India’s increase of customs duty is unlikely to boost local manufacturing of footwear in the world’s No. 2 producer, and is only expected to make flip flops to sneakers costlier for consumers.
Finance Minister Nirmala Sitharaman, in her budget for 2020-21, raised import duties on footwear and related raw materials by 10 percent and 5 percent, respectively. While companies agreed that cheap imports of ready products and raw materials does impact the local industry, they don’t expect the increased levy to counter that.
There might be some slowdown in products coming from China, but they are already cheap or can come through countries like Vietnam that have lower duties because of free-trade agreement with India, according to Alok Kumar Gupta, president of Confederation of Indian Footwear Manufacturers. A 10 percent hike will have no impact to boost production for Indian manufacturers, including smaller and unorganised players, he said.
India is the world’s biggest footwear producer after China with a $9-billion market, according to Statista. While the industry doesn’t have a breakup, senior executives BloombergQuint spoke with said about 60-70 percent is unorganised.
The nation imported shoes and raw material worth $746 million in the year ended March 2019, according to data on the commerce ministry’s website. Gupta, however, pegs inbound shipments higher at Rs 12,000-12,500 crore (about $1.7 billion). More than two-thirds of that come from China.
Large manufacturers like Puma India agreed that a higher duty won’t help much. “India currently doesn’t have the infrastructure, capability, skill set and technology to manufacture higher-end footwear. Therefore, increasing customs duty of footwear from 25 to 35 percent may not have a significant impact on imports,” Abhishek Ganguly, managing director at the shoemaker, told BloombergQuint. Instead, footwear would become costlier, he said, adding that Puma could increase prices of some of its products by 8-10 percent.
Relaxo Footwears Ltd., which imports sports shoes, flip flops and components from China, said the company wants curbs on cheap, low-value imports, not quality products. “We import the things we actually cannot make in almost every category,” Ramesh Kumar Dua, managing director at the company, told BloombergQuint. He reiterated that a 10 percent increase in duty won’t boost local production as Chinese manufacturers are already selling at a tenth of Indian prices.
The maker of Bahamas, Sparx, Schoolmate and Relaxo Hawaii range plans to increase prices between 8 percent and 26 percent.
Also Read: Relaxo Eyes West, South India To Unlock Future Growth Potential
The problem also stems from synthetic fabric used in bulk of the shoes sold in India and globally. While India has the capacity to produce the material, the raw material is coming from China at throwaway prices, according to Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organisations. The duty hike will have a muted impact on such imports, he said.
Rising Asean Imports
China accounted for nearly 70 percent of the footwear and footwear component imports by India in FY19, followed by Vietnam, Hong Kong, Cambodia and Indonesia. While China’s share has fallen by about 11 percent over the previous year, it has increased by 36 percent on average for Asean countries including Vietnam, Cambodia, Indonesia and Thailand.
Sahai said the industry may shift manufacturing to such countries with whom India has free-trade agreements and lesser duties. “China is already shifting its manufacturing to Vietnam, Cambodia, and other countries,” he said. “So, this could lead to shift in import from China to Asean countries.”
According to Gupta, Chinese products are already entering India via Vietnam. “Basically, you’re closing one door but then there is another way,” he said, adding that domestic production can be increased only by curbing all imports.
Pressure On Exporters
India exported footwear products worth nearly $2.9 billion in FY19. The industry makes 225 crore pairs every year, employing 3-4 million people directly and indirectly.
Yet, it’s among the least preferred by overseas buyers as producers in countries like China sell at much lower costs, buoyed by large-scale merchandised manufacturing and developed infrastructure. Indian exporters say the import duty hike could impact their competitiveness with global peers in the short term.
A leading shoe manufacturer and exporter said the increased duty could hit exports.
“We haven’t adjusted our sales to the 5 percent increase [in duty that kicks in immediately],” said Rafeeque Ahmed, chairman of Chennai-based Farida Group. “No customer will adjust the amount because duty has changed in our country.”
Ahmed said the government increased the duty after fixing drawback rates—the proportion of import duty that can be claimed as refund on exports—for 2020. “We won’t get a refund for more than a year and this will hurt my competitiveness, production and have an impact on employment,” he said. “A 5 percent hike means everything for me will go up by 5 percent.”
What Can Be Done
Bata India Ltd. imports just 5 percent of its inputs and wan’t to reduce it further. “We’re already importing some of our sports shoes through Vietnam where the duty structure is very low,” RK Gupta, director finance and chief financial officer of Bata India, told BloombergQuint over the phone. The company, which already has four manufacutring units in India, may consider increasing localisation and has spent Rs 80 crore in the past 2-3 years on technology to make quality products here.
But it’s a larger, organised manufacturer that has built its own capabilities. For smaller footwear makers, doing that is difficult.
Small-time manufacturers work in small, dingy areas with no proper set-up, according to Gupta of footwear manufacturers’ confederation . “They also have no exposure to market their products.”
The government must help create infrastructure by building clusters and warehousing capacity with basic technology for such players, he said. “Unless this improves, the market will not become bigger.”
Puma’s Ganguly said by increasing import duty, the government has only diverted from the problem. “It should instead promote companies that set up technically sound manufacturing facilities aiding the industry’s growth, which is a big global opportunity.”
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