The textile and apparel industry in India has faced challenges due to political factors resulting from international trade expansion and global trade regime liberalization. The Government of India (GOI) responded by implementing various initiatives, including the National Textile Policy (NTP) 2000. Introduced in 2000, the NTP aims to enhance industry competitiveness and increase India’s share of global textile and apparel exports to 10% by 2010, a substantial growth compared to its current level of only 3%.
The Government of India (GOI) has taken steps to boost the Brand Accessory Industry, which includes the label and packaging sector, in order to improve brand value. Under the NTP 2000, the GOI removed ready-made apparel articles from the list of products exclusively reserved for Small Scale Industries (SSI). As a result, foreign companies are now allowed to invest up to 100 percent in the apparel industry without any obligation to export goods. This policy also applies to the Label & Tag industries within the Branding Sector.
The Government of India (GOI) approves proposals involving foreign equity up to 51% in manufacturing textile products or related branding items in composite mills within 2 weeks. The Reserve Bank of India (RBI) grants automatic approval for foreign investment ranging from 50% to 100% in priority industries/activities. Trading companies primarily engaged in export activities can also receive automatic approval for holding equity up to 51%.
100% Export Oriented Units (EOUs) and units established in designated Export Processing Zones (EPZs) are granted automatic approval if they satisfy the specified criteria. Likewise, foreign technology agreements are also qualified for automatic approval within certain limitations.
Tax Policies
India possesses a well-established tax framework wherein both the Central Government and State Governments have the power to levy taxes. The Central Government imposes direct taxes like personal income tax and corporate tax, as well as indirect taxes encompassing customs duty, excise duty, central sales tax, and service tax.
States have the power to enforce professional tax and state sales tax, along with other local taxes like entry tax and octroi. Foreign collaboration and investment are subject to both direct and indirect taxation. Although customs, excise, and sales tax do not directly impact investment income, income tax has a substantial effect on investment strategy. Tax policies also play a vital role in the Branding Solution Industry, including corporate tax liability.
Income earned worldwide is taxable for Resident Organizations incorporated in India or those with their entire management and control within India. However, non-resident corporations (foreign companies) are only taxed on income generated in India from operations conducted within the country, income originating in India, and income received in India. The tax rate may vary based on the company category (domestic or foreign). Foreign collaborators are typically considered non-residents unless their affairs’ control and management solely exist in India. Additionally, there is a provision for Minimum Alternate Tax (MAT).
The Minimum Alternate Tax (MAT) rate is currently set at 7.5% on the book profits of companies if their normal tax rate is lower than this percentage. Foreign investors who want to establish production or manufacturing facilities in India must take into account excise duty, a tax imposed on goods produced within the country. The Central Excise Act of 1944 and the Central Excise Tariff Act of 1985 regulate this duty. The term “manufactures” refers to the creation of a new article with a distinct name, character, use, and marketability.
Both basic excise duty and special excise duty are charged at a consistent rate of 16 percent. The Excise law guarantees a CENVAT Credit Scheme to reduce the effect of duty on excisable goods utilized as inputs/capital goods for manufacturing other excisable goods. Within this scheme, businesses have the option to claim CENVAT credit on excise duty, special excise duty, and additional custom duties on raw materials and capital goods, irrespective of whether they were domestically purchased or imported. This credit can be used towards settling the final product’s excise duty.
Customs duty, which is imposed on the import of goods into India, has been decreasing in recent years, allowing for the unrestricted importation of raw materials for the production of Labels & Tags. Additionally, various other taxes are enforced by the central and state governments. These include stamp duty on asset transfers, state-imposed real estate taxes, and municipality taxes on real estate within their jurisdiction, as well as octroi on goods entering their jurisdiction. Another tax to consider is the Value Added Tax.
