CONTENT. Chapter I Introduction Background Chapter Scheme Limitations & Constraints 2

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1 CONTENT Chapter Particulars Page No. Executive Summary I - V Chapter I Introduction Background Chapter Scheme Limitations & Constraints 2 Chapter II Leather and Leather Products Sector - An Overview Introduction Structure of Leather Industry The Product Segments Production structure of Leather Industry Wages Salaries in Leather Sector Competitive Benchmarking Measures for Anti Dumping by Companies in India Chinese footwear remains controversial in EU The Regulatory Regime Competitiveness Enhancing Initiatives Trade Facilitating Initiatives I

2 Chapter III Productivity Of Leather & Leather Products Sector Introduction The Key Features of the Registered Factory Sector 3.3 Data and Variables Growth Rate Analysis of Leather Industry Labour Productivity Growth Partial and Total Factor Productivity Analysis of Leather Industry Chapter IV Export Trends In Leather And Leather Products Introduction Export of Finished Leather Export of Leather Footwear Export of Leather Goods Export of Leather Garments Export of Leather Footwear Components Export of Saddlery and Harness Major Leather Products Exporting Countries in the World World Leather Exports Growth Chapter V Globalization And Prospects For Leather Industry Introduction Competitive Strengths of Indian Leather Industry 5.3 Indian Leather Industry: Constraints SWOT Analysis II

3 Chapter VI Field Survey Findings Profile of Leather Manufacturing Units Turnover and profitability of the Units Profitability of the Manufacturing Units FDI and ICT Usage Employment Profile Trade Related Information Cost Competitiveness Price Factors Factors affecting Productivity Factors responsible for Competitiveness of the 53 Units 6.11 Research and development expenditure and Product innovation 6.12 Factors affecting competitiveness of the Units Measures taken for boosting domestic & export competitiveness during last five years 55 Chapter VII Recommendations References ANNEXURE Annexure 1 (Survey Questionnaire) Annexure - 2 (List of Units Contacted for the Study) Annexure 3 (Methodology Adopted for Partial and Total Factor Productivity Estimations) III

4 Table No. LIST OF TABLES Particulars Page No 3.1 Characteristics of Registered Leather Industry in India (Value in Rs. Lakhs, others in Numbers) 3.2 Growth of Organized Leather Industry Labour Productivity Growth in Indian Leather Industry: 18 Segmentwise Analysis 3.4 Productivity Estimates for Labour and Capital inputs Labour, Capital and Total Factor Productivity Growth (%) Index of Labour, Capital and Total Factor Productivity Growth Rates Composition of India s Leather Exports: to Direction of India s Leather Exports: to India s exports of finished leather: Destination wise (US$ Million) 4.4 India s exports of leather footwear: Destination wise (US $ Million) 4.5 India s Exports of Leather Goods: Destination wise (US $ Million) 4.6 India s exports of leather garments: Destination wise (US$ Million) 4.7 India s Exports of Leather Footwear Components: Destination Wise (US $ Million) 4.8 India s Exports of Saddlery and Harness: Destination Wise (US$ Million) IV

5 4.9 Export Share of Major Leather Producing Countries in the World Growth in World Trade of Leather and Leather Products Distribution of Leather & Leather Products Manufacturing Units NPC Field Survey 6.2 Average Annual Turnover of the 62 Leather Manufacturing Units State wise (Rs. Lakhs) 6.3.a Average Profitability of the Units during (Number of Responding Manufacturing Units) b Average Profitability of the Units after 2000 (Number of Responding Manufacturing Units) Extent of increase in Profitability after Extent of decrease in Profitability after Extent of ICT usage in the Unit Average Employment per Unit Range of increase in employment Units engaged in exports (Number of Manufacturing firms) Percentage of exports to total sales Growth in export during the last five years Range of increase in exports during last five years Import by leather manufacturing units Level of import of raw materials for units Production 49 requirement 6.15 Level of import of finished product 49 V

6 6.16 Domestic market share of the manufacturing unit Share of domestic sales to total sales Cost competitiveness of the firm during the last five years due to labor productivity Cost Competitiveness of firms due to Total Factor Productivity Ratio of various Cost Components in Total Cost of Production 51 Respondent (%) 6.21 Labour productivity during last five years Research and Development Expenditure by Manufacturing firms R&D and Product Innovation 54 VI

