Textile, clothing industries seek incentives amid stiff competition from foreign firms

Kathmandu, May 13

For the past several years, textile manufacturers in Nepal have made numerous rounds of Singha Durbar, the administrative centre of the country, sat with the ministers, policy makers and bureaucrats, organised dozens of interactions, forums and seminars requesting to check the illegal imports of textile and clothing (T&C) but the progress is meager with the country witnessing about 80 per cent unauthorised buy in of T&C every year.

A few months ago, a news about the smuggling of about 1500 containers loaded with cloth and garment into Nepal on the eve of general elections last year went viral. But there is a mysterious inaction from the side of the authorities including the ministries and concerned departments.

President of the Nepal Textile Industries Association (NTIA), Shailendra Lal Pradhan, probably represented the voice of the sector when he questioned Finance Minister Dr. Prakash Sharan Mahat at a pre-budget discussion programme on Wednesday about the government turning deaf ears to the demands of the manufacturing industries which are proritised by the government.

 

Demand and supply gap

There is a consumption of about Rs. 600 billion worth of cloth and colth-related products in Nepal, but legal imports and domestic production make up only Rs. 100 billion. The size of consumption is estimated by the NTIA in 2018 with the assumption of about 30-33 metres per capita cloth demand per year. It said that the estimate was based on an Indian study conducted in 2012 which said that an average Indian needed about 25 metres of cloth a year and there was an increment by 5 per cent each year.

"We have put the statistics at 30 metres per capita per year on the basis of the Indian study since our environment, socio-cultural status and climatic conditions match with our southern neighbour," the association had said then.

 

If one is to believe the customs data and domestic product estimates, an average Nepali citizen spends only Rs. 3,428 for all sorts of cloth including curtains, table cloth, umbrella, bag and shoes. "This is implausible. Take an example of a school going kid, you have to buy at least two pairs of shoes, two sets of dresses, a bag, a sweater or a coat, a jacket and many more. The money doesn't cover the need," said Jitendra Lohia, Vice-president of the NTIA.

On the contrary, according to the NTIA estimates, a person spends about Rs. 20,568 on all types of cloths in a year.

 

Regulating open border

The largest challenge for the textile, and many other industries operating in Nepal, comes from the open border with India. While Nepalis are the customers of all businesses in the bordering towns and cities in India, their purchasing of cloth could reach the size of about Rs. 100 billion, said Lohia who is the Managing Director of Pragati Textile Company, one of the largest manufacturing facilities in the sector.

"It is very difficult to regulate the open border that spans more than 1,800 kilometres. Therefore, the government here should enact provisions to protect domestic industries and discourage import of cloth and garments," he said.

Earlier, the country had imposed 15 per cent customs duty on most of the cloth imports but with the implementation of the SAFTA (South Asian Free Trade Area) the rate has come down to 5 per cent which has directly impacted on the competitiveness of the domestic industry.

According to the NTIA, this provision has forced many textile industries to close down their operations. So, the government should impose 10 per cent excise duty on cloth and garments and wave off the duty for domestic products in order to make them competitive, the association said in a memorandum submitted to the Ministry of Finance three weeks ago.

 

Tax discounts

The NTIA has demanded to continue with the 50 per cent discount on electricity tariff and 5 percentage point discount on interest of bank loan with the removal of Rs. 50 million ceiling for the loan. The government had decided to offer the first two facilities to the textile industries about five years ago. But they couldn't be continued.

NTIA President Pradhan suggested the government to apply multi-rate for the Value Added Tax (VAT) and charge only 5 per cent on textile as practiced in India or provide VAT adjustment facility or provide cash subsidy equal to the VAT. "Likewise, the government should immediately impose VAT on cotton yarn. It will discourage the illegal trade of yarn and cotton cloth, and increase the revenue of the government," Pradhan urged the FM Dr. Mahat on Wednesday.

To minimise the impacts of the open border, smuggling of cloth and shopping of any amount from the bordering Indian towns, the government should implement the provisions suggested by us for at least a decade, he said.

Nepal's neighbouoring countries like India, Pakistan and Bangladesh have provided discounts on interest of bank loan and electricity tariff, up to 45 per cent subsidy on technology transfer, and cash incentives on cloth and garment exports. India has been charging only 5 per cent GST on cloth.

 

Export or export-substitution?

Nepal exports cloth and garments of Rs. 10 billion to Rs. 12 billion in a year. In Fiscal Year 2021/22, Nepal exported such goods of Rs. 12.6 billion and in nine months of current FY 2022/23, textile and garment of about Rs. 10.5 billion was exported.

Likewise, the country has imported textile and clothing of Rs. 35.8 billion in nine months this year. Last year, the import size of such items was Rs. 56.02 billion. The country had earned the revenue of Rs. 18 billion from T&C imports. Government authorities said that a significant size of T&C items is under-invoiced.

Entrepreneurs and industrialists involved in textile, yarn and garment say that the increasing domestic consumption of 'made in Nepal' clothing is the best solution for the industries. Various studies conducted by the national and international agencies have concluded that Nepal's landlockedness and poor infrastructure has made the goods expensive by 15-27 per cent in the international markets. When countries like Bangladesh, India and Pakistan are using cutting-edge technology, sea transport, and enhanced the productivity of their workers, Nepal is lagging behind in such terms.

"The best way to promote domestic textile and clothing industry is to protect them by offering incentives on tax and utility, and imposing excise duty on imports," said Lohia. He said that the policy makers are yet to turn their attention to import substitution from export promotion. It will save the hard-earned foreign currency and reduce the unauthorised trade.

Secretary of the Ministry of Industry, Commerce and Supplies, Madhu Kumar Marasini, also stressed on the regulation of border to promote the domestic industry. "The government is providing concession on the duty of raw materials, and facilitating the export of T&C items. The MoICS will communicate with the MoF to further facilitate the supply of raw materials," he said.

The government is also providing training to the workers of the industry. But this is not sufficient, say the industrialists.

 

Developing value chain

Meanwhile, the incentives provided to the domestic textile industries will result in the reduced price of textile which will ultimately attract the garment industries to the Nepali raw materials. The growth of textile industry will make a positive impact on yarn manufacturers as well.

Nepal is exporting yarn of up to Rs. 10 billion primarily to Turkey, India and other countries. The massive export to Turkey is happening because the country is not importing Indian yarn, so the future is not assured. "Therefore, we need to develop a value chain inside the country. It will not only cushion the industrial sector but also create jobs and increase revenue," said Lohia. According to him, this integrated development could generate additional 500,000 jobs in the next few years.

Currently, there are about 250 textile industries of which 20 are large. About Rs. 20 billion is invested in those industries. They have employed 50,000 people in their factories. 

 Published in Friday Supplement of The Rising Nepal daily on 14 May 2023.