Texprocil Project

The textiles industry is at a turning point. On the one hand its competitor China is investing heavily in modernizing machinery and developing a variety of textiles, and on the other hand India’s exports over the past five years have been stagnant and fallen slightly. On the other hand, India has a big opportunity as China’s global market share has decreased, creating space for India. However, India’s competitor countries have been able to take greater advantage of this gap by increasing their market shares. Last fiscal year (2017-2018), India’s exports of textiles and clothing fell by 3% in US$ terms, while that of Bangladesh went up by about 10%, and of Vietnam by about 8%. Though the introduction of GST and a shrinking UAE market may be significant reasons for India’s immediate export decline, there are a number of structural issues that need to be addressed to provide a positive momentum to India’s textiles exports and production in general.

While there are a number of structural problems in the industry, recent developments have affected the sector. On the face of it the trade faceoff between China and the U.S. should have generated an export opportunity for India. But global changes in China’s textile strategy which includes expanding its reach to new markets such as Vietnam, Indonesia, the Philippines through investment has adversely affected India’s export markets. The US buying strategy is increasingly favoring its FTA partners and hence India is not able to benefit. With the growing emphasis on Just on Time delivery the U.S. is increasingly favoring the western hemisphere for imports in comparison to more distant Asia. Deeper FTAs of China with ASEAN has adversely affected India’s exports to China too.

On the domestic front, the introduction of the GST reduced the protection extended to the industry through the refund of IGST on imports. Delayed GST refunds blocked working capital and reduced incentives for the producers to expand production. With the introduction of the GST, the reduction in duty drawback drastically reduced the level of support provided to the textile industry in India. In addition, the recent Panel at the WTO has challenged 5 export subsidies provided by the Indian Government to the textile industry. This paper analyses how these subsidies would be replaced by WTO consistent ones and enhance India’s competitiveness at the same time.

Replacing WTO Inconsistent Subsidies

The US in March 2018, challenged five Indian export-related subsidies: (1) the Export Oriented Units Scheme and sector specific schemes, including Electronics Hardware Technology Parks Scheme, (2) the Merchandise Exports from India Scheme, (3) the Export Promotion Capital Goods Scheme, (4) Special Economic Zones, and, (5) Duty-Free Imports for Exporters program. A decision by the US to establish the Dispute Settlement Panel at the WTO has now led to the next step that is the composition of the Panel. This Panel will address the issue of India’s export subsidies in general. However, for textiles and clothing, the situation is different from other export subsidies.

An analysis by the WTO Secretariat in 2010 showed that India had reached export competitiveness as defined in Articles 27.5 and 27.6 of the ASCM, i.e. a share of at least 3.25% in world trade of a product for two consecutive years (see Annex 5 for the text of these Articles). Under these provisions, when a developing country has reached export competitiveness in one or more products, export subsidies on such products have to be removed over a period of eight years. The minutes of the Committee on Subsidies and Countervailing Measures record India’s agreement to phase out export subsidies on textiles and apparel by end-2018 (see Annex 6). While it may be possible to extend these subsidies for some time, especially as India’s national elections are due around the beginning of 2019, these subsidies will have to be phased out in the not too distant future. The export subsidies that will be phased out will have to be replaced by new or improved schemes that are consistent with WTO. Without this, India’s difficult competitive position will become even more onerous for Indian textiles exporters.

While removal of these subsidies is imminent, this situation also provides an opportunity to revamp support to this sector. Hence new schemes should be devised not just to replace the WTO inconsistent subsidies but devising them in a manner which makes the sector competitive. Doing so also requires taking stock of the subsidies and support provided by India’s competitors. Identifying the structural inadequacies of the textiles and clothing sector also provide insights for designing smart WTO consistent subsidies for this sector.

