09th November 1997

'Local textile industry on road to grave'

By Mel Gunasekera

The budget decision to abolish import duty on fabrics has brought out an outcry from the domestic textile industry.

Ceylon Textile Manufacturers Association Chairman A Y S Gnanam told the Sunday Times Business, "the budget decision is killing the industry. We won't be able to run our companies, because people will find it cheaper to buy fabric imported from China, rather than what is manufactured here."

Since the budget proposals were announced, the association has met several ministers to seek redress.

"We are in a situation where we have to look for the road to Kanatte," a dejected Mr. Gnanam said.

The Ceylon Textile Manufacturers Association (CTMA) in a newsletter last month warned that, the removal of duty on imported fabrics would result in the demise of the textile sector.

"It will be a unique experiment undertaken by a government anywhere in the world. No country in the world including the most liberalised regime has adopted a 'Duty Free' system for textiles. On the contrary, apart from 'duty', they also adopt from time to time, other measures in the form of anti-dumping levies, surcharges quota systems, to protect the textile sector and its important place in their economies," the newsletter said.

The domestic textile manufacturing industry employs more than 30,000 people with a capital investment of over Rs. 5 bn. A furher Rs. 3.6 bn of borrowed capital (banks and other institutions) for modernisation of this industry is also at stake, Mr. Gnanam said.

Industry officials say around 60 small and medium-scale textile manufacturing establishments and about five large-scale units have virtually halted their operations. Even the remaining units are operating at less than 50 per cent capacity, with the hope that the government will provide some remedial action.

Despite concessions and an international investment promotion campaign by the BOI, there has not been significant foreign investment in the textile industry in Sri Lanka, the newsletter said.

"It would be foolhardy to think that there will be an influx of foreign investment in domestic textile manufacturing once the textile imports are made duty free."

Apparel exporters have also highlighted that the domestic textile industry was not strong to meet the challenges of the export industry. At present, 95 per cent of its inputs (including textiles) are imported. Apparel exporters say the domestic textile industry has not modernised and expanded its capacity, production and quality, despite the protection provided by successive governments.

Some apparel exporters even said, that if the domestic textile industry was to close down, they were prepared to absorb the entire workforce.

However industry analysts say most local textile manufacturers are using antiquated equipment and heavy investment in hi-tech equipment is needed to improve the quality of local fabrics and bring down costs. The government has also proposed a credit scheme for textile makers to import new equipment.

Others say the existing tariff barrier was providing only marginal protection to local manufacturers since there was widespread smuggling and leakages of duty free textiles.

Deputy Finance Minister G. L. Pieris in his budget speech on Wednesday said only Rs 700 mn had been collected as duty last year and nearly half had been paid by the government. Most of the tariff barrier is believed to have been creamed off by smugglers.

"The biggest losers will be smugglers and corrupt officials," one analyst said.

The most telling success story among local textiles firms is Kabool Lanka. The former state-owned Thulhiriya textiles mills was turned around by the Korean Kabool group with heavy capital investment.

However its success had been a hard act to follow. Others such as Pugoda, Veytex and Kuruwita have not been able to export or compete with imports successfully.

South Lanka Textiles, a major foreign investment project also found itself deserted by their owners. The local investors who bought the company have managed to keep the firm going with some success.

Even the top blue-chip Hayleys which ventured into textiles has run into difficulties demonstrating how difficult it is to compete with international producers.

Budget boost for agriculture

The Budget for 1998 was a consoli dation of the fiscal strategy of pre vious budgets with some minor changes. The fundamental weakness of the country's public finances left little room for more positive measures or even a significant improvement in the budget deficit.

These weakness arise out of the huge public debt and its costs of servicing, the continued high defence expenditure, increasing costs of administration and the large expenditure on welfare programs. If not for the slightly reduced debt serving costs owing to lower interest rates and the sale proceeds of public enterprises, this years budget could well have been less palatable.

There are some notable changes. While holding onto the need for controlling the fiscal deficit, the government has recognised the need for targeted new expenditure and incentives.

It has departed to some extent from the philosophy that getting the macro economic fundamentals correct would suffice to usher higher growth.

This budget attempts to pick the winners and help losers. It targets expenditure to some selected regions. Agriculture, an ailing sector is expected to get new investments .Small industries are to get favoured treatment and a Mini-Premadasa type of garment factory program is put in place.

These departures are likely to be welcomed by many and perhaps frowned upon by the IMF. The undeniable fact, however, is that the efficacy of these measures would depend so much on effective implementation rather than budgetary propositions.

The focus on agriculture is certainly much overdue. It was most crucial that agricultural efficiency should be enhanced at this critical time when the country is expected to join SAFTA.

The budget speech specifically recognises the need to buttress our infrastructure for agriculture to make ourselves competitive. Besides the issue of agricultural trade and competitiveness, half of Sri Lanka's battles on the economy would be won if an efficient agriculture could ensure higher incomes for farmers and lower prices for consumers.

Research , extension and marketing have been earmarked for a new thrust and it is hoped that these programs would be expeditiously and effectively implemented. The range of measures for the development of agriculture, is fairly extensive. The release of government land for agricultural farms is indeed a positive measure.

Yet as it often happens the actual process of obtaining land is so cumbersome, politicised and corrupt that many entrepreneurs opt out. Inter-cropping on coconut land has moved at a snail's pace. Will the new infusion of Rs100mn get it moving ?

The minimum producer price scheme should assist in inducing farmers to expand their production of the selected crops, but will the credit guarantee ensure an institutional ability to extent credit ?

These measures for the development of both large and small scale agriculture are most welcome, but the government must be fully aware that these measures could come to nought, if they are badly implemented.

It is vital that the government energises, motivates and encourages the implementation and monitor the progress of the agricultural program.

Small industry is expected to get a boost by the lower rate of taxation. Yet since tax evasion is more the rule than the exception, it is not quite certain whether such a measure would have an impact in increasing production. At least we hope that more enterprises will operate their businesses within the tax orbit and that the government's revenue would increase.

Such a low rate of taxation could perhaps result in small enterprises conducting their business in a more organised and professional manner. This may itself lead to small enterprise development.

The reduction of the rate of corporate taxation to less than 30 per cent would have to await an improvement in the overall revenue - expenditure situation. So must the removal of the national defence levy. These two could indeed boost company profits and corporate savings and investment, yet, in the context of the country's huge defence expenditure it is understandable why these concessions could not be made.

Budget 1998 has once again made it very clear that the government has placed its reliance on private enterprise. Many are the measures which indicate this. It is also heartening that the government is willing to take a pro-active role to help the disadvantaged sectors and correct some of the imbalances which have occurred particularly with respect to agriculture.

If this budget succeeds in resuscitating a demoralised agriculture it could have achieved a major breakthrough. Yet what agriculture needs is not budgetary pronouncements but implementation at ground level.

Continue to Business page 3 * Boost for equity but blow for debt market * CIMA takes measures to win faith on corporate accounts

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