7 EXECUTIVE SUMMARY Leather and Leather Products sector is one of the important sectors among the various constituents of the manufacturing sector in India, mainly due to its contribution towards employment. It is one of the unique sectors which have the advantage of the both value addition and export potential. It also contributes significantly to total manufacturing output and exports from the country. Leather industry has massive potential for employment, output growth and export. The sector is one of the top eight foreign exchange earners worth over Rs crores per annum and accounts for 3% of the global leather-related trade of Rs crores. An estimated 15% of total purchase of leading global brands in footwear, garments, leather goods & accessories in Europe, and 10 percent of global supply is outsourced from India. Leather industry has undergone dramatic transformation in the recent years from a mere exporter of raw materials in the sixties to that of value added finished products in the nineties. The Indian leather industry comprises of both organized and unorganized and organized sectors. The organised manufacturing sector broadly consists of tanning and dressing of leather manufacture of luggage, handbags saddlery, harness and footwear. Currently unorganized sector plays a dominant role in the entire production. The small scale, cottage and artisan sectors account for over 75 per cent of the total production and majority of them belong to unorganized sector. Though footwear is produced by both large and small scale sector, the small scale sector has almost 90 per cent share in the total production of footwear in India. India s leather and leather products exports have been growing at 6.80% per annum during to Major export destinations are Germany, USA, UK, Italy and Hong Kong. India s exports of finished leather have been growing at the rate of 6.42% during to Hong Kong is one of the major export destinations of finished leather products. Hong Kong cornered the largest share (42%) of India s finished leather export in Leather Footwear: India s exports of leather footwear have been growing at the annual rate of 3.50% during to The leading importer of Indian leather footwear is UK followed by Germany, USA, Italy, etc. Leather Goods: India s exports of leather goods have been decreasing at the rate of 2% per annum during to period. Germany s position as the major destination of India s leather goods exports during the early 90 s has changed VII

8 drastically. UK, Spain, Netherlands, Australia, UAE and Belgium have all increased their imports from India. Leather Garments: Leather garments exports from India have been decreasing at the annual rate of 2.46% during to Germany is the leading importer of leather garments during The share of Belgium and Canada has increased over the years. Leather garments exports to Germany, Italy, USA, France, UK and Netherlands declined over the years. Leather Footwear Components: India s exports of leather footwear components have been decreasing at an annual rate of 2.27% during to India s exports of leather footwear components have increased to Spain, Portugal, France, Switzerland, Slovakia, Austria and Hungar, Italy, Germany and France are the major importers of Indian Leather Footwear components. Saddlery and Harnesses: India s exports of saddlery and harnesses have been increasing at the annual rate of 8.96% in the period of to However, the export shares of USA, Germany, France, Netherlands and Australia have been declining. Globalisation and Prospects for Indian Leather Sector Currently India has a share of 2.3 per cent (i.e. US $ 2 billion) of global trade of leather and leather products. India has a large and growing middle class of about 250 million people with good purchasing power. Global players in the leather business, big or small are today focusing increasingly on India's domestic market. The livestock is the raw material for the leather industry. Cattle, buffaloes, goat and sheep are the four live stock species which provide the basic raw materials for the leather industry. India ranks first among major livestock holding countries in the world. In fact, India has the capacity to fulfill 10% of the global leather requirement. The annual availability of 218 million good quality pieces of hides and skins is the main strength of the industry. Along with rich endowment of raw materials, the industry has access to abundant supply of cheap labour. Over the years through government support the industry has been able to develop its R & D facilities considerably. Though there is much to be done in order to meet the challenges of globalization, the industry has established a sound base for the same. VIII

9 Growth Constraints There continues to be acute shortage of good quality finished leather. As a result the industry is dependent on import from China and other countries. Lack of adequate product quality adversely affected exports. On the technology front, most tanneries use outdated technology which inhibits them from producing good quality leather in spite of access to quality raw materials such as hides and skins. Leather industry across the globe has been subjected to stringent pollution control norms due to growing environmental concerns. Since the industry is dominated by small and tiny producers, the availability of finance and the cost of capital turn out to be a major constraint. The Indian footwear component industry which is the pride of India in terms of its contribution to total leather exports is facing stiff competition from China in a number of shoe components - cellulose insole fabrics, coated, impregnated fabrics and interlinings, where the price of the imported materials is between 40% and 50% lower than the indigenously produced materials. Along with the lack of competitiveness, the size of the Indian footwear segment appears to be too small in comparison to that of China. This is evident from the fact that India's share of the global footwear imports is 1.5% while that of China is 14%. The main reason for the low scale of operation in the leather industry and in the footwear segment could be due to the lack of investments in the sector. Over the last 20 years China has attracted more than 10 times of investment that India has attracted. This may be of the fact that for a long time the sector almost in its entirety was in the SSI list. Only after 2001 the leather sector was de-reserved. Field Survey Findings In order to find out the issues and concerns at the firm level a field survey was carried out with structured questionnaires. Firm level details on turnover, employment, domestic and foreign trade, product description, cost related information, factors affecting productivity, factors responsible for competitiveness etc. were compiled. Majority of the responding units (58%) belong to small scale categories. Nearly 63% responding manufacturing units opined that the quality accreditations boosted their business. As regards to average profitability after 2000, 76% units reported that there is an increase of profitability. A large majority of manufacturing units reported an increase in export in the recent years. Most of them reported that foreign direct investment is less than 10 percent. IX

