Leather Exports India

Indian Leather Exports Past Present and Future

Shiv Prasad Chauhan 1

Table of Contents Page List of Tables and figures …………………………………………………..... i Acknowledgements ………………………………………………………….. ii Executive Summary…………………………………………………………… iii

1. Introduction

………………………………………………….6

2. Status of Leather and Footwear Exports in Pre-liberalization era…7 3. Status of Leather and Footwear Exports in Post-liberalization era..8

4. Future……………………………………………………………..12

5. Conclusion……………………………………………………….13

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List of Tables and Figures Page Table 1.1 : Export Revenue Figures for duration of 1991 – 2008 Table 1.2 : Country wise exports of Footwear from India 2003-08 Fig. 2.1 : Pie chart for country wise exports Fig 2.2 : Current Exports and Future Projection upto year 2010 Fig 2.3 : Leather Footwear growth in past four decades

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Acknowledgements

This report is our effort in order to understand the Indian Foreign Trade in real terms and the impact of liberalization on performance of various domestic organizations, Indian exports and Imports and the trade deficit. This report is on the Performance of the Leather and footwear exports with detailed emphasis on the Pre-liberalization, post-liberalization, and future of the industry under the supervision and valuable guidance of the Prof. Nageshwant Roy Vaid. We as a group thank him for giving us opportunity to work on this mental stimulating topic.

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Executive Summary India is a founder member of the World Trade Organization (WTO) and is thus committed in moving in the direction of liberalization of trade in agricultural commodities. Quantitative restrictions on imports are being phased out and exports are also being liberalized. Both agricultural exports as well as imports are now permitted through private trade, except for a few commodities. There is lot of anxiety, interest and apprehension about the impact that trade liberalization may have on producers, consumers and the economy. The present study is an attempt to analyze the impact of trade liberalization on selected commodities and locations and it reviews production, marketing and trade-related policy concerning these commodities. It also discusses the strategy and prospects of trade liberalization to meet WTO obligations. The post liberalization era has opened up a plethora of opportunities for the Indian leather industry. With global players looking for new sourcing options (in addition to China, India stands to gain a bigger share of the global market.Leading brands from the US and Europe are planning to source leather and leather products from India. Global players who participated at the India International Leather Fair, 2005, consider India as the market to be in. The 2006 fair is being designed to focus on the opportunities for sourcing from India. India has a less than 3% share in the global trade in leather compared to China's 20%. Realizing the growth potential of the leather industry, the Government of India has been making significant efforts to promote rapid advancement of the industry. On June 30, 2005, the Cabinet Committee on Economic Affairs (CCEA) decided to implement a Rs 2.9 billion scheme for the integrated development of the leather sector. Under this scheme, existing tanneries will be modernized and new units will be set up for footwear, components and leather products. This scheme is expected to result in gains in terms of productivity, right-sizing of capacity, costcutting, and design-development.

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INTRODUCTION The Indian leather industry is spread over the formal as well as informal sectors and produces a wide range of products from raw hides to fashionable shoes. The industry comprises of firms in all capacities starting from small artisans to prominent global players. Specialized institutions like CLE (Council for Leather Exports) and CLRI (Central Leather Research Institute) have been set up to promote the overall performance of the industry. India ranks first among major livestock holding countries in the world and thus has a rich endowment of raw materials in terms of the cattle population. It has the capacity to fulfill 10% of the global leather requirement. A growing body of research indicates that trade liberalization by developing countries has raised their aggregate incomes. India offers an excellent case to study the effects of trade liberalization for two reasons. First, the magnitude of trade liberalization in India was very big. In 1991, after decades of pursuing an import-substitution industrialization strategy, India initiated a drastic liberalization of its external sector. The average tariff in manufacturing declined from 117 percent in 1990–91 to 39 percent in 1999–2000. The reduction in tariffs was much more drastic in India than in the trade liberalization episodes in Latin American countries like Mexico, Colombia, and Brazil. Second, the trade reforms in India were exogenous and came as a surprise. In response to a severe balance of payments crisis in 1991, India approached the International Monetary Fund for assistance. The IMF support was conditional on structural reforms including trade liberalization, which India launched. The government’s objectives when reducing trade barriers were given by IMF conditionalities. From an industry perspective, the target tariff rates were exogenously predetermined and policymakers had less room to cater to special lobby interests. Export of leather and leather products during 2004-2005 registered an impressive growth at US$2,380 million, exceeding the target of US$2,284 million fixed by the Commerce Ministry. Leather footwear is the leading product category driving the growth of the leather industry. In 2005, leather footwear alone accounted for 30% of the total export of leather and leather products from India. The post liberalization era has opened up a plethora of opportunities for the Indian leather industry. With global players looking for new sourcing options (in addition 6

to China), India stands to gain a bigger share of the global market. 4 Leading brands from the US and Europe are planning to source leather and leather products from India. Global players who participated at the India International Leather Fair, 2005, consider India as the market to be in. The 2006 fair is being designed to focus on the opportunities for sourcing from India.

