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An Investigation of Budget 2012-13 for the Textile & Apparel Industry

Time has came once again like every year to analyze what new traits and attributes are waiting for the textile and garments industry in forth coming fiscal as the finance minister AMA Muhit proposed the National Budget for 2012-2013 in the parliament on Jun 7. The budget is set to be passed on Jun 28 after discussions and adjustments. The budget is worth Tk. 1.90 trillion which has been increased by 17% from the last fiscal. Experts are considering it pretty impossible to implement although the government termed it as a budget to trim down inflation. However, BTT is trying to uncover the upcoming alterations in the taxations, incentives and associated regulations in the industry and observations of the concerned authorities about the budget statements.

Introduction

From the first budget of this government it was robustly depicted that the economy of Bangladesh will be driven by innovative technology and diversified growth. The manifesto included that the commodity prices will be stabilized, income-poverty and human-poverty will trim down to the lower level, access to education and health services for all and a picture of a peaceful Bangladesh was crafted in the minds of common people. But as always the real scenario was different. The vision was to emerge as a digitalized country by ensuring innovative use of ICT. However, to what extent the promises were executed is known to all. Budget for the fiscal year 2012-2013 has a great political aspect that brings great challenges for the government to cater those promises given and to sustain with those amid a shaky world economy.

Anyway, we are not the right people to convey remarks about the entire budget or the reactions of the government; so let’s leave it for the experts and concentrate in our concerned area – how this budget can affect the textile and apparel industry. The industry as for long been the pioneer for earning foreign currency for the country involved in more than 80% of the total export earnings and employing more than 5 million workers. So, the budget is extremely vital for the industry and the concerned authorities always aye for business-friendly regulations.

Budget Summary

As the largest export oriented industry, textile and apparel sector is always influenced by the annual budget. With this new budget 2012-2013, government is saying to be trying to control the inflation, which is on high rise due to the global economic meltdown. Average inflation rate in the current fiscal was just above 10% and the new budget is directed hopefully to minimize it to single digit. The last budget 2011-2012 envisaged the average inflation rate within 7.5 percent. But according to a recent Bangladesh Bureau of Statistics (BBS) report published in April, the general inflation topped 10 percent in March, 2012. Due to the effect of rocket high commodity prices the industry has already been affected. Fresh labor unrest kept the industries of Ashulia to shut demanding further raise of the wages even before the completion of 7 months after the declaration of previous raise. Previous wage raise ranged 70-85% on their previous summation.

Price of grid electricity for industries is likely to increase as well. Gas price yet has not yet increased for the industries but the government has hinted the raise as well. Hence, coming year could be a year when the industries may need to be prepared to pay more for energy and fuel.

The energy and power sector is said to get the highest priority and importance in the budget; we will get on to that as it is in fact the most important issue to talk about when the textile industry is concerned. Government has no way but to try cut the subsidy on electricity which means oil prices will be adjusted with international market as Bangladesh depends on fuel import. This will eventually increase the oil price which is currently on lower side comparing to the international market. Price of diesel and furnace oil will affect the industry as there are good numbers of factories running such generator. Price of grid electricity for industries is likely to increase as well. Gas price yet has not yet increased for the industries but the government has hinted the raise as well. Hence, coming year could be a year when the industries may need to be prepared to pay more for energy and fuel.

Textile industry owners and textile engineers has demanded fund allocation in national budget for 2012-13 for the project of setting up coal-based power plants to ensure uninterrupted power and gas supply for textile industry. At a press briefing, they said if government could ensure uninterrupted power and gas supply for textile industry, they would produce three times more than their present output. The garments industry has also been suffering from power crisis as government is supplying only 406 MW to the industry which accounts only 50% of the total demand. As a result the garments industry is also depended on captive energy that accounts for 250 million dollar additional cost every year.

Though there is no or very little progress in formulating laws and policies on coal extraction and import, winning international legal recognition of our rights and sovereignty over the 200 nautical miles exclusive economic zone and the adjacent continental shelf in the Bay of Bengal is something to cheer about. Opportunity is now open within the maritime boundary for exploration of oil and gas which is considered as an immensely potential area to discover energy source.