10 Average employment across the manufacturing units have been found increasing from 257 employees per unit during to 315 employees per unit during The decline in employment reported during the last year indicates that the sector is facing problems due to increasing competition. The casualization of labour increased during the last five years. Cost competitiveness of the manufacturing units increased during the last five years. More than 86% units reported that price competitiveness increased during the last five years. However, the product price was reported increasing due to the increase in the import of raw materials during the last five years. A large majority of manufacturing units (65%) reported an increase in labour productivity during the last five years. Though the availability of quality human resources increased during the last five years, it is reported to be still short of industry need. As far as Government interface with business/private sector is concerned, about 69% manufacturers are not satisfied. Major factors that adversely affected the competitiveness of leather manufacturing in India have been identified as non conducive government policies and taxes, rupee appreciation against dollar, increase in raw material price, poor quality of products, increasing labour cost, infrastructure bottlenecks, intense competition from China, very high interest rate, lack of quality work force, exports clearance problems, higher import and excise duty, high power & water charges, old designs, changes in the foreign buyers taste preferences, preference for branded items, higher income tax rate on export profits, pollution norms etc. Recommendations: It is quite apparent that the globalization process though threatens Indian leather sector, provides ample opportunity in the form of potential growth. Efforts should be made by government and other agencies to improve product quality. through improved design, development and prototyping. X

11 Emphasis should be put on building brand loyalties for Indian leather products. Efforts should be made by the council of leather export to concentrate on niche markets like Europe. Also, the industry should focus on women's fashion footwear, where India faces competition mainly from Eastern European countries. Leather producing units should be given incentives to adopt adequate pollution control measures. Government can evolve support schemes for leather manufacturing units that implements pollution control measures. Emphasis should be placed on the expansion and modernization of all segments of the leather industry including tanneries. In fact, there is need for a paradigm shift in the adoption of technology in the leather industry in India. Not only the rationalization of the duty structure but also all round efforts to be made to encourage existing producers of leather products for technological up gradation. Modernization will definitely require a heavy dose of investment for which availability of capital will be a major constraint. Since, most of the players in the leather sector are small and tiny industries, the government should take proactive steps for easing the capital constraint. Encouraging FDI in the leather sector would ease capital constraint and also improve the quality of Indian leather products. However, in order to increase FDI in the Indian leather sector it is essential to encourage good governance and global bench mark of best practices and provide good infrastructure for the sector. Development of human resource is an important requirement of Indian leather industry. In order to increase the availability of a large pool of skilled workers and artisans, efforts should be made to enhance training and capacity building infrastructure in the country. In order to rejuvenate and drive the Indian leather industry on its potential growth trajectory there has to be an appropriate detailed policy package and a road map for the fast track growth and development of the sector. There should be timely and a purposeful review of the policies implemented by the government for the leather sector from time to time. There is a need for developing a coherent statistical data base on the leather sector with regular updating. XI

12 Reduction in excise duty for Leather and Footwear Industry should be considered. The Central excise duty has been reduced by GoI as part of the economic stimulus packages Announced on December 7, The central excise duty on footwear of MRP between Rs. 250/pair to MRP Rs. 750/pair has been reduced from 8% to 4% and for footwear of MRP exceeding Rs. 750/pair has been reduced from 14% to 10% as part of the economic stimulus package. In the stimulus package announced on February 24, 2009, there has been reduction in the general rate of central excise duty from 10 per cent to 8 per cent. The excise duty on footwear of MRP exceeding Rs. 750/pair has now been further reduced from 10% to 8% in the third stimulus package after being reduced from 14% to 10% in the first fiscal stimulus package. 1.1 Background CHAPTER I INTRODUCTION The leather and leather products sector has been identified as one of the unique sectors which has the advantage of both value addition and export potential. Apart from the contribution to employment, this sector contributes significantly to total manufacturing output and exports from the country. The methodology adopted for the present study is based on two pronged approaches. First approach is based on a review and analysis of published data and literature related to the sector. Second approach is to conduct an in-depth field survey of the manufacturing units through structured questionnaires and discussions. The survey has been carried out among middle and top level executives of leather and leather manufacturing units spread across various leather clusters in India. Apart from the unit level investigations, the views of leading experts such as management specialists, technologists, economists, policy makers etc., have also been sought on a host of issues related to the sector. In the recent years industrial sector has exhibited impressive signs of recovery from a low overall industrial growth rate (based on index of industrial production) of 2.7 per cent in the year to 11.3 per cent during After peaking in the year , growth rate of the sector has dipped to 8% in as a result of number of adverse factors such as rupee appreciation against dollar, increase in inflation rates, rising fuel prices, infrastructure constraints, restrictive labour laws, of late global economic recession etc. XII

