Effects of Labor Laws and Costly Credit on Garment Exports

images (1)Lately, the Indian garment sector has witnessed a boom in exports, thanks to increasing demand from all major markets including the USA and the European Union. With big orders pouring in, garments have become one of the top growing export sectors in the country. Because of its high quality garments, India has become one of the preferred sourcing destinations for several brands such as Zara, H&M, Mango, Tommy Hilfiger, etc. However, the country’s inflexible labor laws and costly credit are proving to be major roadblocks for the sector, especially when it comes to exports.

Stringent Labor Laws Affecting Investors

The stringent labor laws prevailing in the country have created great apprehension among garment manufacturers. They believe that the bigger they grow, the more difficult it is to run a business. It is to be noted that garment is one of the most labor intensive sectors in the country after agriculture. Hence, the impact is more on this segment than the others due to strict labor laws. More than 8 million workers are employed by the sector, out of which 70% are women. Often companies are closed without prior approval from authorities, which deprive workers of their statutory dues.

Take for example the Factories Act of 1948. This act restricts even a willing worker to work beyond 48 hours in a week. This not only reduces production capacity, but also his earnings. India’s loss is its competitors’ gain. Though labor costs are higher in China, yet its flexible labor rules, lower credit costs, subsidized power and better infrastructure has propelled its garment sector and exports. The Bangladesh government’s bilateral treaties with European nations and other countries of the world have enabled buyers to import garments from the country without any import duty.

High Credit Costs Hurting India

Higher credit costs are also hurting garment exports from India. While credit cost in India hovers around 11 to 12%, the same is around 3 to 5% in rival nations. Shortage of electricity in states like Tamil Nadu and Andhra Pradesh, where many garment exporting companies are located are also hurting these companies. In these states, high labor costs have reduced manufacturing competitiveness to a large extent.

The Way Forward & Challenges

However, recently garment exports have started to pick up, aided by several external factors. According to data from the Apparel Export Promotion Council, India’s garment exports to the EU has increased by 5.9% on year-on-year basis during January-May 2013, while those of Bangladesh and China have declined by 1.8% and 9.7% respectively during the same period. Yuan’s rise against the dollar and labor unrest in Bangladesh has worked in India’s favor. Importers now desire to buy from India, rather than Bangladesh because of safety related issues and the overall stability that India provides.

The Government of India has taken initiatives to attract investment in the sector. However, India must work out a way to make its labor rules more flexible to provide a competitive edge to the sector.