Benchmark Study III: India’s garment industry and the Public Welfare

Any foreign professional analyzing India’s economic, political, and social condition would probably conclude: Here is a country unable to move forward. A country given to the quick fix and political expediency rather than strategic change; where demagoguery too often trumps honest political leadership.

There can be no doubt that India faces a series of obstacles, which it seems government is unable to overcome.

Economic challenges

  • GDP growth is now 5%, the lowest increase in a decade
  • Inflation has reached 9.2%, among the highest in the world (rank 197th)
  • The budget deficit is among the highest in the world (rank 166th)
  • Government tax and other revenue totals 8.2%, perhaps the lowest in the world (rank 211st)
    • 40% of the economy operates in the grey area, paying 0 taxes
    • Foreign direct investment (FDI) is falling rapidly
    • The current account trade deficit is -$80.2 billion, among the highest in the world (rank 192nd)
    • Unemployment 9.9% (rank 107th)
    • Underdeveloped industry sector
      • 53% of labor force employed in agriculture accounting for 17% of GDP
      • 19% of labor force employed in industry accounting for 18% of GDP.
      • 65% of labor force employed in service accounting for 28% of GDP

Structural unemployment is rampant.  In an urban society, employment is cyclical, rising in good times and falling in bad times.  In the villages, however; levels of employment cannot rise even when business in the urban areas is booming.

Disguised unemployment is an even more serious problem.  In the villages everyone works but paradoxically, many are not gainfully employed.  In the villages work is divided among the available workers: the more workers, the greater division of work.  However, as the number of workers rise, the point is reached where production no longer increases with each additional worker.  The pie stays the same, but each worker receives a smaller slice.  In these circumstances, social, cultural and economic differences lead to terrible conditions as the village reverts to a feudal society.  Those with capital, whether money or land, become richer while those without become ever poorer.  Debts are passed on from generation to generation; serfdom and even slavery become endemic.

Economic development in India has lead to social bifurcation.  While the minority living in the cities is moving to compete in the 21st century global economy, the great majority living in the villages is returning to the 17th century feudal society.

Successive governments have been unable to create a viable strategy to bring development to the mass of its citizens.  Government cannot relocate these people to urban areas.  Their numbers are too large and the cities already lack sufficient infrastructure to meet the needs of the existing urban population.

With government taxes and revenue totaling only 8% of GDP, the central government simply lacks the funds needed to bring economic development to the villages.  Meanwhile the efforts of state governments have been at most mixed.  Both national and state government initiatives do little, offering palliatives that treat the symptoms rather than the underlying causes.  These efforts at best do little to solve the problem and often prove to be counter-productive.

Top of the counter-productive list are agricultural subsidies that rather than offering viable alternatives, serve to push villagers further back into subsistence farming. These subsidies are not only expensive, and non-productive but more importantly, restrict India’s ability to enter into international free-trade agreements as an equal partner.

Second on the counter-productive list is government investment in local handicrafts.  There is no doubt that India is home to many unique and marketable handicraft products.  Furthermore, everyone certainly agrees that in the rush to develop, these special skills should not be lost.  However, investing in handicraft production as a development strategy makes little sense.  Developing local handicrafts will not make any substantial impact on unemployment/underemployment of 700+ million people. More to the point, developing traditional craft industries does nothing to take the rural population out of the 18th century and bring them to the present.

Demographic and Social Challenges:

  • 42% of the urban population and 77% of the rural population do not have access to improved sanitation facilities
  • 43% of children under age 5 are underweight (ranks 2nd)
  • Education expenditures totals 3.3% GDP (2010) (Rank 131)
  • Literacy:  (age 15 able to read and write):  male 73.4%, female 47.8%

Successive governments have done little to create practical strategies to overcome the economic, demographic and social disadvantages, concentrated in India’s rural areas. Government is proud of the fact that India is the world’s largest democracy; while those same governments seem unable to overcome the fundamental challenges facing those living in villages who are the majority of India’s population.