13 In an era of technology driven growth, very few manufacturing activities contribute significantly to employment. The manufacturing of leather and leather product is one such sector which contributes considerably to employment generation in the manufacturing sector though it has a meager (1.1 per cent) weight in the Index of Industrial Production (IIP). Moreover, this sector is among a few sectors that can benefit from globalization due to comparative cost advantages that India enjoys. Indian leather industry, provides employment to 2.5 million persons and has access to cheap raw material, skilled labour, and a vibrant domestic market. Probably these are some of the important ingredients on which Indian leather industry rely on to face the challenges in the coming years. Global players have shown considerable interest in Indian leather sector and leading leather brands from the US and Europe are sourcing leather and leather products from India. Thus, Indian leather industry has a significant potential to grow and to provide large-scale employment opportunities. 1.2 Chapter Scheme This study report has been presented in six chapters. Chapter II presents an overview of leather industry in India. Chapter III discuss productivity perfofrmance of Indian leather & leather goods sector. Chapter IV analyses the trends in exports of leather products from India. Chapter IV analyses the prospects of Indian leather industry in the wake of globalization and provides a SWOT analysis. Chapter V provides the feedback received from the field survey of leather manufacturing units and other stakeholders spread across India. Chapter VI presents recommendations emerging from the study. 1.3 Limitations & Constraints Keeping in view of initially set scope of work that was mainly to focus the study on secondary data sources, which has its own inherent limitations as a result of reliability in working out the projections, in order to substantiate the secondary data field evidences have been also included through a primary survey later on. Due to the limited resources available in terms of finance, the field survey was undertaken with limited scope and coverage. However, efforts have been made to minimize such constraints by analyzing various data sources in order to arrive at broad recommendations for the development of the sector. The recommendations have been formulated considering its implementability. XIII

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15 CHAPTER II LEATHER AND LEATHER PRODUCTS SECTOR: AN OVERVIEW 2.1 Introduction Leather industry occupies a prominent place in the Indian economy because of its massive potential for employment, output growth and export. Currently, the industry employs about 2.5 million persons of which 30% are women. Nearly, 50 per cent of the total domestic production is exported. The sector is one of the top eight foreign exchange earners of the country and accounts for 2.5% of the global leather-related trade worth Rs crores. In India, leather exports are growing at an annual rate of 5-6 per cent per annum (CII, 2006). The Indian leather industry includes both formal as well as informal sectors from small artisans to global players and produces a wide range of products from raw hides to fashionable shoes. Specialized institutions like Council for Leather Exports (CLE) and Central Leather Research Institute (CLRI) have been set up to promote the overall performance of the leather sector. The leather industry has undergone dramatic transformation from a mere exporter of raw materials in the sixties to exporter of value added finished products in the nineties. The share of value added finished items in the total exports from the leather sector have reached 80 percent now against 20 percent in the 1970s. The Policy initiatives taken by the Government since 1973 for the development of the sector through optimal utilization of available raw materials have been instrumental in the phenomenal transformation of the leather industry. One important policy initiative taken by the government includes liberalization of the leather sector. Government has de-reserved the manufacture of various types of leather viz. semifinished leather, harness leather, leather shoes etc., which are produced by small-scale sector. Moreover, government is setting up exclusive shoe component parks for meeting the demands of the global sourcing majors. It is expected that Indian foot wear industry will grow leaps and bounds at a rate of 10% to 15% in the future years. To tap the huge domestic footwear market, branded players are establishing footwear supermarkets in India. 2.2 Structure of Leather Industry Important aspects of the industrial structure can be categorized into product segments and structural components. In the following sections we analyze these two aspects separately The Product Segments XV

16 The Indian leather industry comprising of both organized and unorganized sector, produces wide range of leather products. The organized sector of leather products broadly consists of tanning and dressing of leather (NIC Code- 1911), manufacturing luggage, handbags saddlery, harness (NIC Code-1912) and footwear (NIC Code-1920). However, the unorganized sector along with the above broad category of leather products produces a number of other leather items. In order to have a clear picture of the industry we focus on four major items produced by the Indian leather industry. These four items constitute the various product segments of the Indian leather industry. (a) Leather footwear (b) Leather footwear components (c) Leather garments (d) Leather goods (a) Leather Footwear: Among the above mentioned product segments, the footwear segment is the pride of Indian leather industry. It ranks second in the world, next to China. India is the world's second largest producer of footwear with estimated production of more than 700 million pairs per annum. Footwear accounts for 18 percent share of total exports of leather products worth U.S. $300 million per annum. Various types of shoes produced and exported by India are dress shoes, casuals, moccasins, sports shoes, huaraches, sandals, ballerinas, and booties. Major production centers are Chennai, Delhi, Agra, Kanpur, Mumbai, Kolkatta and Jalandhar. Most of the Indian manufacturers of modern footwear are already supplying to major brands in Europe and USA. In the last five years, the leather footwear and footwear component production increased by 60%. Interestingly, despite producing more of gents` footwear India is major producer of ladies footwear in the world.though, the Leather Industry, (especially the Footwear industry) has made a strong contribution to the Indian economy, India's share in global trade remains as low as U.S. $ 30 billion. Being a labor intensive industry, its contribution to employment is significant which consists of a large chunk of illiterate workers. About 40% of employment is represented by unskilled workers indulged in table work operation in the assembly line. Minority community and lower caste people have their sole source of livelihood from collecting carcasses, skinning dead animals and tanning leather which also consist a large proportion of employment provided by leather industry. XVI

