RMG industry: a bright spot
From a fledgling experiment to a $20 billion industry, the RMG sector today is the world’s second largest apparel exporter with a 4.5 percent share in global garment exports.
At the beginning of the year, the RMG industry was bestowed with European Union’s new rules meant for LDCs under the Generalised System of Preferences (GSP). Upon enforcement of the new rules of origin (RoO), Bangladeshi RMG exporters will enjoy duty and quota free exports for 100 percent of its RMG products into the EU market although Bangladesh imports fabric from other countries.
Earlier, under the RoO, EU disallowed entry of finished RMG goods, which had raw materials imported from another country. Unlike Bangladesh, Indian and Vietnamese exporters will still have to pay duty to gain entry into the EU market that therefore, increases the competitiveness of the Bangladeshi apparels. This relaxed rule has already resulted in exports shooting up more than 40 percent in February this year to a record $1.9 billion.
The US and the EU markets have traditionally been the most favourable export destinations for Bangladeshi apparel makers. Of the close to $20 billion RMG exports, more than 75 percent of these are shipped and find their way either to the EU or the US apparel stores.
However, there are hardly any news headlines across the world today that do not mention the embattled future that confronts both these giant economies. As a result, expanding the export basket and tilting it towards other robust economies like India will generally be viewed as common sense.
Common sense prevailed this September, although at the expense of the Indian apparel makers. As the Bangladesh premier was accused head over heels at one point of time for being too pro Indian by another “Battling Begum”, it was about time that Bangladesh received the same amount of reciprocity from the Big Neighbour. In what has been termed as a “game-changer”, Indian Prime Minister Manmohan Singh dished out the biggest economic favour that our country had ever witnessed. Although one of the other major deals broke off, India went ahead and extended duty free access to 46 Bangladeshi RMG items to the gigantic Indian market.
As soon as the Indian PM made his intentions on the Indo-Bangla RMG deal public, India’s textile industry went bonkers over the decision, making the Indian press aware of the direct impact the deal would have on the lives of 35 million Indian workers. On the other hand, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) was busy preparing the layout of a congratulatory advertisement to be published in different newspapers highlighting the success of Indo-Bangladesh friendship.
At present, Bangladesh has a quota to export only 10 million garment pieces to India and it took just 6 months for the riverine country to exhaust the quota set by the Indian government. As a result of the quotas, Bangladesh’s RMG export to India is only worth $35 million compared to $20 billion in RMG exports worldwide.
India is Bangladesh’s second largest trading partner with imports from India standing at $4.5 billion and exports to India amounting to a paltry $0.5 billion. This deal was primarily focused on reducing the $4 billion deficit and the only way to neutralise the huge trade gap was to give magnanimous concessions to Bangladesh’s export sector. Any consumer goods market in India has to be huge, given its population and the Indian apparel industry is no different. The Indian clothing market stands at $30 billion annually and if Bangladesh captures 10 percent of the market, $3 billion in RMG exports would be achieved every year just from the Indian market. As a result, the deep hole in Bangladesh’s trade deficit is possibly going to be plugged by the biggest cork you can ever imagine, gifted by India’s PM.
“Men’s underwear is moving out of China, but it’s going to Bangladesh. It will not come here,” says Ajay Shah at India’s National Institute of Public Finance and Policy to Wall Street Journal (WSJ). A recent International Labour Organisation (ILO) report on minimum wages across the world states that Bangladesh has the lowest minimum wage at $58 in purchasing power parity (PPP) terms.
Vietnam’s minimum wage at $84 is at least 40 percent higher than Bangladesh’s minimum wage, and clearly represents a distinct cost advantage over its closest rival. India and China’s minimum wages are at least 200 percent higher than Bangladesh’s minimum wage. In a labour intensive industry where low cost is the only arsenal for survival, its not surprising to find Ajay Shah and many more economists sharing common view.
Not only labour costs but also duty free import of machinery and raw materials, along with periodic bouts of a devaluation of the taka, has made the local RMG industry globally competitive and capable of establishing Bangladesh as a hub for RMG exports.
Indian and Chinese garment companies are already shifting their manufacturing facilities to low cost destinations and foremost on their list of setting up a RMG units is Bangladesh. Indian bigwigs like Ambattur Clothing and House of Pearl have already set up operations in Bangladesh, looking to profit from the duty free access of Bangladeshi readymade garments to the Indian and EU markets.
The Multi Fibre Agreement introduced in 1974 was aimed at restricting imports from developing countries like India to developed countries by imposing quotas. However, Bangladesh was given preferential treatment and duty free access to the US and EU markets, which marked onset of the Bangladesh RMG sector for decades to come. Close to three decades later with increased access to the EU market and the Indian market, 2011 could well go down in history as the start of a new era in Bangladesh’s RMG industry.
The writer is a banker and can be reached at email@example.com