If garment manufacturing vendors outside India are supplied with tags, there are no charges for Central Excise and Value Added Tax (VAT) in addition to the basic cost and freight charges. However, if the tags are supplied to vendors within India, payments are made using a Delivery Voucher (Form 515) along with a consolidated Invoice. In these cases, Central Excise and VAT can be avoided if Form H for Commercial Taxes (VAT) and Form CT3 (for Central Excise) are provided. The duty and tax rates for tags and stickers are as follows: Central Excise is 8.4% for tags and 16.48% for stickers. VAT is 4% and CST is 3% with Form C, and without Form C it is 10% (though these can be avoided if the garment manufacturer provides Form H for exports). These duties and taxes can be avoided if the invoice is directly sent in Euros and the supply of materials is done in either India or outside India.
Economic factors: Since the economic restructuring and liberalization of the Indian Economy in 1990, India expects rapid growth with long-term sustainable market expansion, increased manufacturing output, and investment opportunities.
The Government of India (GOI) has implemented economic reforms to liberalize industrial licensing and investment procedures, reduce the public sector’s role in the economy, lower import duties, ease import licensing requirements, relax controls on foreign direct and portfolio investment, and improve capital market operations. These reforms have effectively increased India’s potential for economic growth. It is projected that India will soon achieve a 10% growth rate. In the past, India experienced significant growth progress with rates increasing from 4.5% in the 1980s to 6% in the 1990s and eventually reaching 8% by the end of the previous century.
The growth rate in India was approximately 9.2% in 2007 and 9.6% in 2006. This growth was driven by market reforms, an influx of foreign direct investment (FDI), increasing foreign exchange reserves, a rise in the information technology (IT) and real estate sectors, and a thriving capital market. Sustained investment and high savings rates also contributed to this strong economic environment. The percentage of gross capital formation in the GDP increased from 22.8% in fiscal year 2001 to 35% in fiscal year 2006, with the gross rate of savings as a proportion to GDP growing from 23.5% to 34.8% during the same period.
On the social side, wealth concentration among a small portion of the population has been observed in India. Additionally, due to positive demographics, buoyant economic growth, and wage inflation, India has seen one of the highest increases in high net worth individuals (HNIs) globally. It is projected that by 2025, India will have a total of 24 million exceptionally wealthy citizens.
The number of high net worth individuals (HNIs), or individuals with financial assets over US$1mn, has increased to 83,000. This reflects a growth rate of 19.3% and is attributed to positive demographics, buoyant economic growth, and wage inflation in India. As a result, India is experiencing one of the fastest increases in HNIs globally. Projections suggest that by 2025, India will have a total of 24 million wealthy citizens.
Currently, there are 1.6 million households earning over INR4.5 million (USD100,000) per year and spending INR0.4 million (USD9,000) annually on luxury products. This translates to a market size of approximately USD14.4 billion for luxury goods.
According to McKinsey Reports, it is expected that India’s middle class will grow from 5% to over 40% of the population within the next two decades. This positions India as the fifth largest consumer market with significant opportunities for private consumption.
The Indian Apparel & Fashion Industry serves different consumer segments, such as the expanding middle class and the elite class, resulting in a flourishing market for local and international retailers and brands. As a result, the Branding Solution Industry has experienced significant growth. Furthermore, on April 1, 1999, the Government of India (GOI) implemented the Technology Upgradation Fund (TUF) to encourage investments in new textile and apparel technologies.
Financial support is available for the Label & Tag Industry, which heavily depends on the apparel and fashion sector. This program aims to assist in the production of labels, including woven labels, care labels, and printing. Eligible firms can receive loans at interest rates that are 5% lower than those offered by specific financial institutions in India. The loans can be used to upgrade technology and textile machinery necessary for label manufacturing.
Officials from the Government of India (GOI) have implemented an interest rate incentive to bridge the gap between domestic and international capital costs. The Reserve Bank of India (RBI) has also granted automatic permission for foreign technology agreements in electronics, specifically radio-frequency identification (RFID). However, this permission is only valid for technology priced below USD 2 million, with royalty payments not exceeding 5% of domestic sales and 8% of exports. Any proposals that deviate from these guidelines must seek government approval through the Foreign Investment Promotion Board (FIPB) for foreign direct investment (FDI) or foreign technology collaboration agreements.