17 (b) Leather Footwear Components: Leather footwear component is another important segment of the Indian leather industry. The product range in this segment includes shoe Uppers, Sandal Uppers, Moccasin Lasted Uppers, Unit soles, Insole and Sock Linings etc. which are mainly exported to UK, Germany, Italy, USA., France, Portugal, Switzerland, Spain, Netherlands and Austria. The important production centers for this segment are Agra, Ambur, Bangalore, Chennai, Delhi, Jallandhar, Kanpur and Mumbai. (c) Leather Garments: The Leather Garment segment occupies a significant place in the Indian leather industry. The product classification of leather garments comprises of jackets, long coats, waist coats, shirts, pant/short, children garments, motorbike jackets, aprons and industrial leather garments. Indian leather garments sector entered the world market in the mid-eighties. It accounts for nearly $ 300 million of exports. Germany is a major export market for leather garments. India, China and Turkey were the major suppliers of leather garments to the German market and accounts for about 78% of the market share. Among the three major exporting nations of leather garments, India has captured 20% of market share in both German and EU markets. Other markets for India are Italy, U.K., U.S.A. France, Spain and Netherlands. Denmark, Switzerland and Canada are among latest export destinations. (d) Leather Goods: The leather goods segment of Indian leather industry range from designer collections to personal leather accessories, comprising of a wide range of products. And its share is nearly 21 per cent in Indian leather industry. This product segment includes the products like bags, handbags, hand gloves, industrial gloves, wallets, ruck sacks, folios, brief cases, travel ware, belts, sports goods, upholstery saddlery goods etc. The production of these items mainly takes place in large number of units located in Chennai, Kanpur and Calcutta. Significant feature of this is that it employees skilled labor and they are equipped with modern and sophisticated machinery. This segment meets the requirements of bulk buyers and consumers in Europe, USA and Australia. The major market for Indian leather goods segment is Germany, with an off take of about 25 per cent of the leather goods produced in India followed by USA, UK, France and Italy. This leather goods segment has maintained an average growth rate of 11 per cent during the last five years. XVII

18 2.2.2 Production structure of Leather Industry Unorganized sector plays a dominant role in the entire production of leather and leather products. The small scale, cottage and artisan sectors account for over 75 per cent of the total production. Though the small scale industries (SSI) are classified as organized sector most of them are in the unorganized sector. A contrast of product segments with the production structure of the leather industry in India reveals that while footwear production is undertaken both in large and small scale sectors, leather garments and other products are mainly produced in the small-scale sector. In fact, though footwear is produced both in the large and small scale sector, the small scale sector has almost 90 per cent share in the total production of footwear in India. There are about 42,000 registered SSI units in India producing leather footwear. Location wise Indian leather industry can be divided into 5 regions namely, southern region, northern region, eastern region, western and central region. Among the five regions southern region is relatively wide spread and comprises states like Tamil Nadu, Andhra Pradesh and Karnataka. Chennai, Ambur, Ranipet, Vaniyambadi, Trichy and Dindigul are the major producing centers in the state of Tamilnadu. Whereas, the capital cities of Hyderabad and Bangalore are the major production centres in the state of Andhra Pradesh and Karnataka respectively. Tamil Nadu is the leading state in India in terms of number of registered factories for leather and footwear industry. The state of Tamil Nadu had 37% (810) of total leather and footwear factories in India at the end of In the northern region the state of Punjab and national capital territory of Delhi are the two main producing locations. Jallandhar is the major producing centre in Punjab. In the eastern region West Bengal is the only state which produces leather and leather products significantly where kolkata is the major producing centre. In the western region, Maharastra is the major producing state for leather and leather products where Mumbai is the major producing centre. Similarly, in the central region Uttar Pradesh is the major producer with Kanpur and Agra as the two major producing centers. Uttar Pradesh is the second major state in India in terms of number of registered factories with 15% of total factories in India at the end of The states of Tamil Nadu and Uttar Pradesh together accounted for 52% of total factories in West Bengal and Punjab are the other key states in India with significant number of registered leather and footwear manufacturing units. The following map provides the distribution of leather production centers across the country. XVIII

