This is one paradox – the leather industry. On one end, it is blamed for contaminating rivers and creating health problems, while on the other, it’s toxicity gives way to purity, and it is heralded as one of leading forex earners for India and the hope of livelihood to about 25 lakh citizens. Odd truths, really. And lately, this ‘focus sector’ in the Make in India programme seems to be experiencing chill winds from various directions. Will it be long before we hear “S.O.S”?
Shivani Kapoor | September 2015 Issue | The Dollar Business
Quite often, your love for luxury leather goods ends up getting you Louis Vuitton bags, Clarks shoes, Burton jackets or Argos sofas. But do you know some of these finest leather footwear, bags and jackets are manufactured in India? In a market flooded with Italian and French labels, Indian leather industry has etched its name on the world map.
A host of leather wares, from garments to shoes to accessories like belts and handbags, to furniture and car seat covers, Indian leather is now found everywhere, with Indian leather manufacturers and exporters leaping into the export business and emphatically endorsing the ‘Make in India’ concept.
TECTONIC SHIFT
From being a mere raw material supplier in 60s and 70s to championing the exports of value-added and high-end products, the Indian leather industry has undergone a phenomenal change in the last few decades. With an annual turnover of $12.5 billion, the thriving Indian leather industry is today the world’s fourth biggest exporter of leather goods. Thanks to the leather tanners and manufacturers who are shipping high-end products to their rich clients in Europe and US, the industry’s export order book is only swelling further by each passing day!
A glimpse of the sector’s growth can be seen in its exports that touched an all-time high of $6.5 billion in FY2015, registering a CAGR of 13.10% in the last five years. What’s more? A ‘focus sector’ in the Make in India programme, the Indian leather industry is expected to achieve a turnover of $27 billion in the next five years, from its current annual turnover of $12.5 billion, with exports too projected to touch the $15-billion mark by FY2020.
TESTING TIMES
So far so good! But not all is well with the sector that contributes heavily to India’s forex reserves. Leather exporters are facing tough times on account of declining exports and policy reforms. Exports of leather and leather goods from India have experienced a decline of about 7% during April-August 2015. This, despite the sector being a ‘focus sector’ under Prime Minister Modi’s ‘Make in India’ initiative to push exports.
For Roofi Waki, a leather exporter from UP’s Kanpur, the last one year has been a journey of ups and downs. For the first time in his 35-year leather trade journey, he is fighting hard to stay afloat. “Our exports are down by 40-50%, in just one year. There is a lot of uncertainty in this trade now. Every time we get an order, we keep our fingers crossed to get the shipments delivered and receive our full payment,” he tells The Dollar Business. Interestingly, Waki is not the only one riding the high tide. There are many leather exporters, across the country, who have been feeling the pressure and finding hard to stay on top of the tide.
So, what’s the reason for this underperformance? “The global slowdown and the weakening of euro – Europe accounts for a major share of Indian leather exports – has led to the fall in exports. The sudden drop in demand has resulted in accumulation of stocks as buyers are postponing their due shipments,” adds Waki.
The footwear industry, which forms the biggest piece of Indian leather exports pie, is feeling the heat too. “The leather industry is facing unexpected crisis and Agra’s footwear industry is no exception to it. While the footwear industry in Agra grew at a CAGR of 15% in last one decade, there has been a negative growth of 14% in first half of FY2016, may be on account of decline in euro. Since two-thirds of our exports are Europe-bound, the business has been hit drastically,” Puran Dawar, MD, Dawar Group and President, Agra Footwear Manufacturers & Exporters Chamber tells The Dollar Business.
PROBLEMS GALORE
If you thought that fighting slowdown and falling exports were the only concerns of the leather exporters, you are in for a surprise. For the industry, which is among the leading foreign exchange earners for India, there are problems in abundance. Talk to those in the trade and you would find how infrastructural bottlenecks and government apathy are impeding the industry’s growth.
