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May 2018 Economy and Policy

Published on: 2018-05-13 15:12:51     82 times read    0  Comments
Reviving the Nepali Textile Industry

While Nepali textile industry is on a saline drip, a few strategic moves may revive the sector.

--BY CHETAN GADIA

The government in its earnest effort has offered much in the past to promote the domestic textile industry in Nepal. There was a time when Nepali textiles were exported to neighboring countries bringing much of the foreign exchange and investment. However, that changed quickly with the drastic growth of polyester production in India and development of textile manufacturing in China, Bangladesh and Vietnam. Now the Nepali textile industry is struggling to survive on local demand which is also prone to various obstructing factors such as smuggling, undervaluation and under-invoicing of imported goods. 

Broadly speaking, the processes in textile are creation or extraction of fibers, production of yarn or thread through spinning of fibers, weaving/knitting of fabrics and finally dyeing, processing and finishing of textiles. Of these manufacturing activities, only spinning of fibers has been satisfactory in Nepal. It is because Nepal enjoys the benefit of anti-dumping policy placed by Turkey against Indian yarn. If the recent reports are to be believed, Turkey is all set to relax the anti-dumping duties imposed upon the import of Indian yarn after which Nepal will have no apparent cost advantage. Hence, it is in the interest of the spinning businesses in Nepal to develop Nepal’s textile industry at the earliest. 

But the approach taken towards development of the textile industry in Nepal is not appropriate. Currently, fabric manufacturers are protected by high duty on import of synthetic fibre-based fabrics and they are also provided with VAT refund depending on the fabric composition. The amount of VAT refund for synthetic fibre based fabrics is 70 percent. Such policy only promotes short-term price war in the country with no focus on technological development and creation of a sustainable business. With manufacturing costs as much as three times higher than rest of the world, the VAT refund provides only a short term cushion. 

As textile manufacturers are less hopeful about future possibilities in the textile industry, the money made through such refund is being routed to other industries or simply being invested into fixed assets such as real estate. Such practice has left the country with almost-obsolete technologies in weaving or knitting and absolutely no development in other areas such as dyeing and processing of fabrics. 

In India, the Maharashtra state government has adopted one of the most comprehensive textile sector development policies. The policy aims to provide a stimulus to the textile industries by attracting investments in the sector and creating a farm to fashion value chain. This initiation has helped the most basic activity in textile production which is farming of cotton in the regions of Vidarbha and Marathwada that are infamously known for farmer suicides. It is a comprehensive policy in a sense that it not only promotes creation of jobs with benefits but also aims at promoting investment for upgradation of technology that is much needed to compete in the international market. 

Based on this policy and some of my learning in the past, here are a few recommendations that can help get the industry back on track:

Reduction or Replacement of VAT Refund 
The government should create a development fund for textile sector than spending on VAT refunds and also set aside an additional budget. These funds should solely be used for development of textile industry and creation of jobs.

Subsidy on Capital Investment and Interest
The textile policy should provide capital subsidy of up to 40 percent on investment in upgradation of technology from shuttle based weaving and knitting machines to more advanced machines that are based on latest technologies such as rapier, air jet, water jet etc. An interest subsidy on long term project based loans will help mitigate the risk of interest rate hike which is currently acting prohibitory towards any new investment. The investment subsidy can be disbursed in installments over three years from the date of start of production to ensure that it has been made in the right spirit. Also, the policy should only cover investment for fresh machines and not the ones used and later discarded by western economies. 

Land acquisition
Land acquisition in major industrial corridors has become almost impossible due to skyrocketing land price. Key land parcels should be earmarked for investment in textiles only and the same should be made available for industrialists at low costs and a condition that the allocation will be taken back if the industry is not set up within five years from the allocated date. The concept of industrial parks which allow sharing of common amenities such as effluent water treatment, steam, electricity, roads etc. for activities specific to a project only being undertaken by an investor has worked very well in India and China. It helps in reducing costs drastically. A typical standalone textile unit with only 1-2 activities in the entire value chain would require about one acre land which is available at only Rs four million in India whereas the same is priced at least Rs 12.5 million in Nepal. Any value that the business would generate will have to be at least as remunerating as the asset itself or else it will not make any economic sense.

Power
Per unit cost of power is at least three times higher for industries in Nepal than in India. After raw materials and workforce, power is the biggest cost head in textiles. A power subsidy will help in bringing the costs down and help compete in the international market. Just to give the idea of relative cost, with Rs 3.5 per unit subsidy on power and some other benefits relating to quality of power utilization the per unit cost of uninterrupted power supply for textiles in Maharashtra is now Rs four. Average cost of electricity in Nepal with an average load shedding of 3-4 hours which is fulfilled through diesel generator is Rs 12 to Rs 15 per unit.

Textile Ecosystem
Textile industry is a backend support system to the entire fashion industry. Fashion is not just about beautiful models walking on a ramp to some jazzy music, but also a business about making people look good with different attires. It could be applied to things as basic as uniforms for students and officials, a wedding dress or even what one wears during last rites. Case in point, Sri Devi beautifully dressed in white even while she was being carried to the cremation grounds in Mumbai. The reason I am investing time to build context here is because the current approach is piece meal in supporting each activity in the value chain independent of the other. 

An integrated textile policy, which helps develop the entire value chain - using the best technology to shear 600,000 sheep in Nepal to a beautiful garment landing up at a retail store, is required. Manufacturing of garments needs to be supported equally or even more than basic activities such as spinning through government forums developed to help garments procure the right quality of fabric locally, create brand awareness about Nepal made fabrics and develop know how of the science and art behind fashion and fabrics. To this extent, a tie-up with Indian institutes such as Synthetic and Art Silk Mills’ Research Association (SASMIRA) and National Institute of Fashion Technology (NIFT) and other such counterparts in China to create institutions that can churn graduates with ample knowledge of textiles is also required.

The above recommendations have to be reviewed in totality and not independent of each other. To a reader unaware of the poor scenario of textiles in Nepal, it may just seem a list of wishes one makes to a special deity but current conditions demand such divine intervention. Else, we all will be looking at a country that couldn’t get it right with even the most basic industry that has existed for the longest period in the history of mankind.

In conversation with some of the industry stalwarts who have devoted their entire lives in the development of the textile industry, I have always been told that the Nepalis people should promote textiles in Nepal by wearing Nepal made fabrics. But as an end user of these fabrics, I believe that this thinking is overly emotional and political. As a consumer, I have the right to the best quality fabric at same or even lower price. If better quality is available in an Indian or Chinese fabric at the same price, there is no reason for me to choose Nepal made fabric. 

The industry can work towards better quality fabrics only if there is enough headspace in terms of cost and the onus is on the government to enable it. If these recommendations are executed, Nepal will mature into a textile exporting economy while simultaneously enabling gradual phasing-out of the government support. As an industry, we just need a focused approach towards developing a very specific capability towards a limited set of fibres, yarns and fabrics. Every country has found its mojo by concentrating their efforts on to something. We need to find our own.

Gadia is the director at Noble Textiles Pvt Ltd. The views expressed in the article are entirely personal opinion of the author and don’t represent any organisation/association he is associated with.


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