19 The nature of these production centers varies in terms of the distribution of producing units and product segments. For example, the small scale industries producing leather are mainly concentrated in the state of Uttar Pradesh and Tamil Nadu. As far as the concentration of various product segments are concerned, Agra and Ambur are the major production centers of footwear and footwear components. Similarly, Bangalore, Chennai, Delhi, Hyderabad etc are leading producers of leather apparels whereas Kanpur, Kolkata, Mumbai etc are the major producing centers for of leather accessories. Thus, the different production centers cater to different segments of leather industry. Nevertheless, there is a great deal of overlapping in this respect also because various segments of the leather industry are more or less interrelated due to scale benefits on account of location. 2.3 Wages Salaries in Leather Sector In the leather industry, that both female and male workers are offered the same wage and there is no discrimination against female workforce. The total number of shifts across firms is approximately in the region of 26 per month. Large variations in wages paid to workers across firms are observed. These variations are noticeable in terms of both payments made via piece rates or monthly wages. Since the work in this industry is very skill based and people with any prior industry training are always preferred. Such workforce is scarce in supply. In the case of machinery usage, it is observed that across most units, firms have increased their machinery usage. This shows that leather manufacturing units across the country are purchasing more machines and upgrading their technology as new machines by and large embody better and improved technology of production. Mixed response is found to adoption of modern technology in the recent past. It is asserted that this is due to the fact that large firms have the financial capability to undertake investment in modern machineries and hence consider technological up gradation as a natural phenomenon of moving to a higher end of value chain. On the other hand, small firms because of several constraints- skilled manpower, expensive machinery and fluctuating market demands are unable risk technological up gradation. 2.4 Competitive Benchmarking XIX

20 The competitive benchmarking of India has been done with China, Italy and Brazil to identify the areas where India has competitive advantages and disadvantages as compared to these countries. The exports of India have registered CAGR of 3.61% from 2000 to 2006 as compared to 10% achieved by China. While the exports of India has registered a higher CAGR as compared to Italy and Hong Brazil which are the other two major exporters of leather and footwear products, the analysis of the value of exports show that the share of India in total exports of leather and leather products in world is very low at 3.14%. The higher CAGR of India can also be attributed to lower exports in absolute terms in 2001 as compared to Brazil and Italy. The labour productivity index of India is among the lowest in the Asian Countries at 0.94 in 2005 as per the study conducted by Asian Productivity Organisation (APO). Mongolia and China have the highest labour productivity index at 1.65 and 1.56 in The labour productivity in India is very low as compared to China in production of shoes, garments and leather goods. The pairs of shoes per employee per day in India are 20 pairs as compared to China which was at 40 pairs. Similarly, the pieces of leather goods per employee per day in India are low at 6-8 pieces as compared to China at pieces. The labour productivity of India has been impacted due to rigid labour laws like lack of flexibility in contract labour laws. Units employing over 100 people currently fall under the purview of Industrial Disputes Act. The Act stipulates that employers must obtain necessary approvals to effect lay-offs. This proves to be a hindrance especially for small and medium enterprises. 2.5 Measures for Anti Dumping by Companies in India As in most other countries, protection appears to have been the dominant motivation behind the levying of anti dumping duties in India. General Agreement on Tariffs and Trade (GATT) therefore contains some contingent measures, which permit the signatories to withdraw their normal obligations under specified circumstances and impose higher protection against import of one or more goods from one or more countries. Contingent protection measures fall under three categories -- antidumping, countervailing and safeguard measures. Anti-dumping duties are expected to overcome only the problem of dumping. To deal with the problem of direct and indirect Government subsidies there is provision for countervailing duties. In both cases injury and causal link must necessarily be proved. Safeguard measures dealing with the problem of "increased imports" and neither dumping nor subsidies need be present. For safeguard measures to be implemented serious injury to the domestic industry is required to be established. Some safeguard measures are tariff increases or quantitative restrictions; it remains a sparingly used measure, as compensation may have to be paid to the trading partners in appropriate cases. XX

21 The subject of anti dumping is very topical and highly controversial. There seems to be some ambiguity in the definition of trade-distorting phenomenon ''dumping''. A product is said to have been dumped in the Indian market if it is introduced into the commerce of the country at less than the normal value of the product and it causes/threatens material injury to an established industry of the country. The phenomenon of dumping is per se not condemnable as it is recognized that producers sell their goods at different prices to different market. Differences in price are also due to demand and supply. Export prices are generally lower than domestic prices. However, where dumping causes or threatens to cause material injury to the domestic industry of India, the Authority (Ministry of Finance) initiates necessary action for investigations and subsequent imposition of anti-dumping duties. Normal Value is the comparable price at which the goods are sold, in the ordinary course of trade. The Normal Value cannot be determined by means of domestic sales. The act provides for the following two alternative methods. 1. Comparable representative Export Price to an appropriate third country. 2. Cost of production in the country of origin with reasonable addition for administrative, selling and general costs and for profits. The 'Margin of Dumping' is generally expressed as a percentage of the Export Price. It refers to the difference between the Normal Value of the similar article and the Export Price. Article VI of the GATT states the measure to prevent dumping. Most WTO member countries have adopted/amended their antidumping legislation largely in accordance with the GATT provisions to deal with dumped imports. Pursuant to GATT 1994 detailed guidelines have been prescribed under the specific agreements which have also been incorporated in the national legislations of the member countries of the WTO. Since Indian Laws have been amended in order to bring them in line with the provisions of the respective GATT agreements. Sections 9A, 9B and 9C of the Customs Tariff Act, 1975 and the corresponding Customs Tariff (Identification, Assessment and Collection of Anti- Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 there under form the legal basis for anti-dumping investigations and for the levy of anti-dumping duties. Some have raised questions about the ambiguities in antidumping regulations and procedures; others have questioned the economic rationale behind such laws. Imposition of Anti Dumping Duty is based on commodity to commodity, country to country and suppliers in exporting countries. Global Trade Protection (GTP) report has reported that global anti-dumping activity has remained at relatively low levels in 2005 and The reason being that commodity type prices remain relatively high etc., a) less dumping is taking place and b) it can be difficult to establish that domestic industries are injured. Despite the relatively low levels of anti-dumping activity worldwide. In India, the numbers of anti-dumping cases have increased substantially over the last five years. China continued to be the main target of anti-dumping cases in the recent years. Interesting to note, is the fact that there is a significant upward trend towards China as a target. The proportion of global anti-dumping initiations against China has been significantly increasing in recent years. The Global Trade Protection Report has found that global trade protection activity in the first six months of 2007 was at a record low since the creation of the WTO. XXI

