In catching up with an old friend who was recently visiting from India, the subject came up of a new development with his family business. Since 1987, his family’s private company has produced accessories and apparel in India, where the textile industry is the second-largest employer nationwide, after agriculture. But his firm is now going through an interesting transition—it is being moved completely out of India. In the early 2000s, on the back of rising exports stemming from a weak rupee, the textile sector saw heavy investment. But between 2005 and 2008, the rupee appreciated and exports slowed, leading to overcapacity and reduced profitability. Against this backdrop, my friend’s company made its first forays across the border and set up capacity in Dhaka, Bangladesh. Now, his family business is poised to be based entirely out of Bangladesh and Vietnam, with no presence in India.
What is interesting to me about his experience is how quickly and easily entrepreneurs can set up shop in terms of permits and paid-in capital. In fact, Bangladesh ranks higher than India in this regard. Further, labor is readily available. The textile sector typically employs more women and a high female labor participation rate in both Bangladesh and Vietnam is an additional bonus. This is in contrast with India where female participation has been declining. The employees at the mills value their jobs and the stability it offers. Inexpensive labor in India on the other hand has a choice. My friend’s factory near New Delhi virtually shuts down during the summer as workers return to their villages to take advantage of other work opportunities there. Historic legislation passed about a decade ago, known as the Mahatma Gandhi National Rural Employment Guarantee Act, aims to ensure job security in rural areas by providing at least 100 days of guaranteed wage employment each year to unskilled manual workers. While it offers a lower pay, the work is also less demanding. But the scheme leads to underemployment, and in the case of my friend’s business, disrupts his production cycle for several months.
In terms of capital, it can often take longer to obtain credit approval in Bangladesh, compared to India, but this does not pose much of a constraint as it is relatively easy to transfers funds into Bangladesh and repatriate them as compared with India. Similarly, Bangladesh recently implemented systems that allow for online submission of documents for import and export, reducing the time and effort needed to acquire permits.
By comparison, additional challenges in India include competitors and suppliers who game the system. For instance, there are anti-dumping duties that make it difficult for my friend’s company to import plastic injection equipment, which is key to production but largely unavailable in India. Similarly, another group successfully lobbied for anti-dumping legislation that materially reduced the import of higher quality, cheaper fiber from Malaysia. Consequently, over the past decade, there hasn’t been incentive for my friend’s family to reinvest in their India operations. Taking a look at sector data in aggregate, one can see the effect of these long-standing issues: 12% of U.S. apparel imports come from Vietnam and 6% from Bangladesh, but only 4% from India.
The current Indian government, with a reformist prime minister, seems cognizant of the need for reform. The “Make in India” campaign addresses some of the issues related to permits, logistics and foreign direct investment, to some success—several foreign companies have invested in the textile sector. Currently, nearly half the power looms are at a standstill in the country and each loom employs 2.5 workers. Addressing some of the deterrents to reinvestment should open up employment opportunities. However, the caveat still stands that small and medium manufacturing in India requires sustained effort over time by multiple governments. One hopes that Prime Minister Narendra Modi’s sweeping mandate has given him enough momentum to lay the groundwork for permanent structural change.
(c) Matthews Asia