markets matter a lot for Pakistan where more than 50 per cent of total exports are directed and bulk of these merchandise is textiles. Dismantling of the quota regime has given opportunity to the European and American buyers to demand more than an ounce of flesh from the importers.
The textile-producing and exporting countries are in a mad race to market their products in US and EU- a combined market of $350-400 billion. Exporters say that total textile export market will touch $800 billion in next few years.
To seize this opportunity, the industry seeks a package— concessions, incentives and subsidies to promote export, encourage investment and generate employment. After capital spending of about $5 billion in last five years, the textile industry now plans to invest more than $7 billion by 2010 to generate about 6.2 million jobs.
The package was first presented to Prime Minister Shaukat Aziz on May 20 but the response was not encouraging . Much to the dismay of textile leaders, the 06-07 budget ignored the industry issues altogether. The Prime Minister’s advisor on Finance Dr Salman Shah came to Karachi on June 16 to address a post- budget seminar. The industry representatives raised the issue of subsidies and tariff cuts but Dr Salman Shah snubbed them and asked “where will this money (Rs50 billion) come from.” His contention was that the government is already giving Rs109 billion subsidy in the budget and any additional provision will create many problems.
Early this month when the National Credit Consultative Council (NCCC) met at the State Bank of Pakistan, SBP Governor Dr Shamshad Akhtar also politely asked the textile leaders to consider options other than subsidised bank loans. The issue was also ignored by the prime minister at the recent Export Promotion Board meeting.
But one fine morning the media reported that the Economic Coordination Committee of the Cabinet had approved a Rs25 billion subsidy programme for the textile sector. “It is not Rs25 billion but hardly Rs14-15 billion’’ says a textile exporter. The package offers six per cent R&D rebate to readymade and knitwear for export to selected markets and a three per cent rebate to fabrics.
The readymade garments sector is not happy with three per cent rebate for fabrics as it will deny them their basic ingredient. “Our objective should be to consume entire domestic cotton, yarn and fabrics for the production of value added goods’’ Aziz Memon asserts.
The State Bank too did not take too long to announce a 1.5 per cent cut in the export refinance. Overall about Rs30—35 billion have been promised to textile industry, for which the government was earlier reluctant to consider. This estimated assistance will come from supplementary budget or the State Bank.
The year 05-06 closed with a big budget deficit, an unprecedented trade imbalance of over $11 billion, a pitiably low saving and investment ratio. The year 06-07 brings a big challenge to the government, the businessmen and the bureaucrats.