STATUS OF THE SECTOR PRE-LIBERALIZATION ERA: India restricted the export of raw hides and skins in the Sixties. But the semi-processed EI (East India) hides and skins constituted the bulk of the export structure of the leather industry. The industry itself occupied the third or fourth place in the export structure with shipments around Rs. 184 crores, out of which semi-processed was Rs. 153 crores, finished leather Rs. 17 crores, leather footwear hardly Rs. 10 crores and leather garments and goods negligible in 1972. Raw hides and skins were brought from different centres including upper India to the numerous EI tanneries in Tamil Nadu, particularly to the erstwhile North Arcot (now Vellore) district. The Kolkata region had also developed a new process known as the `wet-blue', a shade better than raw but nowhere near the EI, and as a result a large number of tanneries were concentrated there but next only to Tamil Nadu. The erstwhile Soviet Union was the main purchaser of the `wet-blue' and the `EI' was being bought by Western Europe. These semi-tanned EI hides and skins were being brought largely in London, further processed if necessary, graded and sold to the users in West Europe; a typical colonial pattern of the Englishman's burden in order to ensure correct quality to the users for producing leather products in Europe. A. Nagappa Chettiar was not only the biggest exporter at that time, but also a pioneer in changing this colonial pattern of trade. He established direct contact with the users in Western Europe and did away with the middleman in London and many other tanners from Tamil Nadu followed suit. He was also advocating the leather industry's upward movement towards value-added exports in the form of finished leathers and leather products although no one took him seriously because it was easy and profitable to export semi-processed leathers. There was also a North-South divide in the leather industry at this time because the cheap footwear and leather goods industry was concentrated in the North and Western India and they felt that the raw hides and skins were being taken away to Eastern and Southern India and 7

exported as semi-processed leathers. If these leathers were available to them in finished form at least, they could add value and export in the form of quality footwear, leather goods and garments. This manifested in the form of establishment of an Export Promotion Council for Finished Leather, Footwear and Leather Goods at Kanpur. The Madras Leather Export Promotion Council was essentially, if not exclusively, a semi-processed exporters' body.

The 1972 Aannual International Leather Fair of Chennai was international only in name as only one or two machinery manufacturers from abroad participated. The Deputy Minister for Commerce, the late A. C. George (a Harvard MBA) inaugurated the fair and the fashion parade and was greatly mesmerised by the beautiful leather garments on the attractive models. He expected that these were produced in large numbers in Chennai. When he learnt that it was not the case, he wanted a note immediately to re-organise the industry in order to encourage valueadded exports. An informal note was given suggesting restrictions on the export of semiprocessed leathers and fiscal incentives for switchover to finished leathers. The Government was constrained to appoint a committee under the then DGTD, Dr. Seetharamiah, who was also a leather expert. The committee went into the entire question and recommended that the time had come to restrict the export of semi-processed leathers and a number of incentives should be provided for a smooth switchover. A quota system for phasing out export of semi- processed hides and skins was introduced in 1973. Shipment of raw hides and skins was already banned. It should be noted here that the EU leather lobby tried hard to stall the new policy. But the Central Government stood firm in the welter of opposition.

POST-LIBERALIZATION ERA: India has experienced transformation from the regime of regulated economic development to competitive regime since the liberalisations of 1991. The main thrust of these liberalisations has been on industrial delicensing and openness, that is, import liberalisation and removing barriers to exports for accelerating growth. In July 1991 major economic reforms were undertaken with the objective of transforming the regime of regulated economic development to competitive regime for accelerating economic growth. The new policies have liberalized many government controls on production capacity, 8

imported capital goods, intermediate inputs and technology. The main thrust of these reforms has been on openness, that is, import liberalisation and removing barriers to exports. As the process of liberalisation is taking deeper roots with the continuous on going economic reforms, changes in the structure of Indian industries are inevitable. The reforms may increase import penetration or these may force domestic producers of some industries to improve their efficiency in order to meet the threat from imports and thereby contribute to domestic demand expansion. Import liberalisation may facilitate easy import of better intermediates and capital goods but this may adversely affect domestic suppliers of intermediate products. Post liberalization era has shown a remarkable increase in the domestic demand as well as the export expansion. The figure showing the export revenue generated by leather and footwear industry over the duration of 1991-1998 is collected from the Indian Export Portal and DGCI&S which is tabulated as follows:

Table 1.1 Exports (Rs m) 1991-92 to 2007-08 Year to 1991-92 1992-93 1993-94 1994-95 31277.6 36999.4 40760.2 50571.5 Leather & leather manufactures 8477.8 12013.5 Finished leather 19843.6 25117.9 17926.5 21305.2 Leather goods Leather garments 11434.0 11881.5 14355.9 17252.7 Footwear of leather Leather footwear component Year to 1995-96 1996-97 1997-98 1998-99 794333.4 873773.8 986597.2 1085314.8 Manufactured goods 58611.7 57006.3 61570.6 69887.8 Leather & leather manufactures 12419.9 10687.7 10994.4 11316.4 Finished leather 12128.9 10445.4 14394.7 18304.9 Leather goods 13834.7 15065.0 15802.8 15728.2 Leather garments 11386.8 11979.6 10476.8 12383.8 Footwear of leather 8127.4 7907.2 8937.3 10400.4 Leather footwear component Product

98-99

99-00

00-01

01-02

02-03

Footwear 575.49 606.60 638.57 655.35 625.25 %

7.05%

5.41%

5.27%

2.63%

03-04

04-05

05-06

767.73

910.77

1045.24 1236.91 1475.83

(4.59%) 22.79% 18.63% 14.76%

Growth 9

06-07 18.34%

07-08 19.32%

The figures in above table are showing a positive trend followed by the Leather and Footwear industry over the past years. But in the year 2002-03 the Expected growth in the Leather exports can’t be met and a negative figure emerged in the export figures. This is basically due the economic crisis prevailing over different countries at the period of time. Later on in the following years the figures and the growth percentage both increased considerably and in a health manner. When we look at the exports of Indian Leather and Footwear to different countries around the globe it has been found that the European Union and the USA are the major markets for Indian Footwear accounting for 79.95% and 9.22% share respectively in India’s total footwear export. The major markets for Indian Footwear are Germany 16.66%, UK 16.31%, Italy 15.32%, USA 9.22%, France 7.81%, Spain 5.10%, Netherlands 4.91%, Portugal 2.50%, UAE 2.48% and Denmark 1.18%. These 10 countries together accounts for nearly 81.49% of India’s total leather products export. More Detailed figures can be revealed from the following table give below th e pie-chart. Fig 2.1 India’s Exports of Footwear – Country-wise Share in Total Exports (200708) – Source: DGCI& S

Table 1.2 Country-wise export of Footwear from India – 5 years (Value in Million US$)

CAGR

Growth Country 2003-04 2004-05 2005-06 2006-07 2007-08 % Germany

146.23

164.73

170.97

10

217.23

245.92

13.87%.

UK

154.44

192.62

195.78

208.2

240.77

11.74%.

Italy

107.65

103.63

134.35

186.11

226.10

20.38%.

USA

89.17

107.34

131.07

127.15

136.01

11.13%.

France

50.84

64.84

74.48

99.81

115.24

22.70%.

Spain

38.06

46.86

63.7

64.57

75.22

18.56%.

Netherlands

20.09

20.03

32.96

48.57

72.49

37.82%.