There is a growing consensus that the first step to solving these problems is to decrease India’s reliance on agriculture and primitive services and to increase India’s languishing industrial sector.  However, any attempt to increase the role of industry faces seemingly insurmountable obstacles

  • India’s lacks the social overhead capital to support even the current level of industrialization; let alone allow for further expansion of this sector;
  • Most industries simply cannot deal with potential workers who are functionally illiterate and have never held a job;
  • Moving greater numbers from the villages to the cities makes little sense when India’s urban centers are already unable to cope with the existing population.

Given the current state of India’s economy coupled with the country’s demographic and social challenges, any substantial development of the industrial sector will require an industry that can operate effective within the country’s current severe restrictions:

  1. The industry must operate on a large scale
  2. The industry must be export orientated
  3. The industry must be labor intensive
  4. The industry must be able to operate effectively with workers who are both functionally illiterate and have never held a job.
  5. The industry must be capable of operating in a rural environment, with an absolute minimum of social overhead capital

There is but one industry that meets these criteria:  Garment making

Not only can a large garment factory operate within the severe restrictions listed above, the industry also offers one additional economic and social advantage:

  1. Most of its employees are women aged 18-25.

The garment export industry is the first stage of economic development

Regrettably, India’s garment industry is hampered by its own severe obstacles.

The most serious of these are undoubtedly the structural and systemic impediments, notably the inability to import material as discussed in the previous article.  However, above and beyond these are micro-economic issues, which have trapped India’s garment-export industry in an environment of stagnation.

The problem can be summed up with the following paradox:

Wages remain low while FOB prices, already comparatively high, continue to rise.

To put it another way, if wages in China are 3.7 times wages in India, why are China’s FOB prices in China 22% lower than in India.  The answer is all about overhead.

In the case study shown above, the Chinese worker is paid 3.7 times his counterpart in India, while the CM cost of a style produced in China is 26% lower than the same style produced in India.  And, that is a very conservative figure.

Cost is all about overhead, and overhead is all about productivity

There is more to raising productivity than a means of India competing with China.  The greatest benefit comes when In India competes with India

India’s garment factories low productivity is no secret.  Everybody understands the problem, while at the same time this same everybody is trapped, unable to find a viable remedy.  The garment industry’s micro-economic problems are but one aspect

Of the greater economic, demographic and social problems facing India

The question is: Why is India unable to make progress to overcome these persistent obstacles?

The most common reasons offered are endemic corruption, the power of interest groups and bureaucratic delays.

Yet these facile explanations cannot be the full story.

Corruption is a worldwide phenomenon.  Levels of corruption may be greater in South and Southeast Asia, but levels in India are well below most other regional garment exporting countries

 

Interests groups wield great power in India.  However, interest groups wield great power everywhere. For example, there is a widely held belief among political scientists and historians that interest groups are not only the greatest power in the United States today, but have been so from its very beginning in he late 18th century.

Finally while we must accept there is good reason to believe that with regard to bureaucratic delays India is in a class of its own; even accepting that India’s obdurate bureaucracy is the personification of delay and obstruction, bureaucracy in itself does not have the power to bring development to a complete stop.

There is a cultural phenomenon at work.

Strategic development has two parts.

The first is the technical part:  Creating the strategy.  To effect change you must create a viable, practical, comprehensive and integrated strategy. This is usually considered to be the single most important and most difficult part.  To some, creating a viable strategy is the only part.   In truth, creating a strategy, while certainly not easy, is neither the most difficult no the most important part.

The real problem is the second part

The people part:  Enrolling the players in the strategy.  For a strategy to succeed, it must meet three requirements:

  1. The ability to enroll all the required players
  2. The need to accept that each player will have their own agenda
  3. The ability to convince each player, they will benefit, providing the strategy succeeds.

The India Global Garment Initiative has two separate player groups:

  1. The external players:
  2. The internal players:

The external players:

i.         Customers

ii.         Transnational factories

iii.         International institutions

iv.         Specialist professional organizations

Enrolling the external players will not be easy.  For many if not most, their past experiences have lead them to believe that no strategy will succeed in bringing change to India; or that a strategy that would appear to succeed at the outset will invariably be stymied by the same factors which have caused all earlier attempts to fail.

