The high cost of finance has been a major barrier for growth of the textiles sector, in a bid to counter torpidity in exports due to stiff competition, the Union textile ministry is contemplating interest subvention of 3.5 percent on the working capital loan for garment companies

Rashmi Verma, secretary, Union textiles ministry said that in order to boost the textile sector, they have announced several incentives in the last few months. The major area of concern, however, remains high cost of production because of elevated interest rates on working capital.

Some interest subvention has to be given to the textile sector to make India’s products competitive vis-à-vis other countries such as Bangladesh and Vietnam where capital is availed to the textiles players at much lower interest rate than those here.

According to trade sources, borrowing working capital at high interest rate keeps product prices up, resulting in lowering India’s competitiveness in the world market. As a consequence, countries with lower interest rate regimes, such Bangladesh, Vietnam, Ethiopia and Indonesia, are taking advantage of growth in the global textiles sector.

Despite repeated efforts by the government to promote export through various sops, only about $40 billion of textiles per year have been supplied by India to the global market over the past several years. In fact, this year, textile imports are expected to decline to $40 billion from $42 billion last year, mostly because of the global economic slowdown.

To address the concern, the textiles ministry has sent a proposal to the finance ministry to chalk out working capital availability at a maximum interest rate of seven per cent, said textile ministry Secretary Rashmi Verma.

Rashmi Verma further that the textile ministry is of the view that the working capital should be made available at attractive rates — such as prevalent in Bangladesh or Vietnam, if not less, to make India competitive.

As most textile units are small and fragmented. These avail no economies of scale and have low productivity.

She also emphasised on increasing value addition locally and reducing exports of raw materials like cotton and yarn in addition to tax holidays to textiles mills to compensate the loss incurred through free-trade agreements.

Dilip Jiwrajka, managing director, Alok Industries, in a recent interaction, had estimated average interest rate on working capital between 10.5 and11 per cent, and had urged the government to bring it down.

Jiwrajka further added that when the Technology Upgradation-Fund-Scheme was introduced first in early nineties, the average interest rate on working capital was offered at three percent, which brought lots of investment into the textile sector. But, now the interest rate has surged to around 11 percent, which has made servicing the debt difficult.

Recently, India introduced the amended TUFS for attracting more investment. The government has also announced the inclusion of man-made fibre for up to 15 percent in exports to get benefit of duty drawbacks.

The textile sector contributes nearly seven percent to India’s gross domestic product, and 13 percent to merchandised exports.