India’s Competitiveness disadvantages

While India has committed in the WTO that it would remove its export subsidies by end 2018, India’s textiles industry is facing a crucial time due to a significant decline in exports in financial year 2017-2018. Several developments relating to its major competitor countries are likely to create even tougher competitive conditions for the industry in the near future. For example, an LDC, Bangladesh has duty free access to a number of international markets, including the EU, until at least late-2024. Similarly, Vietnam’s Free Trade Agreement with the EU will begin phasing-in duty free access of Vietnam’s exports to the EU by end 2018. China’s outward FDI is continuing and the focus includes a restructuring of the textiles and clothing industry, with large domestic support to textiles while increasingly shifting clothing production to other countries with low wages. Moreover, FDI from China, Korea and developed countries in these countries usually involve a large scale of production, which provides inherent cost and quality related advantages for the enterprises established. In contrast, the Indian production facilities are on average much smaller and miss out on the gains of large-scale production.

Taking account of the various factors which result in erosion of competitiveness for India’s exporters, the information gathered through IKDHVAJ’s fact finding missions suggest that if tariffs, subsidies and other operational factors of competing countries are aggregated, India’s disadvantage may be as much as about 20%.

Competitiveness Constraints

Among the major issues faced by exporters, two significant ones are relatively high labour and infrastructure costs. In this context, it is significant that the productivity of Indian labour is low and thus productivity adjusted wages are higher in India than in Vietnam or Bangladesh. As compared to its competitors like Bangladesh, the Indian industry is at a disadvantage in terms of absolute wage levels. Labour laws are seen by companies as barriers for export, especially to establish a large scale of production that enables better links with export markets.

It is imperative that skills and technologies be improved in the sector for both larger employment and greater competitiveness. This requires subsidies for training workers, to reduce costs, enhance labour skills and productivity, and expand to new markets emerging due to changes in demand patterns and new types of fabrics and garments. Financial support could be provided also to reduce the incidence of costs on account of important inputs such as labour, electricity, and costs and delays due to inefficient logistics. Customs and clearance procedures in India are more time consuming than in countries like China. For example, the movement of made-ups and textiles from China’s Xinjiang province to Shanghai for shipment outwards takes 4-5 days from end to end (from mill to ship leaving the port), compared to 10+ days in the Indian context.

Another barrier to the textiles sector in India arises due to fragmented production chains amongst clusters. There is little or no clarity for the buyers when it comes to identifying the clusters in terms of specific products that they want. Competing countries like Bangladesh and China offer clear understanding of the products they can deliver. Furthermore, whereas 80% of Indian exports are from firms with a turnover of less than 250 crores, 80% of China’s exports, and most of Vietnam and Bangladesh’s exports are from firms with a turnover of over 250 Cr. The turnaround time required to meet an export order is roughly double or sometimes triple that of Vietnam and China, and roughly one fourth more than Bangladesh. This not only adds to the cost but also makes India un competitive in the export market.

Replacing WTO inconsistent Subsides

Among the support programs challenged by the WTO the following Schemes are proposed:

• Replace MEIS with a similar scheme which is based on x% of eligible turnover instead of x% of fob value of exports.
• Replace EPCG with duty free imports for capital goods currently being imported or specified under the ATUFS scheme, subject to a review after 3-4 years. If the domestic industry catches up with some lines, those could be reviewed.
• In SEZs and EOUs, the duty free import of capital goods and income tax exemptions is likely to be called in question. For capital goods the replacement of EPCG could be applicable to all importers regardless of whether it is in a SEZ or not. For Income tax exemptions it is proposed to introduce a new scheme that will be applicable to all new investments irrespective of whether it is in an EOU or SEZ.
• Review DFIA on a case by case basis as most of these subsidies such as Advance authorization and EPC are likely to be consistent with WTO.

While all the other schemes apart from MEIS can be revoked by a stroke of the pen, it is the MEIS that requires replacement with a WTO compatible scheme. At the outset it should be clarified that all support measures suggested in this paper are in addition to those proposed under ROSL, duty drawback, refund of embedded taxes and any other taxes not classified as an export subsidy. The proposals made here are for support policies that would replace MEIS if it is phased out. This is because under WTO, financial support cannot be provided by linking it to exports. Therefore, the f.o.b. value of exports can no longer be used as a basis to provide support to the textiles industry.