“The micro, small and medium enterprises (MSMEs) are the worst hit. Leather products are part of Kanpur’s DNA and there is a huge potential for exports and growth. But issues like high labour cost and shortage of trained workforce are holding back the Indian leather industry,” says Taj Alam, President UP Leather Industries Association. Echoing similar views, Waki says: “The Kanpur roads are bad and we hardly get uninterrupted power supply. These factors have hit the operations hard. And to top that you have stringent pollution norms. We are fighting all by ourselves for our survival.” And that’s not all! Intense competition from countries like China, Pakistan and Bangladesh, influx of cheap Chinese and Vietnamese imports, high interest rates, financial constraints, rising raw material prices and emergence of synthetic and textile winter garments as an alternate to leather garments are all acting as roadblocks to the industry’s growth.
COWED DOWN
To add to the woes of the industry players, the ban on beef is a nail in the coffin for those involved in the leather trade. “The beef ban has aggravated our problems to an extent that at the time of taking the order, we tell our buyers that the shipment might get delayed in the absence of raw material. Beef ban has led to shortage of raw material which has brought down the production and affected the delivery of goods. Ultimately, our business is suffering,” rues Waki.
The Indian leather goods industry has gone through a lot of changes over the last decade. While exports have risen at a CAGR of 8.9% , imports have exploded at a CAGR of 35.6%.In fact, the raw material shortage has forced tanners to resort to imports which has increased their cost of production. “The beef ban (mainly ox and bull) here has kind of spell a doom on leather trade. The ban on beef has accounted for a shortfall in the raw material, so much so that we have to be dependent on the imports,” Alam tells The Dollar Business.
THE REAL CULPRIT?
Interestingly, several leather exporters and manufacturers, The Dollar Business spoke to, feel that it’s the “unthoughtful” policy reforms that are the real culprits behind these structural problems.
“The major issue with the new Foreign Trade Policy 2015-20, as far as the leather and footwear industry is concerned, is the reduction of duty credit scrip under the newly notified Merchandise Exports from India Scheme (MEIS),” says M. Rafeeque Ahmed, Chairman, Council for Leather Exports (CLE). In fact, there are several leather products (which were earlier entitled to incentives scrips) that have been left in the lurch under MEIS.
Agrees Subash Kapoor, Managing Partner, Capsons Co., also Vice-Chairman of CLE, as he tells The Dollar Business: “MEIS benefit is available only if you export to certain countries. As we need to meet stiff turnover targets under Make in India programme in a challenging environment, the leather sector was expecting enhanced support measures under the new FTP. However, the removal of certain benefits are threatening and will significantly affect the export prospects.”
POLICY AT PLAY
Another major policy issue that the industry has been grappling for long now is the ‘actual user’ condition under the DFIA scheme. Para 4.29 (viii) of FTP 2015-2020 states that “No Duty Free Import Authorisation shall be issued for an export product where SION prescribes ‘Actual User’ condition for any input.” Earlier, the condition was limited to just that particular input [para 4.2.7(b) of FTP 2009-2014 stated that “wherever SIONs prescribe actual user condition, DFIA shall be issued with actual user condition for these inputs and no transferability shall be allowed for these inputs even after fulfilment of export obligation”]. This change has been a real dampener for exporters who have been working on thin margins as this small alteration in DFIA means their bottomlines turning red.
Here’s an example that will make clear how irrational the provision is. According to DGFT’s Standard Input Output Norms (SION), to produce and export 1,000 sq. ft. of finished leather made from hide of cow or buffalo, one requires 43 different inputs in different quantities (as per SION G7). And there is only one input – supplementary vegetable tanning agent such as gambier/ chestnut/ tara/ sumac – to which the actual user condition is attached. While under the previous FTP, DFIA was issued for export of finished leather from hide of cow or buffalo with actual user condition for the said input (supplementary vegetable tanning agent), under the new FTP, DFIA shall not be issued for export of finished leather made from hide of cow or buffalo. This is really a big blow and the industry has been crying foul since the day it was announced. “This is really a big blow. Since no exporter ever opts for Gambier as the input of import, therefore it should either be deleted from the SION G7 or the DFIA should be allowed to be issued excluding the item Gambier so that the benefit of DFIA may be availed by the exporters,” says Alam.