The government has established a special FIPB (Foreign Investment Promotion Board) as a means of expediting and facilitating foreign investment in significant projects that are deemed advantageous for India but do not qualify for automatic approval under SIA (Secretariat for Industrial Assistance) guidelines. In the apparel industry, a five force analysis reveals that the bargaining power of suppliers is influenced by factors such as supplier concentration, volume importance, and the potential for forward integration, ultimately impacting their ability to exert power.
There is a concentration and significant risk of forward integration affecting the buyer’s profitability in the textile and apparel manufacturing sector in India. This sector is characterized by a high number of suppliers who mostly operate independently on a small scale, resulting in fragmentation. This fragmented structure reduces the power of Indian suppliers due to their limited ability to achieve economies of scale. Nonetheless, there are also a few large domestic suppliers in the Indian market.
The Raymond group, which started as a textile manufacturer in 1925, has expanded its operations to include multiple apparel retail companies. The challenge for new entrants lies in gaining supply side economies due to the high fragmentation of small suppliers. However, foreign retailers may source from a few large domestic suppliers and achieve economies of scale. These suppliers pose a threat of forward integration into the retail sector, becoming formidable competitors. The bargaining power of customers is currently on the rise.
Within the apparel industry, customers are gaining more awareness of different brands and products. This has resulted in heightened competition, prompting a decrease in prices across various product lines and brands. To entice consumers, many brands are now providing substantial discounts. Additionally, customers are placing greater emphasis on the brand when making purchases and frequently switching between different ones. The market is saturated with private label brands, unbranded items, and numerous local brands, expanding customer choices for selecting products.
The intensity of rivalry in an industry is influenced by factors such as industry growth, industry concentration, diversity of competitors, and product differentiation. High rivalry can lower industry profitability by affecting prices and competition costs. However, a fast-growing market can present revenue opportunities. Since 2006, trade liberalization has resulted in a surge of foreign retailers entering the Indian apparel retail industry.
The market has seen a significant increase in competition due to the abundance of growth opportunities. Industry concentration indicates the number of companies operating within the same markets. If these companies have comparable market shares, competition becomes more intense, leading to decreased profitability. In India’s unorganized retail sectors, numerous mom and pop stores compete within similar markets. The existence of various types of retailers in India contributes to diverse competition.
Due to the prohibition of multinational retailers, domestic retailers now dominate department stores and hypermarkets. On the other hand, foreign retailers mainly operate in specialty stores and shopping malls. Competition within the organized sector is fueled by various factors including store size, product range, customer service quality, and overall store atmosphere. Consequently, the retail industry is witnessing growth through an augmented number of shopping malls and retail chains. In order to increase their market share, larger retailers are expanding their presence across multiple regions by improving their supply chain system.
The entry of foreign retailers and increased competition lead to more product options and market improvements. Foreign apparel retailers focus on young urban consumers by offering innovative and different products in western style. On the other hand, domestic retailers provide a mix of traditional and fusion clothing brands, with a higher adoption of western attire for men’s and women’s clothing. Specifically, branded ready-to-wear men’s clothing accounts for 40% of their total purchases.
Although the deregulation of Foreign Direct Investment (FDI) presents better opportunities than ever, the government is still safeguarding domestic industries by imposing some restrictions on diversity competition and delaying the further development of the retail industry. One of the main concerns for existing firms is the potential threat posed by new competitors. These new companies often bring new resources and have the ability to drive down product prices, therefore reducing industry profitability. As a result, incumbent players try to increase the threat for new entrants by creating barriers to entry.
The threat of new entrants is heightened under certain conditions: 1) when incumbent players achieve economies of scale, 2) when switching costs are high, 3) when there is limited access to distribution channels, 4) when there is a cost disadvantage, and 5) when government policies favor domestic firms. The following discussion focuses on these entry barriers specifically for foreign retailers planning to enter the Indian apparel industry.