22 The GATT agreement as well as the Indian laws provides that the injured domestic industry is allowed to file for relief under the anti-dumping as well as countervailing duties. However, the same articles shall not be subjected to both countervailing and anti-dumping duties to compensate for the same situation of dumping or export subsidization. The investigation process involves the following steps: 1. Screening - the document is scrutinized and if the evidence is not adequate, then a deficiency letter is issued normally within 20 days of the receipt of the application. 2. Initiation - Public Notice is issued initiating an investigation to determine the existence and effect of the alleged dumping. The Designated Authority notifies the diplomatic representative of the Government of the exporting country before proceeding to initiate the investigation, within 45 days of the date of receipt of a properly documented application. 3. Access to information - Non-confidential evidence is provided. 4. Preliminary Findings - in appropriate cases, finding containing the detailed information on the main reasons behind the determination within 150 days of initiation. 5. Provisional Duty - not exceeding the margin of dumping, but only after the expiry of 60 days from the date of initiation of investigation and will remain in force only for a period not exceeding 6 months, extendable to 9 months 6. Oral Evidence - request to opportunity to present the relevant information orally, but subsequently it must be reproduced in writing. 7. Final Determination - within 150 days of the date of preliminary determination. 8. Disclosure of Information - interested parties must be informed of the essential facts which form the basis for its decision before the final finding is made. 9. Time-limit for Investigation Process - one year from the date of initiation of the investigation, but maybe extended for an additional six months. 10. Termination - under specified cases. A retrospective application will not go beyond 90 days of the date of imposition of provisional duty. An anti-dumping duty imposed under the Act shall have the effect for 5 years from the date of imposition, unless revoked earlier. An appeal against the order of the Designated Authority may be filed with the Customs, Excise and Gold (Control) Appellate Tribunal within 90 days of the date of the order. The Legislation provides for the collection and refund of duty. Another aspect of dumping which is not altogether trivial is the fact that, against the background of a once hungry-for-imported-goods country, countries try to sell, and mostly succeed in selling, to India goods which would not be saleable in their own countries mainly by virtue of quality XXII

23 and age -- time elapsed and time remaining in relation to manufacturing date. It appears that there are no barriers in India at which these types of goods are stopped and checked Chinese footwear remains controversial in EU In October 2008, the European Union (EU) initiated an expiry review of anti-dumping duties on footwear with leather uppers from China. EU anti-dumping measures are normally adopted for a 5 year period. However, due to the extremely political nature of the footwear anti-dumping investigation, measures in this case were exceptionally adopted for only 2 years. This reflected the fact that there was a large involvement of retailers and importers in the investigation, significant because the EU has a public interest test ( Community interest ) before measures can be adopted. The expiry review is just as controversial. Fifteen of the 27 EU Member States opposed the initiation of an expiry review, believing that the measures should be allowed to expire after the 2 year duration. At initiation, the European Commission is only obliged to consult the Member States and thus the investigation was initiated. However, if the Commission determines that the measures should continue, 15 Member States would be sufficient to block the continuation. Ultimately, Member States must adopt the measures proposed by the Commission and a simple majority (14) is sufficient to force the expiry of the measures. The duty remains in place during the expiry review. The Commission stated in a press release that it would work to complete the review as expeditiously as possible, if possible in shorter than the usual timeframe of months. 2.6 The Regulatory Regime The continuous support of the Government has resulted in massive transformation of the Indian leather and leather products sector. As maintained earlier, the industry which was a mere exporter of raw material in the sixties has now become one of the major exporters of the value added finished products. Recognizing the opportunities for Indian leather industry from globalization, the government over the last decade and a half has under taken several initiatives. Those initiatives may be broadly divided into two categories. One is competitiveness enhancing initiatives (those, directly affect the competitiveness) and the other is the trade facilitating initiatives (those affect the exports). Of course, the trade facilitating initiatives also affect the overall competitiveness of the industry, but they affect indirectly. Nevertheless, it is important to have a discussion of these broad categories of initiatives undertaken by the government to improve the performance of the leather industry in India Competitiveness Enhancing Initiatives The government over the last decade and a half has undertaken various measures in order to enhance the competitiveness of leather industry in India. Some of the important measures are be the followings. Firstly, as a part of the liberalization measures, most of the items of manufacture in the leather sector have been de-licensed. And the Government has de-reserved the manufacture of various types of leather including semi-finished leather, harness leather, leather shoes etc. from small-scale sector. XXIII