…AND IT CONTINUES
Further para 4.26(ii) of FTP2015-20 states that “additional customs/excise duty, being not exempt, shall be adjusted under CENVAT credit as per DoR rules.” Sounds good. But there’s a catch. Leather industry is exempt from central excise and the players hence are not registered with Central Excise. Since leather exporters are not registered with Central Excise, they are not eligible for CENVAT credit rules. This new condition of FTP 2015-2020 is punishing the industry and the leather exporters are being forced to act against one basic principle of exports that is common knowledge – they end up exporting duties and taxes!
Other issues faced by leather exporters include the long customs processes and delays in clearance. Sankar Dawn, MD of Om Leather Artdeco, Kolkata and Convenor of Leather Goods in CLE, says: “It takes really long to get the testing clearance for the exports of goods that has many times delayed our shipments. The testing of the leather takes place at Central Leather Research Institute (CLRI), Chennai. It has to undergo too many processes and that takes quite long. Too much time is wasted getting clearance. This needs to be minimised.”
In the light of so many hassles, the policy reforms and incentives provided to the leather exporters appear nothing more than a few peanuts. This needs to change if India doesn’t want to lose on some valuable export orders.
NO HIDING
Stringent environmental regulations and factory compliance with pollution norms too have left the leather industry gasping government’s directive to adopt Zero Liquid Discharge (ZLD) system. However, industry players feel that the idea of ZLD is not a sustainable option since the cost is very high. “Adopting ZLD system is no solution to meet environmental regulations. The stringent pollution norms have hit the leather industry.
In Tamil Nadu alone, the capacity of the leather industry has come down to 40% because of these stringent norms,” says Ahmed. Although several state governments have announced setting up of integrated leather parks to provide some respite to the leather industry, such plans are yet to see the light of the day. For instance, Uttar Pradesh Chief Minister Akhilesh Yadav had, in 2012, sanctioned over 900 acres of land for setting up two leather parks, in Hardoi and Kanpur, to boost leather production in the state. Two years have passed since then, and still nothing substantial has come up. Interestingly, Yadav had last year also assured to set up a leather park inside a bird sanctuary on the Delhi-Agra highway, but the inauguration was postponed following an outcry over its possible impact on the sanctuary. Relocation of tanneries have been hit by multiple bottlenecks and government apathy. “Several leather manufacturers, who invested in these units, are sitting idle since they have not got the permission from the state pollution board. There is uncertainty as to when operations will commence. Manufacturers continue to stare at a bleak future,” says Dawn.
CALL TO ACTION
There’s no doubt that the leather industry has a huge potential to earn truckloads of precious forex for the country. All it requires is a little push from the policymakers – in form of right polices and an infrastructure which is at par with competition. In a crowded market of foreign labels of luxury leather goods, several Indian names have made a mark. Isn’t this a matter of great pride? And when those involved in the trade work hard against odds to make a mark, why should they lose out to the Indian government’s apathy? They aren’t banking on some divine intervention; all they are asking for, is that the government should show some mercy and care for the economic interests of the stakeholders of one of India’s prime export sectors.
“ADOPTING ZLD SYSTEM IS NO SOLUTION TO MEET ENVIRONMENTAL REGULATIONS”
M. Rafeeque Ahmed CHAIRMAN, COUNCIL FOR LEATHER EXPORTSTDB: How has the leather industry performed in the last few years? What are your projections for the future?
M. Rafeeque Ahmed (MRA): The Indian leather industry has done well in the last few years. The leather industry witnessed an average growth of 8-10% in the last three years. And we hope it to grow at the same pace in the near future. I agree that for the past 4-5 months the Indian leather industry has been facing some problems and has experienced a decline of about 7% during April-August 2015. But it’s mostly because of the steep drop in the value of euro against the dollar. It’s important to understand that the European countries account for a significant proportion, over 60%, of India’s total leather exports.