Portugal

15.12

18.75

22.15

35.03

36.86

24.95%

UAE

14.94

18.36

25.78

34.64

36.61

25.11%

Denmark

11.7

13.75

18.37

14.65

17.44

10.49%

Australia

8.44

8.00

11.58

10.11

12.48

10.27%

Sweden

6.29

6.95

6.77

7.99

12.04

17.62%

Canada

8.71

9.84

11.95

10.91

10.41

4.55%

South Africa

7.23

6.72

8.26

12.11

8.54

4.25%

Japan

2.01

2.55

3.17

3.07

4.63

23.19%

Others

86.81

125.8

133.9

156.76

225.07

26.89%

910.77

1045.24 1236.91 1475.83 17.74%

Total 767.73 Source: DGCI&S

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FUTURE When I was going through the Indian Footware Industry – A Vision Document 2010 released by DGCI&S I found that in future Leather and Footwear exports are forecasted and expected to increase due to various favourable policies of government to support and promote the export of leather and leather products to the other countries. The leather and footwear industry is surely having a promising bright future ahead some of the facts to support this fact are underlying below: Footwear is the engine of growth of the leather industry, currently accounting for an export value of US$1212 million, holding a major share of 41% in India’s total leather trade. Considering this fact, we have set an ambitious target of US$ 4.5 billion in respect of Footwear export from India by 2010-11 where the overall export of leather products will reach US$6.98 billion, wherein footwear alone will account for a share of 65% in India’s total leather export trade. The Footwear exports for the year 2008-09 was 2597.60 million US$, which will be outshine by the figures expected in the preceding years i.e. in 2009-10 the export figures are expected to be 3428.83 million US$ and in 2010-11 it will rise to 4526.05 Million US$. So the trend of Footwear exports can be represented graphically as follows: Fig 2.2 Current Export of Footwear and Projections by 2010-11

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CONCLUSION One of the intriguing questions of history is why India failed to industrialise as rapidly as some other countries. By 1914, India had the third-largest railway network, the world's largest jute manufacturing industry, the fourth-largest cotton textile industry and the largest canal system. India controlled 2.5 percent of world trade. It also had a merchant class consisting of businessmen like G. D. Birla and Kasturbhai Lalbhai who made huge trading profits during the First World War and reinvested them in setting up industries. In his fascinating book, “India Unbound,” Gurucharan Das outlines the reasons for India’s slow progress. One problem was agriculture, which remained stagnant. “You cannot have an industrial revolution without an agricultural surplus or the means to feed a rapidly growing urban population.” Moreover, after India won freedom, Jawaharlal Nehru and his planners attempted to industrialize the country through the state. Not trusting private entrepreneurs, they made the state the entrepreneur. There were at least six things wrong with India's development strategy. One, it adopted an inward-looking, import-substituting path, rather than an outward-looking, export-promoting route. Two, it set up a massive, inefficient, public sector to which it denied operational autonomy, resulting in heavy unproductive investments. Three, it over regulated private enterprise with the worst controls in the world, leading to diminished competition. Four, it discouraged foreign capital, denying itself the benefits of technology and world-class competition. Five, it pampered organized labor to the point where the country had extremely low productivity. Six, and perhaps most important, it ignored the education of children. The biggest hurdle was the prevailing philosophy in the pre-liberalization era formulated and popularized by Mahatma Gandhi and Pandit Jahawarlal Nehru according to them Small companies are better than big ones (Gandhi); public enterprises are better than private ones (Nehru); local companies are better than foreign ones (both). They so mesmerized the society that their ideas remained live and kicking even after they passed away. Despite all this post-liberalization era has made a considerable contribution in making the exports a primary objective to earn the forex for the country. The Performance of the Leather and Footwear exports over the last decades can be represented with the help of following graph: In July 1991 major economic reforms were undertaken with the objective of transforming the regime of regulated economic development to competitive regime for accelerating economic 13

growth. The new policies have liberalized many government controls on production capacity, imported capital goods, intermediate inputs and technology. The main thrust of these reforms has been on openness, that is, import liberalisation and removing barriers to exports. As the process of liberalisation is taking deeper roots with the continuous on going economic reforms, changes in the structure of Indian industries are inevitable. The reforms may increase import penetration or these may force domestic producers of some industries to improve their efficiency in order to meet the threat from imports and thereby contribute to domestic demand expansion. Import liberalisation may facilitate easy import of better intermediates and capital goods but this may adversely affect domestic suppliers of intermediate products. The Footwear exports for the year 2008-09 was 2597.60 million US$, which will be outshine by the figures expected in the preceding years i.e. in 2009-10 the export figures are expected to be 3428.83 million US$ and in 2010-11 it will rise to 4526.05 Million US$. Footwear export has increased from US$40.15 million in 1977-78 to US$ 1475.83 million in 2007-08. The leather and footwear industry is surely having a promising bright future ahead as can be seen in the Indian Footware Industry – A Vision Document 2010 released by DGCI&S. The Indian government is planning to bring the Leather and Footwear Exports under the regulation of the EXIM Policy so as to motivate Indian exporters by providing them special services and other incentives and make policy to promote exports to other countries. A general trend graph is shown below to make the understanding more clear and support my view. Fig 2.3 India’s Footwear Export Growth over the last Four Decades

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