Two schemes are proposed to replace MEIS

The first scheme to support manufacturing enterprises and the second is to support merchant exporters.

First Scheme for Manufacturing Enterprises

The first issue that needs to be addressed in the current MEIS scheme which makes it WTO incompatible is that it must be linked to exports. The support scheme can instead be linked to turnover. However if the total value of the MEIS subsidy is to be shared across all producers of textiles the amount of subsidy available to each would be so small as to provide no support at all. Hence it is necessary to introduce a filter that would take account of the objectives of some national scheme of the Government of India, e.g. the schemes which aim to promote employment and social equity. For instance, the Government has introduced schemes that provide Employers Provident Fund (EPF) benefits for new investment. The option suggested is to use EPF accounts as a filter to arrive at the figures for subsidy support. Thus, instead of using the entire turnover, it is suggested that a concept of “eligible turnover” be used based on the EPF employees of the firm.

Eligible Turnover and simple replacement of export subsidy schemes for textiles

It is proposed that financial support be based on a concept of eligible turnover, i.e. an adjusted value of the conventional concept of turnover. This adjustment takes account of the fact that the Government has encouraged compliance with EPF regulations, including development of its support policy based on EPF for reducing the burden on employee costs for new employees. Eligible turnover is defined as follows:
Eligible Turnover = (Total Turnover/total employment), multiplied by number of EPF accounts.
= Total Turnover x No of EPF Accounts
Total Employment
Implementing the subsidies based on this concept would involve a number of steps, which look separately at three parts of textiles, i.e. yarn, fabrics and made-ups.

Eligible turnover for the firm.

For an individual firm, the information required for calculating the eligible turnover will be the turnover for the firm, and the number of EPF employees it has on its books. Since average turnover for each of the three parts of the textiles value chain would differ, the relevant number of EPF employees must be multiplied by the average turnover per employee for the firm for different parts of the value chain of the industry (i.e. yarn, fabrics and made-ups).

Each firm submitting its application for the subsidy would have to provide proof of the number of EPF registered employees. It will also have to add its audited accounts specifying its turnover and employees.

The basic incentive structure for a subsidy involving EPF registered workers is to encourage firms to get more workers registered under EPF, an important objective of the Government and also emphasized by global markets. In the short term however, there may be a disruption felt by those who do not have a significant part of their workers registered under EPF. In general, this would involve the small-scale sector. To give a breathing space and time for adjustment especially to the small-scale sector, it would be relevant to consider options that take account of the present operational characteristics of the sector and the currently available subsidy programmes that need to be phased out. Information from interviews and feedback from stakeholders, as well as consistency analysis of different data components for the industry suggest that most of the small-scale sector and the unorganized sector exports not directly but through merchant exporters. A closer look is taken at the activities of the merchant exporters, and a separate scheme has been devised for them.

It is noteworthy that the estimate for turnover per employee is likely to change with time. Therefore, it is proposed that a review of the relevant estimates be conducted every three to four years to determine a new basis, if required. This will build upon and keep improving the insights into the current exercise which would begin with the industry wide average calculated for the previous financial year.

Proposed Amount of Subsidy For Each Part Of The Supply Chain

These proposals take into account the components which should be a focus for improving the competitive position of domestic textiles industry. These proposals are also based on feedback from the industry on areas which need particular attention. In general, the subsidy proposed is in terms of a percentage applied to eligible turnover.

For cotton,

the schemes should focus on raising awareness about contamination and crop insurance for hedging against price fluctuations are schemes. Such schemes are already being operated by the government.

For Yarn,

it is proposed that a subsidy rate of 0.75% be applied to the eligible turnover for the firm.
This subsidy rate is proposed on the following basis:
0.25% of eligible turnover, towards transportation of raw material and relax Cabotage rules.
0.5% of eligible turnover, towards supporting power costs.