TDB: What are your immediate concerns about the industry? And as Council for Leather Exports’ Chairman what corrective action plan you have in mind to tackle those concerns?
MRA: My present priorities are to see that the production capacity increases and exports of our value-added products go up. We have been wanting to increase the investments in this sector. Since the industry is also a part of the ‘Make in India’ initiative, we feel that the production capacity and the foreign direct investment in the leather industry should increase. Under the Make in India programme, the Indian leather industry is expected to achieve a turnover of $27 billion in the next five years – which includes an export turnover of $15 billion – up from the present $12.5 billion.
THE LEATHER INDUSTRY IS EXPECTED TO ACHIEVE A TURNOVER OF $27 BILLION BY 2020
TDB: In the wake of beef ban, do you think the leather industry has been caught in political crossfires? How has the ban affected the industry?
MRA: No, I don’t think so. The beef ban is not new. It has been there for the past 15-20 years. It’s only in Maharashtra that the slaughtering of bulls and bullocks has been banned recently. The ban on cow slaughtering was there from past so many years. However, the leather trade has been affected in Tamil Nadu because of beef ban. The slaughtering of the cattle has been reduced so much so that the leather operations have been affected to about 5-7%.
TDB: Competition from the neighbouring countries is growing. How are you dealing with it?
MRA: Bangladesh is at an advantageous position because they have got the ‘least developed country’ status. There is no duty on export products from Bangladesh in Europe and America. They have this advantage over India. Besides, a lot of Chinese are now investing in Bangladesh. It can be one of the reasons that Bangladesh is doing well when it comes to leather exports. As far as China is concerned, it is already doing great because the scale of manufacturing there is very high.
TDB: How are pollution norms affecting the industry’s operations?
MRA: In tanning segment, particularly, we have been asked to adopt Zero Liquid Discharge (ZLD) system, which is practically not sustainable because the cost is very high. Adopting ZLD system is no solution to meet environmental regulations. It is like solidifying the liquid discharge, dumping it into a bag and storing it on the ground. We are saying wherever it is possible, we should be allowed to mix the effluent into the sewage treatment plants and treat it. The stringent pollution norms have hit the leather industry. For instance, in Tamil Nadu alone the capacity of the leather industry has come down to 40% because of these stringent norms.
TDB: Are you happy with the current incentives provided by the government to the leather exporters?
MRA: The duty credit scrip of 4% which was earlier being given to the leather sector under Focus Product Scheme has now been reduced to 3% under the Merchandise Exports from India Scheme (MEIS) scheme in the new FTP. Further, the benefit of duty credit scrip under MEIS is limited to the exports of a few leather products and to only certain countries. For instance, the MEIS benefit is not available on the finished leather, shoe upper and footwear components and the duty scrip benefits are also not available to the Group A countries. Extending the MEIS benefit to exporters of these leather products and for exports to Group A countries can definitely help boost exports.
“REVISION OF INTEREST SUBVENTION SCHEME FOR ALL LEATHER AND LEATHER PRODUCTS WOULD HELP BOOST EXPORTS”
N. Mohan GLOBAL BUSINESS HEAD, FOOTWEAR AND LEATHER GARMENTS, TATA INTERNATIONAL LTD.TDB: Can you tell us a bit more about TIL’s expansion and investments plans for the footwear business?
N. Mohan (NM): At present, we are producing and exporting six million pairs and we have aspirations to grow this capacity to 10 million pairs over the next 3-4 years. For this, we have made the necessary investments in terms of infrastructure. We are more into exports and 90% of our products are exported. Only 10% are for the domestic market.
TDB: Footwear segment has been the biggest contributor in the overall leather exports from India in FY2014-15 (35.07%). Given this, what’s the strategy and plans for the near future to increase the footwear production capacity and boost exports?
