Industry Insights

The Indian footwear sector – poised for growth in the 21st century

The footwear sector has the potential to grow up to US$ 80 billion, or eight times its present size, by 2030. This can translate into a source of livelihood for more than 3 million people and become a driver for entrepreneurs in the SME sector – starting a footwear production unit takes only 6 months (including skill training of 4-6 weeks), and it is a ‘green’ industry. With a ready market of 10 billion pairs or more per year of footwear by 2040.

THE INDIAN FOOTWEAR INDUSTRY IS POISED TO MOVE TO THE NEXT LEVEL

However, there are certain challenges to the sector that may not allow the sector to achieve its potential. A key challenge has been the stagnation in production capacity, which stands today at ~2.2 billion pairs. A key reason for this has been the focus of policy on Small and Medium businesses, and the burden of taxation for the industry on the organized sector, which has not encouraged the growth of the sector.

This can evolve into a serious issue for the exchequer, since as of now, India does not have the capacity to meet demand beyond the present demand levels. Once India’s footwear demand rises, this will result in significant dependence on imports, particularly from China, which has a large organized sector, abundant production capacity and low cost of production.

It is estimated that if India’s per-capita demand for footwear equals the present average for developed markets by 2030, at current capacity levels, domestic production would be able to meet only 25% of the demand, and lead to a forex loss of ~US$ 55 billion annually through imports.

The footwear industry in India – An overview

  • India is the second largest producer of footwear globally, accounting for 13 per cent of the global footwear production, next to China, which dominates the global footwear industry accounting for close to 67 per cent of the market.
  • Comparing footwear production in key developing markets – China produces 14,200 million units, followed by India producing 2,209 million units. Brazil produces 900 million units while Vietnam produces 770 million units annually. Out of the ~2.2 billion pairs of footwear produced annually, about 180 million pairs are exported, while the rest (~95% of the produce) meets the domestic demand.
  • The average per capita footwear consumption in India continues to be low at ~1.66 pair per annum in comparison to the global average consumption of ~3 pair per annum and developed countries average of 6-7 pair per annum
  • By products, the Indian footwear market is dominated by casual footwear market that makes up for nearly two-third of the total footwear retail market. The majority of the Indian footwear market is men’s footwear that accounts for nearly 58 per cent of the total Indian footwear retail market. Non-leather footwear accounts for ~1.23 billion pairs, or 56 per cent of the footwear market in India.
  • The strength of India in the leather footwear sector originates from its command on reliable supply of raw material resources in the form of raw hides and skins, quality finished leather and large installed capacities for production of finished leather and foot
  • The Indian footwear industry is highly fragmented with almost 15,000 small and medium enterprises operating largely in the unorganized segment; and limited presence of organized segment.
  • The industry is dominated by unorganized sector which accounts for around 85 per cent of the total footwear production. The competitive intensity is high between the two segments and currently, both are estimated to have an equal share of the overall domestic market in value terms.
  • India has an installed capacity of 2.8 billion pairs, second only to China. The bulk of production is in men’s leather shoes and leather uppers for both men and ladies. India has over 100 fully mechanized, modern shoe making plants.
  • Footwear is a labor intensive industry, providing jobs around 1.1 million people, and is a source of employment to people from the weaker sections of the society and the minorities, especially in the leather segment. The footwear industry along with other few industries such as textile and apparel industry together are the largest employers in India, after the agricultural sector.
  • The footwear industry has a significant representation of women, who comprise more than half of the workers employed in this industry. However, this is primarily in the southern part of the country, where a high degree of mechanization and a stronger organized sector has enabled the share of women in the workforce to be as high as 90 per cent in footwear clusters in Tamil Nadu and Kerala.

Future outlook

  • Per capita footwear consumption in India is ~1.7 pairs, compared to 6 pairs in developed markets. Assuming that this level of per capita demand for footwear in India will be reached by 2030, the overall demand for footwear could reach up to 9 billion pairs.
  • Assuming 6% inflation in footwear cost every year, this represents a total domestic market size of US$ 80 billion by 2030. Even if the per capita demand for footwear is lowered to 4 pairs, the total domestic market size (compounded for 16 years from 2014 to 2030) would come out to be US$ 45 billion.
  • Though there is significant potential in this sector, it must be noted that footwear production capacity in India has remained almost stagnant in the last decade primarily due to a small organized presence in the footwear sector and a policy framework that does not encourage the growth of the organized sector.