For the fabric sector,

it is proposed that 2% of eligible turnover be given as subsidy. This is based on the following considerations:
The fabric sector should get a power subsidy of 1% of eligible turnover.
In addition, financial support equal to 0.5% of eligible turnover be provided for product development, brand development and R and D subsidy to improve the competitiveness of this sector.
An additional subsidy of 0.5% of eligible turnover is proposed for enterprises meeting ISO 14000 standards and the concomitant environmental costs.
For the made up sector, a subsidy equal to 4% of eligible turnover is proposed.

For this sector,

an employment subsidy of 2% is proposed for this segment, which is a significantly labour intensive part of the textiles industry.

In addition, a subsidy of 2% is proposed for brand development for made-ups, an activity which in its orientation is a form of R&D but has a far more immediate impact on improving market opportunities.

Calculating EPF percentages

It is to be noted that the proportion of EPF employees is likely to be higher for yarn than other parts of the supply chain as this is a highly mechanised part of the value chain. Since importers of textiles and clothing require that the labourers be registered for social schemes such as EPF, an approximate method of determining the proportion of EPF registered employees in each part of the value chain could be to link the estimate to the proportion of employees in the enterprises in the organised sector or those which export their products. Feedback from interviews and stakeholder discussions suggest that nearly 30% of the domestic output of yarn is exported, and nearly 80% of the employment from export units is covered by EPF. Based on this a reasonable working proposition is likely that about (0.3×0.8), i.e 24% of the employees under this sector would be under EPF. Rounding this off to 25%, the initial eligible turnover will be determined for the yarn sector on this basis. This estimate would be examined in terms of its consistency with other information, to assess the validity of the results emerging form this analysis.

In the fabric sector, more than 95% of the production of grey cloth comes from small scale units in the unorganized sector. Also according to the latest data only 4.1% of the annual turnover is exported. On the basis of the a The total exports of cotton fabric was roughly INR 15,484 cr using an exchange rate of INR 70 to a USD. The total turnover of cotton textiles as shown above was INR 3,72,031cr. Hence only 4.1% of the total output is exported. Even assuming that large integrated mills have 100% employment under EPF even if they sell to domestic area the total EPF accounts would be (0
.04×100+1% of total employment in the domestic market) which is equivalent to roughly 5% of total employment. This is premised on the fact that nearly 95% of the total employment in the fabric industry is in the informal sector. Even when formal sector finishes products, grey cloth mostly comes from the informal sector. assumptions given in the footnote, the percentage of EPF employees is this part of the supply chain works out to roughly 5%

For the made-ups sector around 50% of the output is exported and around 90% EPF coverage is expected in the export oriented sector. Thus it is expected that around 45% of the employment in this sector is likely to be EPF covered.

Consistency Check of derived EPF estimates

While the analysis has used reasonable estimates, there is a need to carry out a consistency check of the estimates derived. The methods of distributing the EPF accounts results in around 0.45 million in the yarn sector, about 0.9 million in the fabric sector, and about 5.9 million in the made-ups sector. This adds up to 7.25 million EPF employees which tallies with the registrations currently in the Ministry of Labour. Hence these assumptions give a consistent total for the EPF. This is further examined for consistency analysis with a different allocation of the total EPF accounts to yarn, fabric and made-ups. That exercise also suggests that the allocation derived above is the most robust and consistent with the actual data. Therefore, this allocation is used for further examining the implications of the proposed subsidy regime.

Maintaining Revenue Neutrality

Over time, as the data is collected based on the implementation of the subsidy regime, more details on the actual number of EPF accounts and data on turnover and employment from firms will only be known. The estimates used for the assessment of the proposed subsidy regime suggest that revenue neutrality will broadly be maintained and the situation after implementation is likely be similar to the present situation for MEIS (see Table 25 below).