NM: Under the Make in India initiative, the Indian leather industry has a collective target of $27 billion by 2020 from the current level of $12 billion. This will provide employment to more than 2.5 million people in the country. Worldwide, the footwear sector has a share of close to 65% in the leather industry. In India too, we will aspire to increase the footwear contribution to 65% in the overall leather trade.
TDB: The Indian leather industry reported de-growth during August 2015. What do you attribute this under performance to?
NM: The negative growth can be on account of two reasons mainly. One, finished Leather exports have been hit due to decrease in production on account of environmental issues. Second, footwear and leather garments business has been too much dependent on traditional markets like Europe which is witnessing economic turmoil. We need to diversify our market reach and look at US for growth.
TDB: In the wake of European turmoil, what are the other priority markets for Tata International which can be explored to push exports?
NM: Majority of our products were being exported to European markets. Since we’re experiencing sluggish sales in EU, we are currently focussing to penetrate markets like US and others like Australia, South Africa and Brazil.
TDB: Are you happy with the incentives provided by the government to the leather exporters?
NM: Interest cost is something we need to look at. Any help from the government in revision of interest subvention scheme for all leather and leather products would help.
TDB: What measures are required to enhance competitiveness of Indian leather industry and what are the main areas that need improvement?
NM: In my view, we need to focus on productivity improvement by upskilling our workforce; creation of clusters to support export and concentrate on quality adherence. Additionally, we need to improve our image on delivery compliance. Besides, we need to bridge that credibility gap.
“ACTUAL USER CONDITION, AS PRESCRIBED BY SION, HAS DEPRIVED THE LEATHER INDUSTRY OF THE DFIA BENEFIT“
Taj Alam PRESIDENT, UP LEATHER INDUSTRIES ASSOCIATION
TDB: The Indian leather industry has been continuously underperforming over the last few months. In fact, leather exports from India reported degrowth in August 2015. What do you attribute this underperformance to?
Taj Alam (TA): The leather sector is known for its consistency in high exports and is among the top ten foreign exchange earners for the country. However, leather industry too has witnessed 8.5% negative growth in August 2015. Well, reasons for this underperformance can be many such as substantial devaluation of the Brazilian currency which enabled leather manufacturers of that country sell their products in the international market at cheaper prices than their Indian counterparts. The Brazilian cow leather – which at any time is considered to be a better quality raw material than Indian buffalo leather – is now cheaper than buff hides. Subsequently, the business of upholstery leather and safety boot manufacturing using buffalo hides has now been diverted to Brazil for the better quality and pricing. The beef ban (mainly ox and bull) here has kind of spell a doom on leather trade. The ban on beef slaughtering and consumption has accounted for a shortfall in the raw material, so much so that we are now dependent on imports. As a result, exports of leather and leather products, which use ox/cow hide as raw material, have either been stopped or drastically reduced.
TDB: What are the biggest risks for Indian leather industry as of now?
TA: Stringent environmental regulations are the prime challenges before the leather and tanning units in India. Across the world, ‘dilution technology’ is being adopted by mixing sewage with industrial effluents, while in India leather units are being forced to go for ZLD (Zero Liquid Discharge). The pollution norms and regulations have to be formulated considering the sustainability of the leather sector and in line with developed nations. Availability of raw material is our next big concern. To make the supply chain consistent, regular, and affordable, the export duty on raw hides and skins should be increased to prevent the outflow of the raw material which could easily be converted into value-added leather goods, thus generating more foreign exchange for the country and more employment opportunities for the artisans. Next, issues like poor infrastructure and power shortages are acting as deterrents forcing several leather units to reduce their operations. Labour cost and shortage of trained workforce are also holding back the Indian leather industry. Infrastructure bottlenecks and high production costs are making the Indian leather industry uncompetitive.
TDB: How has beef ban affected the leather industry?
