Lately, the Indian garment sector has been witnessing a boom in exports, thanks to growing demand from all major markets, including the US and the European Union. With the arrival of large orders, garments have become one of the fastest growing export sectors in the country. Due to its high-quality garments, India has become one of the preferred sourcing destinations for various brands like Zara, H&M, Mango, Tommy Hilfiger, etc. However, the country’s inflexible labor laws and expensive credit are proving to be major obstacles for the sector, especially when it comes to exports.
Strict Labor Laws Affecting Investors
The strict labor laws prevailing in the country have created great apprehension among garment manufacturers. They believe that the more they grow, the more difficult it is to run a business. It should be noted that clothing is one of the most labor-intensive sectors in the country after agriculture. Therefore, the impact is more in this segment than in the others due to the strict labor laws. The sector employs more than 8 million workers, of which 70% are women. Companies are often closed without prior approval from the authorities, depriving workers of what is due them by law.
Take, for example, the Factory Act of 1948. This law restricts even a worker willing to work more than 48 hours a week. This not only reduces production capacity, but also your profits. India’s loss is its competitors’ gain. Although labor costs are higher in China, its flexible labor rules, lower credit costs, subsidized energy and better infrastructure have boosted its garment sector and exports. The Bangladesh government’s bilateral treaties with European nations and other countries around the world have enabled buyers to import garments from the country without any import duty.
High credit costs hurting India
Higher credit costs are also hurting India’s garment exports. While the cost of credit in India hovers between 11-12%, it hovers around 3-5% in rival nations. Electricity shortages in states like Tamil Nadu and Andhra Pradesh, where many garment exporting companies are located, are also hurting these companies. In these states, high labor costs have greatly reduced the competitiveness of manufacturing.
The way forward and the challenges
However, garment exports have recently started to recover, helped by various external factors. According to data from the Garment Export Promotion Council, India’s garment exports to the EU increased by 5.9% year-on-year during January-May 2013, while those of Bangladesh and China decreased by 1, 8% and 9.7% respectively during the same period. The rise of the yuan against the dollar and the labor unrest in Bangladesh have worked in India’s favor. Importers now want to buy from India, rather than Bangladesh, due to issues related to security and the general stability that India provides.
The Government of India has taken initiatives to attract investment in the sector. However, India must find a way to relax its labor standards to provide a competitive advantage to the sector.