Source: Textiles Commissioner’s Office, and calculations using the methodology described above.
It should be kept in mind that the subsidy regime proposed above is a replacement for only the MEIS. Thus, all other subsidies which have not been challenged in the dispute settlement process at WTO, should continue to be provided to the sector.

Treatment of Merchant Exporters and addressing subsidies to small scale
The main programmes considered for phase-out are the export subsidies given to textiles, such as MEIS. The small-scale producers sell mostly through merchants who provide their services to them for distribution of the product in various markets. There are three kinds of situations for these merchants. One, is those who provide all finance and inputs to the small-scale producers and they own the product and sell them to the markets where they get buyers. The second is the situation where the small-scale producers sell their product to a merchant who distributes the product in export markets. The third is a situation where the small-scale producer seeks the service of a distributor who does not purchase the product but simply acts as an intermediary to distribute the product in export markets. Producers may take funds from the distributor, or even seek other services like expediting the processes for sales, but the product is owned by the producer and not the distributor. The latter provides only services and gets paid for them.

In the first case, the small-scale producers are the service providers. The service they provide is classified under the United Nations Central Product Classification (CPC) under code 88 as “Manufacturing services on physical inputs owned by others”. The WTO has been guided by the CPC classification in the negotiation and scheduling of commitments under the General Agreement on Trade in Services (GATS). In the

• second case, the merchant or the distributor is a service provider. The category of services they provide is classified in the CPC under code 611 as “Wholesale trade services.
  These figures are based on Textiles Commissioners figures for cotton yarn and textiles from Table 21. For the made-ups sector it is based on SIMA’s figure of turnover for made-ups from Table 21. SIMA’s figures have been divided by 2 to get cotton made-ups.
• These figures are based on the overall industry percentage adjusted for the share of formal and informal sector.
• Calculate on the basis of export figures made available by DGCIS and the assumption that 60% of the total exported for yarn and fabrics are from manufacturing enterprise whereas 80% of the made-ups exported are from manufacturing enterprises.
• Figures derived from Table 23 by multiplying the USD billion figures by 70 and dividing by 100 to get INR cr.

except on a fee or a contract basis . The third case would fall within the CPC under code 612 as “Wholesale services on a fee or a contract basis”

Under WTO, services are not subject to specific subsidy disciplines. However, the scope of the General Agreement on Trade in Services (GATS) covers any measure that affects trade in services, including subsidy measures. The implication being that any subsidy measure should be consistent with GATS rules on non-discrimination. That is MFN and national treatment. In the case of the latter, it applies only where a commitment is undertaken in the sector concerned. India has no commitments in the two sectors referred to above. Therefore, a subsidy to services or service suppliers that are oriented even towards exports markets would not be in consistent with India’s obligations under the WTO. It is noteworthy that India has not notified any obligations for the kind of services provided by the wholesale trading services provider.

Therefore, even to the extent that the merchant is providing the service to seek and connect with external markets, subsidies for these services (wholesale trade services on a fee or a contract basis) would not be inconsistent with India’s obligations under the WTO, unless it is determined that the subsidy is passed on to the good., i.e. textiles The key point is that the product is owned by the small-scale producer and the merchant is only a service supplier. In this case, a subsidy to the service or the service supplier could be determined based on the value added by the service. This information would be available through the GST database of the Government of India.

The subsidy to services could be provided either to “Manufacturing services on physical inputs owned by others” or to as “Wholesale trade services on a fee or a contract basis”, i.e. to the small-scale producers in the first instance or to merchants sought by the small-scale producer in the second case.

The number of small-scale producers is much larger than the number of wholesale trade services providers which are the distributors. Therefore, any subsidy to distribution service providers would be relatively easier to implement than subsidy to the many more small-scale producers provide a service.

In the case where the merchant does not own the product, i.e. provides wholesale trade services, a lump sum subsidy could be provided to the merchant. the subsidy could be provided to the merchant.