TA: Overseas buyers place orders on specific type of leather such as buffalo leather for upholstery, saddlery, belts and safety shoes. Cow and ox leather for garments, shoes, handbags and wallets, etc. And sheep or goat leather for gloves and garments. In absence of cow or ox hides as raw material, following the beef ban, the business is being diverted to countries like Brazil, Argentina, Mexico, Pakistan, Bangladesh and Vietnam, among others.
TDB: There is a feeling in the industry that stringent pollution norms,imposed on the sector, are affecting the operations of leather units. What’s your take on the issue?
TA: Even the people associated with the leather industry want cleaner environment and atmosphere to live in. Even we want the water bodies, be it Ganga, Yamuna or any other river, to be pollution- free. The leather units have been feeling the heat of stringent new regulations on factory compliance. Several factories have been shut down and many others are facing closure threat for not following the pollution norms. Such stringent regulations which are more idealistic than practical are impeding the growth of the industry. So whatever environmental rules are framed, they should not be region specific but pan-India. With the majority of the manufacturing units belonging to the unorganised sector, it is required that both the State and Central governments should help upgrade the existing effluent treatment plants which are highly capital- intensive and cannot be built and operated without government support.
TDB: Is the government doing enough to address your concerns? What are your expectations from the state and Central governments?
TA: Both, the State and Central governments can do much more than what they are currently doing for the industry. The Union Government should formulate industry-friendly environmental policy in line with the prevalent global norms which ‘developed leather nations’ are successfully practicing rather than adopting an impractical and idealistic approach of ZLD, which is not sustainable. Similarly, the state government should improve the infrastructural facility, such as STPs (sewage treatment plants) especially in the cities located near Ganga and uninterrupted power supply.
TDB: Are you happy with the current incentives provided by the government to leather exporters? What kind of policy interventions does the leather industry need to give impetus to exports?
TA: The earlier incentive policy of CCS (Cash Compensatory Support) and AFS (Air Freight Subsidy) has been withdrawn long time back. We do not consider duty drawback or VAT refund as any incentive, as these are the refund of excise or customs duties or sales tax paid by the manufacturer directly or indirectly. Import of second-hand capital goods under EPCG authorisation has been disallowed in the new FTP. It is a major setback to the leather exporters since capital goods are not manufactured in India, and importing them requires high investment, which is a deterrent for the small-time manufacturers. The second-hand, affordable, capital goods if allowed to be imported duty free against EPCG license can increase the productivity of small tanning units who get their work done on job-work as they cannot afford to import expensive new machines. But, in order to protect the domestic machine manufacturers, the second- hand reconditioned machines have been taken out from purview of EPCG License scheme under which we can import new plant and machinery at 0% customs duty, despite the fact that high precision tanning and footwear machines are not made in India. Similarly, import of power generator sets of any kind under EPCG scheme has been disallowed. Keeping in view the acute power supply in states like UP, the refusal of generator sets under EPCG authorisation has badly hit the production line especially for the exports. Next, in terms of para 4.29 (viii) of FTP, “no duty free import authorization shall be issued for an export product where SION prescribes ‘actual user’ condition for any input.” This single provision has deprived the leather industry of the DFIA benefit. In SION sr. no. G-7 for export of finished leather, DFIA is not admissible because one item “Gambier” is with actual user conditions. Since no exporter ever opts for Gambier as the item of import, therefore the item Gambier should either be deleted from the SION sr. no. G-7 or the DFIA should be allowed to be issued excluding the item Gambier so that the benefit of DFIA may be availed by the exporters.
TDB: Competition from the neighbouring countries has been growing. How are you dealing with this?
TA: Vietnam is doing pretty well. Their leather exports are much more than India. Since Pakistan and Bangladesh do not have any restrictions on the use of cow or ox hides, the availability of raw material is not a problem in these countries. Moreover, their environmental issues are not so stringent, that way they have an edge over Indian leather producers.
Copyright @2024 The Dollar Business. All rights reserved.