However, we have one distinct advantage with the outside players:  They act in rational self-interest.  They are open to discussion.  If we can show that the risks are low, the costs are low, the advantages great, and most importantly that by working together as a collective group we can effect change, we can enroll the external players

The Internal Players

The internal players are composed of more divers and intractable groups.  Indian society is extremely complex and filled with visceral animosities.  For every internal Indian player, there is a player in opposition

i.         Caste:

ii.         Religion

iii.         Class

iv.         Gender

v.         Ideology

Because each player group has its own opposition, if success for one player is measured by its ability to effect some particular change, success for its opposition is measured by its ability to ensure that the particular change never occurs.

In this regard, effecting change in India is extremely difficult, simply because it is easier to build a coalition of NO than a coalition of YES.

We must put an end to this internecine cultural warfare, if India is to move forward.

Effecting strategic change above all requires enrolling players with different ideas into a common effort to make an industry and a society more successful as defined by each honest person.

This is somewhat difficult.

The only workable solution is to create a strategy that will meet the agenda of both and to find agreement.

All must willingly agree that some cultural changes are necessary:

  • Slavery must be stamped out
  • Rape can no longer be a group sport

At the same time we must recognize that other cultural changes are no possible.

For example, there are those — the modernists — who believe strongly that India cannot move forward without further economic development, increasing foreign trade and, greater annual GDP growth.

At the same time there are those — the followers of Mahatma Gandhi — who believe with equal strength that economic development does not in itself bring improvement; and that reliance on foreign trade is often a disguised form of neocolonialism.

The general belief is that both sides cannot be correct and that eventually India must accept one side while rejecting the other. Yet this cannot be correct, since both ideologies are deeply embedded in India’s society and culture.

To do so, we must look at the goals. In this regard we must recognize, GDP growth and increased foreign trade are not goals but simply means of reaching these goals.  Neither is a reliance on craft industries or autarky.

The goal must move towards a society that benefits all.

This will not be easy.  However, to continue the internecine cultural war is to surrender control to those who would corrupt society and who would limit development to those policies that benefit them alone.


[1] FOB prices based on square meter equivalents (SME)

[2] The recent events in Cambodia will more than likely move India from 3rd lowest to 2nd lowest wage rates.

[3] Based on AEPC members only, excluding subcontractors and other factories operating in the grey area

[4] This is a very conservative figure.  In practice, overheads (as defines as non material costs other than those for wages to workers who physically change the garment) in India are between 5-6 times labor

[5]  100 = perfect.   Rank 1st Denmark and New Zealand 91.  Rank last 175th Afghanistan, Somalia, North Korea 8

 


[i] FOB costs for most imported products are obtained by dividing the total value in dollars by the total number of units. Unfortunately this does not work for garments because garments is not a product, but rather a collective term that includes approximately 2500 products.  While we can divide numbers of automobiles (or tons of anthracite coal) into the total dollar value of imported automobiles (or anthracite coal) to determine the average price for each, applying the same methodology for garments provides no useful information, because averaging cotton handkerchiefs with wool overcoats makes no sense. The solution accepted by most organizations is to reduce garment units to square meter equivalents (SME).  Using this methodology, 12 cotton handkerchiefs equals 1.4 meters while the same number of wool overcoats equals 46.12 meters.  It is also accepted by these same institutions that calculating FOB on the basis of SME is not a good solution. It does however, have two advantages:

  1. While SME is not an accurate way of measuring FOB prices, it is accurate when measuring changes in FOB prices.
  2. It is the best method yet devised.
    1. While some products are measured in units of pieces (or dozen pieces) others are measured in kilograms making aggregate calculations impossible.
    2. Some major export products such a jeans, are specifically listed in U.S. data, jeans is not listed in EU data.
    3. Specific product definitions are seemingly irrational.  For example a t-shirt is defined as fine gauge cut & sew pullover collarless shirt except wheh it is white, short sleeve, round neck, in which case the “T-shirt” ceases to be a “T-shirt and become underwear.
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One Response to Benchmark Study III: India’s garment industry and the Public Welfare

  1. Keerthi Abe says:

    “Cost is all about overhead, and overhead is all about productivity” reminds me Goldratt, who said in The Goal: An hour saved at the non-bottleneck is a mirage.”

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