New Delhi: Labour and tax reforms are needed to boost employment creation in apparel and leather sectors as the two segments can become vehicles for broader social transformation in the country, the Economic Survey for 2016-17 said on Tuesday.


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Noting that in both apparel and footwear sectors, tax and tariff policies create 'distortions' that impede India gaining export competitiveness, the Survey said that there is a need to undertake 'rationalisation' of domestic policies which are inconsistent with global demand patterns.


It noted that India has an opportunity to push exports from apparel and leather sectors since rising wage levels in China have resulted in China stabilising or losing market share in these products, recommending labour and tax reforms to make the country globally competitive.


Apparel and Leather & Footwear sectors are eminently suitable for generating jobs that are formal and productive, providing bang-for-buck in terms of jobs created relative to investment and generating exports and growth, as per the Survey, which was tabled by Finance Minister Arun Jaitley in Parliament today.


"India is well positioned to take advantage of China's deteriorating competitiveness due to lower wage costs in most Indian states," the report card of the state of the economy pointed out.


However, it observed that the space vacated by China is fast being taken over by Bangladesh and Vietnam in apparels; and Vietnam and Indonesia in case of leather and footwear, while Indian companies struggle in face of a set of common challenges related to logistics, labour regulations, tax and tariff policy and disadvantages emanating from international trading environment compared to competitor countries.


"An FTA with EU and UK in the case of apparel will offset an existing disadvantage by India's competitors- Bangladesh, Vietnam and Ethiopia.


"In case of leather and footwear, the FTA might give India an advantage relative to competitors. In both cases, the incremental impact would be positive," it said.


The introduction of GST offers an excellent opportunity to rationalise domestic indirect taxes so that they do not discriminate in apparels against the production of clothing that uses man-made fibers; and in the case of footwear against the production of non-leather based footwear, the survey said.


"On labour costs, India's source of comparative advantage in this sector, also seem not to work in its favour due to problems like regulations on minimum overtime pay, onerous mandatory contributions that become de facto taxes for low-paid workers in small firms that result in a 45 per cent lower disposable salary, lack of flexibility in part-time work and high minimum wages in some cases," noted the survey.


India imposes a 10 per cent tariff on man-made fibers vis- a-vis 6 per cent on cotton fibres.


The global demand for apparel is moving from cotton fibre products to manmade fibre and footwear of non-leather, it said, highlighting that India's competitors enjoy better market access by way of zero or at least lower tariffs in the two major importing markets, namely, the US and EU.


Another problem faced by the leather sector highlighted by the Survey is that despite having large cattle population, India's share of cattle leather exports is low and declining due to limited availability of cattle for slaughter in India.