Let’s take a look at the power generation plans revealed in this budget 2012-2013 in a chart:

A master plan to produce 8294 MW of electricity by 2013.
Agreements have already been signed to set up 52 power plants both under public & private sector. These plants are supposed to go for production by FY 2013-2014.
Another 30 plants having a capacity of 5600 MW are is in progress to be installed and they are supposed to add to the national grid by FY 2015-2016.
A plan to generate 700-800 MW of additional electricity by undertaking BMRE of old gas fired plants by February 2015.
250 MW of electricity would be imported from India by 2013.
Import of electricity from Myanmar, Nepal and Bhutan is also under way.
Constructing coal based power plants with a capacity of 2938 MW under joined venture investment by 2016.
An initiative has been taken to produce at least 5000 MW of electricity from nuclear energy by 2030.
Plan to produce 500 MW of electricity from renewable energies by 2020. In this trail 70 MW of electricity already have been produced from renewable energy sources under public and private sectors.
And last but not the least, a plan to save at least 350 MW of electricity by adopting various energy saving measures.

The budget has targeted the economy to grow at 7.3 percent (GDP growth) which already has been termed ‘impossible’ by World Bank. Current 2011-2012 fiscal year GDP growth rate target was 7 percent, which in reality is turning out to be 6.7%. GDP projections from the ADB saw growth in Bangladesh declining to 6.2 per cent, and those from the IMF forecasts growth rates as low as 5.5 per cent in the coming fiscal year. New national budget 2012-2013 will be in deep pressure due to pressure of huge deficiency despite the assurance of US $30 crore as budget assistance from Asian Development Bank (ADB). The remaining deficiency of Tk. 10 thousand crore for current fiscal year has already been transferred to the next budget which tells the story. Government is likely to increase borrowings from banking sector once again that will create another pressure on the investment scenario. Stagnant investment will impede the expected growth for sure. RMG sector has great opportunities which require more investment but budget has few incentives to encourage further investment in RMG industries.

Let’s see the development expenditure in a pie chart of the Budget 2012-1013:

Above chart shows that Energy & Power, Transport, and LGRD are consuming 55% of total money all together. That means infrastructure development can be expected from these expanses. Infrastructure development is very important for sustainability of the industry and for ensuring to utilize lied opportunities. But utilization of development budget will remain a great challenge like before as no remarkable improvement has made in governance so far. Relation with donor agencies like World Bank Group and European Union based agencies could not be improved as there are pending issues to be solved with them, hence their support and contribution for development can be sluggish for the next fiscal as well. It is to be seen, how the Indian and IMF fund to be spent for infrastructure development of the country and how those can improve the road & transport situation as well.

The government has been providing special incentives in the form of exemption from duty/tax, exemption from double taxation, imposition of tax at a lower rate, cash support and support from the risk mitigation fund for potential industries mainly textiles and garments. All of these assistants are directed to build a developed and responsible private sector. The government has also stated to continue the process of establishing new industries and restructuring the existing ones by injecting working capital and industrial term loans through bank and financial institutions. Up to 31st December of the current fiscal year, the amount of industrial loan distributed stood at Tk 25,060 crore.

To ensure balanced development and industrialization by encouraging both private and public initiatives the government has proposed to extend uniform tax holiday facilities to all industries established both in public and private EPZs. In the existing system only the Government EPZs have been enjoying this facility.

Another significant proposal has been made is to increase tax at source at a uniform rate- 1.2 percent form all kinds of exports which is 0.60 percent in the existing system. Hence, the concerned authorities termed it as discouraging for the exporters.
To encourage installation of effluent treatment plant (ETP) for preventing environmental pollution the government has proposed to introduce zero duty instead of the existing 1 percent for importing equipments and chemicals to install effluent treatment plants (ETP) for export oriented industries in the coming fiscal year.