When existing firms achieve significant scale economies, it becomes more challenging for new entrants to compete. There are two types of scale economies that can act as barriers to entry: supply side and demand side scale economies.
Supply side scale economies occur when firms with high production volumes achieve cost advantages by distributing fixed costs over increasing units of output, employing more advanced technology, or negotiating better terms with suppliers. In India, retail sales are primarily controlled by unorganized retailers, predominantly consisting of small mom and pop stores that lack significant purchasing power or capability to leverage economies of scale. Conversely, organized domestic retailers operate on a larger scale, providing a diverse selection of apparel products, shoes, and home decor.
The significant domestic retailers have attained economies of scale on the supply side due to their substantial ordering volume and widespread market presence. However, the structure of the supporting industries has hindered the realization of additional scale advantages. In particular, the Indian textile sectors, including the garment industry and apparel manufacturing sector, suffer from high fragmentation, with numerous small production units dispersed throughout the country. This situation has resulted in insufficient modernization and limited marketing capabilities, making it challenging for apparel retail chains aiming to achieve economies of scale.
The increase in customers’ willingness to pay for a company’s products, also known as demand side scale benefits or network effects, is evident. Larger firms with a large customer base gain the trust of buyers who prefer to be part of a large network of customers. In India, domestic retailers benefit from network effects due to their presence in the market, established customer base, and understanding of Indian customers. These retailers have secured their position in the competitive market by expanding geographically or partnering with foreign brands to target specific niche segments. Foreign retailers can enter the market by promoting the unique qualities of Western products and the emotional or symbolic value of foreign brands. However, the high switching cost acts as a deterrent for new entrants.
When buyers change vendors, they usually have to modify product specifications, processes, information systems, and train employees on the new product, process, or system. This results in extra costs for the buyer. However, in apparel manufacturing, labor is more important than specialized equipment. As a result, switching expenses are low.
In addition, foreign apparel retailers may be interested in changing to local suppliers because Indian textile vendors can meet the intricate demands of foreign retailers.
The textile industry in India is the seventh largest in the world in terms of production and trade. It is a crucial component of the Indian economy, with an annual growth rate of 20%. When it comes to jute production, India holds the leading position globally. Moreover, it is the second largest producer of cotton, silk, and cellulosic fiber. Additionally, it ranks fifth in manmade fiber production and sixth in clean wool production. These achievements can be attributed to factors like a skilled workforce and ample availability of raw materials.
India is a favored manufacturing destination for several foreign companies such as Nike, Tommy, and Walmart. The main distribution channels for apparel retailers include specialized stores, department stores, and shopping malls. Although all of these formats exist in India, there has been a rapid growth of mall spaces in major cities. To cater to the increasing demand for international luxury brands among Indian consumers, numerous projects are underway to attract more foreign brands.
India’s first luxury mall. The proliferation of a gray market for domestic and foreign brands presents a serious threat of substitute products for both existing players and new entrants. The availability and market structure of the Indian apparel sector make it highly susceptible to substitutes, especially considering the significant portion of Indian women who are consumers.
Indian apparel consumers who prefer traditional clothing have a variety of options to shop from, both from domestic and foreign retailers. These retailers can consider incorporating small unorganized retailers as well as large conservative designs and local tastes into their product lines, targeting both domestic and foreign consumers. Additionally, small domestic retailers, such as homemade or custom-made brands, are also increasing their competitiveness by embracing a self-service approach. This approach appeals to Indian consumers who are looking for a substitute to readymade garments and prefer clothing from local tailors due to the availability of low-cost fabrics. The existence of a large number of tailors in all Indian cities serves as an indicator of increased competition among existing players and creates a need for new entrants to deliver better and unique alternatives to attract Indian consumers.
The tax exemption and low prices of low priced merchandise reduce the switching cost incurred by buyers. Indian consumers have a high propensity to substitute brands, seeking value and performance at a competitive price. This is driven by the geographic location and the cultural proximity of offerings from unorganized retailers.