In the other case where the merchant owns the product, subsidy could be provided to the merchants based on eligible turnover, taking account the EPF registered labourers working in the value chain. The subsidy could be shared between the merchant and the small-scale service provider based on the

Section 611 Wholesale trade services, except on a fee or contract basis

This group includes:

• services of wholesalers that purchase goods in large quantities and sell them to other businesses,
  sometimes after breaking bulk and repacking the product into smaller packages
• Section 612 Wholesale trade services on a fee or contract basis

This group includes:

• services of commission agents, commodity brokers and auctioneers and all other types of traders who negotiate wholesale commercial transactions between buyers and sellers for a fee or a
  commission
• services of electronic wholesale agents and broker
• services of wholesale auctioning houses

GATS/SC/42, dated 15 April 1994.

condition specified in Customs Notification No. 50/2017 dated 30.07.2017. This states that: “the entitlement certificate issued by respective export promotion councils shall carry the name of supporting manufacturers along with the name of the merchant-exporter in case the goods are exported by a merchant exporter.” This data could be used to distribute subsidies between merchant exporters and manufacturers.

Value added

Given the GST and the IGST data available with trading services agents it is now possible to net out their value added. Interviews with firms revealed that their value added could range from 3.5 to over 25% depending on the nature of the trading firm.

The subsidy to services could be provided either to “Manufacturing services on physical inputs owned by others” or to as “Wholesale trade services”, i.e. to the small-scale producers in the first instance or to merchants sought by the small-scale producer in the second case.

The number of small-scale producers is much larger than the number of wholesale trade services providers which are the distributors. Therefore, any subsidy to distribution service providers would be relatively easier to implement than subsidy to the many more small-scale producers provide a service.

Table B shows the level of subsidies which would maintain revenue neutrality for merchant exporters and for the government. The levels of value added listed below has been based on primary data gathered from about 100 individual exporters as well as consensus arrived at in stakeholder meetings of TEXPROCIl. At best these percentages can be considered as working data. Of course the value added of a firm may be much higher or lower than these averages. Whatever data the firm provides based on its GST payments can be verified on a random basis by the government.

Table B: Subsidies for Traders under old and new schemes

Source: Calculations by IKDHVAJ

• See, Condition 28 (aa) in the notification shown at: http://howtoexportimport.com/Customs-notification-50-2017-last-part-6970.aspx
• Stakeholder meetings organised by TEXPROCIL showed that 40% of the yarn and fabric were exported by traders and 20% of the made-ups were exported by traders.
• This consensus on the value added percentages, i.e 3,5, and 7 was arrived at the stakeholder meetings organised by TEXPROCIL.
• These figures have been derived on the basis on the position of the product in the value chain. The lower the product in the value chain the lower is the requirement of the trader to provide services and vice versa.

Calculation of firm level subsidy for traders Wholesale traders of Fabric

Subsidy to be given to merchant exporters

X% of value added in exports ≤ current level of MEIS

Let x = 35%
Average value added e.g. of Firm 1, a large firm was 6% through GST figures.

If x is 35% then 0.06×0.35 would be the eligible subsidy which would be 0.02 of f.o.b value of the firm.
If a firm’s value added is much higher than 6%, it would nevertheless get a subsidy of only 0.02% of the f.o.b value of the firms’s exports.

Wholesale traders of Made-ups

Subsidy to be given to Merchant Exporters:

X% of value added in exports ≤ Current level of MEIS

Let x be = 50%

Data on one firm that is available shows that the value added was around 7%.

Using this 0.5 x 0.07 would be 0.035 of the f.o.b value of exports.

Thus the trader would only get 3.5% of f.o.b value of exports, though if he increases his value added the percentage could go up to 4%.

By postulating percentages less than the MEIS and putting a cap of the amount of MEIS there is a built in incentive to increase the value added by traders. This would lead to an increase in markets, diversification of exports, and improvement in quality of products.

In the case where the merchant does not own the product, i.e. provides wholesale trade services, a lump sum subsidy could be provided to the merchant for the service.