24 Secondly, National Leather Development Programme (NLDP) was implemented from April 1992 to September 1998 with the assistance from UNDP. The programme aimed at integrated development of the leather industry through selected institutions/agencies in the country. The programme was successful in creating institutional facilities of international standards and capacity to meet the requirements of trained man-power. In order to consolidate the gains of this project and in line with sustainable human development concerns, Phase-II of the programme, namely, SIDE-NLDP (Small Industries and Development and Employment Programme in leather sector) was launched with UNDP assistance of US $ 7 million in September, Thirdly, the Indian Leather Development Programme (ILDP) was implemented as one of the Ninth Plan programmes to complement NLDP. The objectives of the ILDP were mainly to bridge critical gaps in the infrastructure for integrated development of the leather industry, activate national agencies towards tackling gaps in the industry, to promote productivity, value addition, encourage investment, trade development and building up of information base for the leather industry. Fourthly, National Leather Technology Mission (NLTM) was launched in 1995 for integrated development of tanning sector. The programme mainly focused on areas like augmentation of raw material requirements of the leather industry and promotion of environmentally cleaner leather processing methods through use of modern technology. NLTM had a total of 172 activities covering 16 states in the country. In fact, the support for tannery modernisation was given a very high priority under all the aforesaid programmes. Fifthly, on June 30, 2005, the Cabinet Committee on Economic Affairs (CCEA) had decided to implement Rs 2.9 billion scheme for the integrated development of the leather sector. Under this scheme, modernization of existing tanneries and setting up of new units for footwear, components and leather products were planned. This scheme is expected to result in gains in terms of productivity, right-sizing of capacity, cost-cutting, and design-development. Apart from the above initiatives which have direct implications for the competitiveness of Indian leather industry, the government has undertaken several other initiatives in the recent years which are basically trade facilitating in nature i.e. they aim at improving the prospects of export for Indian leather goods Trade Facilitating Initiatives National Foreign Trade Policy (FTP) is perhaps one of the major initiatives which aims at improving export prospects of Indian industries in general. However, some of its components grossly address the trade concerns of the Indian leather industry in particular. Apart from those subcomponents, there are various other steps which the government has undertaken in recent years in order to improve the export prospects of Indian leather goods. The followings could be XXIV

25 considered as some of the important trade facilitating initiatives of the government in the recent years. Firstly, FTP primarily focuses on procedural simplification and trade facilitation measures. As a result several schemes which were hitherto un-availed by the exporter have turned out to be attractive. Secondly, the formation of Inter-State Trade Council to facilitate an enabling coordination between the Central and State Governments in trade policy matters is a very significant step towards increasing export of Indian industries in general and leather industries in particular. Thirdly, the Export Promotion Capital Goods Scheme ( EPCG) scheme has been made further attractive to the SSI sector, as the export obligation has been brought down from 8 times of duty saved to 6 times and procedures for availing the EPCG scheme has been simplified. Fourthly, the Advance License scheme has also been made more attractive with the introduction of various procedural simplification measure, more particularly, all categories of exporters having past export performance can now avail the Advance License for annual requirement, instead of the earlier practice of restricting the facility to only status holders. Similarly, the special facility introduced to the Status Holders in the erstwhile EXIM Policy has also now been operationalized. The schemes would definitely incentivise the industry to aim at aggressive growth. Fifthly, a single common form called Aayaat Niryaat Form has been introduced which is a 50 page set of forms as against the earlier 120 page set. Sixthly, the export obligation on production of goods reserved for the small scale sector in the organized sector has been brought down from 75 percent to 50 percent to encourage exports while providing a reasonable safeguard to the small scale and cottage sector. Non-SSI units can, however, take up manufacture of finished leather from semi-finished stage without any export obligation. Seventhly, the government has allowed the import of raw materials and machinery and components under Open General License (OGL) at concessional rates of duty. Eighthly, government has made efforts to encourage domestic manufacturer of components by promoting joint ventures and by duty rationalization on inputs. Ninthly, the product segments like tanned/dressed fur skins and chamois leather has been removed from the list of industries requiring compulsory licensing. XXV