US tariffs return to the forefront India’s market distortions: exporters devise relocation plans and remedies

* A mid-sized clothing export house on the outskirts of the national capital landed a sizable order from a Texas-based American retailer. The sheer size of the order meant sourcing fabric from one textile mill, that too from a single lot, in order to ensure shade consistency. Not one mill in India qualified, given the relatively small size of operations of individual units that entrepreneurs deliberately limit for easier labour-related compliances. A supplier in Bangladesh was identified, who, in turn, contracted to source the fabric from China. The new QCO (quality control order) norms on man-made fabric in India meant the shipment was stuck for an extended period of time before landing at the export house, resulting in the order eventually getting pared down by the The sheer size of the order meant sourcing fabric from one textile mill, that too from a single lot, in order to ensure shade consistency. Not one mill in India qualified, given the relatively small size of operations of individual units that entrepreneurs deliberately limit for easier labour-related compliances.

* Based in Gurugram Despite the American tariffs, Pearl Global Industries’ diversification strategy of growing its operations to Bangladesh, Vietnam, and Indonesia is suddenly paying off. Other bigger competitors are now trying to emulate the company’s success in exploiting its location advantage and relative duty arbitrage to continue fulfilling orders with American clients. While Bangladesh has been a destination for Indian exporters, others such as Indonesia and Vietnam are being explored, industry players said.

* Titan, the largest jeweler and watchmaker in the nation and a member of the Tata Group, wants to shift some of its production to West Asia. In August, Titan signed a deal for over $280 million to buy the majority of Dubai-based luxury shop Damas. Omega Seiki Mobility, an EV business located in Delhi, is also establishing a $25 million vehicle assembly plant in the Jebel Ali Free Zone of the United Arab Emirates.

The obstacles that India’s structural irregularities and market distortions ultimately place on industries, particularly exporters, have been brought back into sharp relief by the US tariffs. Some of the bigger companies, particularly clothing exporters, have begun to shift a portion of their manufacturing operations outside of India in order to reduce emerging risks and avoid the numerous regulatory inconsistencies that hinder business owners. While garment exporters are following Pearl Global’s lead, others such as jewellery makers are looking at West Asia.

Distortions in the market

For example, there are two persistent inconsistencies in the nation’s textile and apparel industries:

One, in a total reversal of economic logic, India is arguably unique in promoting competition on finished clothing while simultaneously safeguarding inputs and raw materials. With active competition, including the ability to purchase inputs that we lack, raw materials should ideally be made available to exporters and manufacturers at the lowest possible price. The goal of the entire endeavor should be to increase finished goods exports. But it is the other way around.

Second, cotton makes up only 30% of the clothing marketed worldwide; the remaining 70% is made up primarily of synthetics, sportswear, and dresses made of man-made fabrics. Approximately 70% of India’s garment exports are made of cotton, while just 30% are made of synthetic materials. The main reason for this is that tariffs and non-tariff barriers like Quality Control Orders (QCOs) have made importing man-made fiber difficult and costly. As a result, most exporters find it impossible to import raw materials and are forced to purchase local materials at a markup of more than 20–25%. India’s exports are weighed down by these market distortions.

“These are self-inflicted wounds. Part of the reason why India continues to be out of sync with the world and the country is losing market share,” said Ajay Srivastava, the founder of Delhi-based Global Trade Research Initiative (GTRI) and a former Indian Trade Service officer with experience in trade policy making, WTO and FTA negotiations.

A representative with an industry body that works with the government on policy issues said that while the inverted tax (earlier VAT and now GST) regime is a lingering concern for the textile sector, the fact that restricted competition in sectoral inputs, particularly man made fibre such as polyester staple fibre and viscose staple fibre, is a policy flaw that continues to fester. This drains the competitiveness of Indian manufacturers and exporters.

Given that neither Bangladesh nor Vietnam have a significant base of cotton or synthetic fibers, their success can be attributed to their open trade rules on inputs. As a result, exporters can import inputs at comparatively reduced duties from any location. In India, the opposite is true. Competition is allowed at the final stage of the garmenting value chain, but the input stages are tightly controlled to protect some domestic man-made fibre players at the cost of exporters. “Those who have diversified their export manufacturing base now attest to the benefits of moving out of India and are now at a significant advantage after the US tariffs have come into play. The ones impacted the most are smaller exporters who are unable to shift bases or As a result, exporters can import inputs at comparatively reduced duties from any location. In India, the opposite is true.

According to a government official The Indian Express spoke with on the subject, the inverted duty structure has been an issue for decades, and the NDA administration has attempted to rectify it across industries throughout the past ten years. According to the source, “some of these anomalies would be further eased by the new GST rate rationalization exercise.”

Impact of the Trump Tariff

The Centre is exploring the possibility of a stop-gap package, including cheaper credit. The problem is that it is not known how long this pain will last and if there is no visibility into how the demand itself will be impacted, credit sops can only solve a small part of this problem. The Federation of Indian Export Organisations said Tuesday that textiles and apparel manufacturers in Tirupur, Noida, and Surat have halted production amid worsening cost competitiveness and uncertainties over flow of fresh orders.

Regarding measures to mitigate the effects of the Trump tariffs, a further EAC-PM official stated that it is anticipated that the 25% secondary tariffs will eventually be eliminated. Given that the American tariffs pose a risk of a demand shock, the post-pandemic remedies would serve as a model this time as well.

The government has the difficulty of any declared actions not being US-specific. They must be general measures because, as has happened in the past, Washington may impose a commensurate countervailing duty in response to an incremental SOP for a specific market, like the US.

Industry has called for the reinstatement of the Interest Equalization Scheme (IES), which was mysteriously discontinued by the central government last year despite being one of the most successful tools for removing the cost disability of Indian exports. Given that financing rates are far higher in India than in rival nations, this program gave India’s exports—especially those of MSMEs—much-needed competitiveness. It was a relatively small scheme, with some Rs 2,500 crore annual expenditure available mostly to the MSMEs, and not to the larger firms.

“That program has to be revived after being discontinued last year. Srivastava of GTRI stated that it might be necessary to increase the allocation at this time. To at least offset the secondary tariffs, several of the larger exporters have begun negotiating with major local retailers like Reliance Retail and the Aditya Birla Group about entering the domestic market. Exporters have also asked the government for facilitating access to big domestic buyers, including the Indian Railways and procurement by various government departments and undertakings.

The government is being petitioned by downstream synthetic textile producers to lower import prices and remove QCOs on man-made fibers, which have damaged the MMF supply chain’s competitiveness by restricting access to specialized raw materials at competitive prices. The problems of a sector already beset by a demand shock have been made worse by QCOs on polyester and viscose inputs. Imports of cotton are already being eased in part. A top CII representative said some of the QCOs were initiated after representations were made by domestic industry, including MSMEs. Other industry bodies contend that MSMEs have been rallying for the removal of these QCOs, which have been brought in singularly after lobbying by big industry players, who have a literal monopoly in sectors such as

Meeting “rules of origin” requirements and avoiding being labeled transhippers may be crucial for businesses wishing to migrate. According to US standards, businesses usually have to show 35–40% local value addition. This means that a meaningful portion of manufacturing, assembly, or finishing must take place in these external Markets that they’re increasingly relocating to.