In the other case where the merchant owns the product, subsidy could be provided to the merchants based on eligible turnover, taking account the EPF registered labourers working in the value chain for the merchant. To avoid duplication, the merchant should be provided such a subsidy only if the enterprise working for the merchant in this case is exclusively working for them. In this context, it is noteworthy that the subsidy could be shared between the merchant and the small-scale service provider based on the condition specified in Customs Notification No. 50/2017 dated 30.07.2017. This states that: “the entitlement certificate issued by respective export promotion councils shall carry the name of supporting manufacturers along with the name of the merchant-exporter in case the goods are exported by a merchant exporter.” This data could be used to distribute subsidies between merchant exporters and manufacturers.

Impact on the sector of introducing new subsidies

• Exports from the Indian textile sector rise by 20.4%; they range between 19.2% and 21.4% for different destination countries.
• Output from the textile sector in India rises by 5.5%;
• Employment in the textile sector rises by 5.62% in both unskilled labor and skilled labor.
• Cost of production of textile that gets exported falls by: 3.07%
• Prices of textiles rise by 0.42% (while we may expect a larger rise in price due to the huge surge in demand, it rises less because of the cost reductions shown in 4 that push it downwards).
• GDP rises by 0.18%.
• National employment of unskilled labor rises by 0.44% and skilled labor rises by 0.27%.

Implementation mechanism

The documents and process of providing the subsidies to the merchant exporter could be as follows:

• The Merchant Exporter be asked to submit the Bank realisation certificate and the GST certificate which specifies the price at which Textiles were procured.
• The Merchant Exporter should self-certify the services as the difference between procurement price and bank realisation price.
• This document with proper proof be submitted to the DGFT as this is a case of export subsidies on services.
• The Merchant Exporter then be given a certificate of the subsidy entitlement which he/she could then use to pay his direct and indirect taxes. These certificates will not be transferable.
• The total subsidies to the yarn sector for traders is proposed to be 30% of value added for fabrics and 50% of value added in made-ups. It is to be noted that these subsidies are to be provided only on the service component of the exports and not on the f.o.b value of exports. The differing percentage therefore is to maintain revenue neutrality and to ensure that the sector gets at least as much support as it got under MEIS.

For the manufacturing enterprises (including the case where the merchant owns the product), the documents required would be the EPF registration of employees. The number of employees registered for the whole financial year preceding the subsidy would be required for this purpose. This would need to be verified by the EPF ministry by the Textiles Commissioner’s office. Upon verification the Textile Commissioner would issue a certificate similar to that mentioned above. The Textile Commissioner could delegate this authority to agencies such as Texprocil which could do the job of verification and issuing the certificate for a small fee. Once this certificate is obtained, the firm could use it to pay its direct and indirect taxes.

Generally self certification by firms along with random checks by the EPF department of the ministry of labour, or by the GST department of the Ministry of Finance should suffice.

Conclusion

The proposals outlined here are premised on the conversations with exporters and enterprises. Two kinds of proposals have been forwarded, one for merchant exporters and the other for manufacturing enterprises. In both cases the distribution of outlays for the different sections of the textiles sector would differ slightly but not significantly. The overall subsidy outlays are more or less the same. The difference with MEIS is explained by the different exchange rates which was operative in March 2018 and is applied now. The rationale for different kinds of subsidies are explained above. However, to simplify implementation it is suggested that flat rates be applied to each part of the value chain of textiles, both for enterprises and traders.

Lack of availability of consistent data was a major handicap in conducting a robust analysis. This Report has also used interviews and questionnaires with stakeholders to obtain primary data. It is suggested that in the next review, comprehensive data collection for the textiles sector be done using a questionnaire as a guide. As the Textile Commissioner’s office has offices in every textile producing district through-out the value chain, this exercise could be performed by these offices in co-ordination with the industry. That exercise would give more comprehensive clarity to the direction of support and its need for creating a competitive stimulus over time.