There are some items for which supplementary duty has been increased. Duty for woven pile fabrics and chenille fabrics, terry fabrics, knitted or crocheted fabric has been increased to 60% which is 45% in the existing system. Knitted fabrics with elastomeric yarn or rubber thread and warp knitted fabrics (made on galloon knitting m/cs) has been imposed a supplementary duty of 60%. Men’s or boy’s overcoats, car-coats, capes, cloaks, anoraks, wind jackets, women’s or girl’s overcoats and similar articles have been imposed a duty of 60% which is 45% now. All kinds of metalized round yarn also have been proposed a supplementary duty of 20%.

Budget Reactions:

Economists and business leaders alleged that the proposed budget for fiscal 2012-13 has very high deficit that would force the government to resort to excessive bank borrowings, resulting in lower credit flow to the private sector and investment stagnation.  ‘With such a huge deficit, the government will have to go for excessive borrowings from banking channels which will create liquidity crisis and squeeze credit flow to the private sector,’ former Bangladesh Bank governor Salehuddin Ahmed told in an instant reaction to the budget.  The economist said there is a possibility of worsening political situation in the coming days and the government might have to borrow more from the banking sector. ‘These two things will have a negative impact on investment prospects.’

The Federation of Bangladesh Chambers of Commerce and Industry president AK Azad said, the overall deficit financing of the proposed budget would be Tk 52,068 crore, of which the government would borrow Tk 23,000 crore from the banking source to make up the deficit. Due to higher borrowing target from banking source, the banks would fall into a severe liquidity crisis and the interest rate on loan disbursement and deposit collection might be increased, he told in an instant reaction to the proposed budget at the FBCCI conference room in the capital.

Azad said the budgetary measure to increase the source tax on export goods to 1.2 per cent from 0.6 per cent would affect exports. He said ‘The country’s export sector is now facing a crisis due to the economic recession in Europe and the proposed source tax will be the last straw. We request the government not to increase the tax.’

Garment manufacturers are worried over the proposed hike in tax at source for export-oriented industries in the budget proposal for financial year (FY) 2012-2013, saying that it will have a negative impact on the sector. They said the proposal has come at a time when the country’s highest foreign currency earning sector has been facing a tough time in recent years on labour related issues have put Bangladesh’s apparel export to her single largest shipment destination at risk. Apparel makers are now paying 0.60 per cent tax at source in the current FY (2011-2012). Leaders of the Bangladesh Garment Manufacturers and Exporters (BGMEA) also requested the government to pay serious attention to the matter and reconsider the proposal to help the US$ 19 billion industry maintain growth amid the economic meltdown in the EU (European Union) region. “Cent per cent tax hike at source on export-oriented industries like us is completely detrimental to the industry. The normal progress of the textile industry will seriously be hampered if such increase is imposed,” BGMEA president M Shafiul Islam Mohiuddin told.

The BGMEA president said the export of Bangladeshi garments to the global market marked a fall due to financial downturn during the last fiscal year. Bangladesh’s garment export to the EU markets has gone down by nearly 15.40 per cent while shipment to the USA has recorded a 28.40 per cent fall in the current year, the president of the country’s apex apparel body said.

The Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) gave mixed reactions to the proposed budget for the next fiscal year (FY), 2012-13. In a press release, the BKMEA leaders hailed the government for proposing zero duty instead of the existing 1.0 per cent on import of industrial equipments, and allocation of Tk. 0.5 billion for skill development. They also hailed the government for taking different initiatives, like – raising allocation for industrialization, education and poverty alleviation. The BKMEA leaders opposed the proposal of imposing 5.0 per cent tax on cash support the government provides to the RMG producers and exporters, saying that the cash support can never be treated as profit. They pointed out that the finance minister in 2009 had exempted deduction of such tax, and urged him to reconsider the proposal. They also urged the government to fix the highest 5.0 per cent interest against import of raw materials for the export-oriented factories, and bring down bank interest rate to single digit for the knit sector. The BKMEA leaders expressed their dismay over non-allocation of incentive for the small and medium industries.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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