Challenges and issues faced by the industry

  • Lack of branding in Indian footwear – Despite being one of the largest employers, marketing and branding remains the industry’s Achilles heel. Marketing activities at the industry level are poor and ineffective, while at the company level, low marketing budgets result in ineffective, short term marketing campaigns which do not go beyond generating awareness.
  • Challenge from China and other low cost markets – The USD 35 billion Indian footwear industry is reeling under pressure as China is dumping its goods in India at a lower rate and also the ratio of exports to imports has fallen drastically. People prefer Chinese footwear over domestically produced goods as they are cheaper and offer a wide variety of goods. Out of the total Indian footwear imports, 63% is imported from China, and the import has increased by 295% in last 5 years. Further, most of these footwear products are sold in the un-organized retail market, without VAT and Excise addition, causing a significant loss to the exchequer and a potential loss of more than 214,000 jobs for the domestic industry.
    • Due to the increasing imports from China to Italy, Indian presence has reduced in the total imports of Italy and thus has recorded a negative growth rate. The maximum exports of India are made to UK and US as they acquire the largest share in India’s total footwear exports with 18.9 per cent and 11.3 per cent respectively
    • Unorganised industry structure and India’s competitiveness vis-à-vis major exporting nations – The primary reason for the unorganised and small scale setup of Indian leather industry is the historical restrictions of licensing and SME reservation of the sector until 2001. Further, majority of companies in the Indian leather and footwear sector are proprietorship or partnership firms, which generally have a lower risk appetite and are usually unwilling to undertake major capacity expansions.
    • The domestic market – overshadowed by exports – The domestic footwear industry was estimated to be valued at US$10 billion (or ~INR62,300 crore) in FY2014-15. India exported US$2.6 billion (or ~INR16,200 crore) worth of footwear in FY2014-15 (according to Ministry of Commerce data). Despite the domestic industry being almost 4 times the size of the export market, the domestic footwear industry has not received much support from the government in terms of policies, compared to the export sector.
  • Tax and Trade Regulations – Globally, footwear is considered as part of the apparel category and taxed similarly. However in India, though branded garment attract no excise duty, footwear attracts excise duty similar to other consumer durables, with central excise duty on non-leather footwear as high as 12 per cent. The effective excise duty rate being approximately 26% of transaction value. In addition to excise, at the state level, Value Added Tax (VAT) of 12 to 15 per cent and octroi (or local body tax) of 2 to 5 per cent are also levied on footwear.
  • Lack of skilled labour – The production process of a leather shoe requires a significant level of knowledge and skill, considering the number of components that go into the making of a leather shoe. While the need for appropriately trained and skilled manpower is felt across all levels, the shortage is felt more acutely at the lower level of semi-skilled work force.
  • Impact of wages – The minimum wage revision which took place in July, 2007 increased the effective minimum wages for unskilled workers by 37 per cent and subsequent increases in January/July every year have further increased this higher base figure by another 216 per cent to adequately compensate for the increased cost of living. Thus, the unskilled worker’s salary has almost tripled between January 2007 and September 2015. In addition, many components of wages not reflected in Minimum Wages fixed. An unskilled worker at the prevailing Minimum Wage of INR 7,600 per month actually has a total remuneration of INR 9,439 per month. With up to 25 per cent of ‘cost of goods sold’ being contributed by labour costs, even a 10 per cent increase in the labour component erodes profitability by a big margin and bring industry dangerously close to making losses.

Interventions required to make Indian footwear globally competitive

  • The Indian footwear industry has the potential to increase its share in the global footwear export market from the current 2.1 per cent to 6 per cent. In order to achieve this potential, the industry would need to transform itself through a combination of structural changes, as well as government incentives.
  • Need for Structural Reforms/Institutional Reforms – There is a need to create a National Level Body particularly for domestic business “Footwear & Leather Products Development & Promotion Council (FLPDPC) and serve as an important bridge between Domestic players and State/Central Governments for Policy advocacy, Infrastructural developments & Fiscal support to Indian companies.
  • Building the Indian Footwear Brand – Branding strategy could help Indian companies, coming on to the global map. As, the industry is more unorganized, the organized sector needs to be taken care of in an efficient manner by advertisements and promotions through newspapers, Print, TV, celebrity endorsements etc. Key points to help bring the Indian footwear brand on the global scene include:
    • Attract FDI into Retail/JV and tie-ups
    • Increase domestic manufacturing & capacity building in the organized sector
    • Create skilled manpower for organized retail
    • Increase cost competitiveness of Indian footwear
    • Create quality and brand consciousness amongst consumers
  • Cluster development efforts have yielded high benefits in SME-intensive leather sector – Cluster initiatives have had success globally, and have allowed the regions implementing such approaches to produce products that are internationally competitive, by allowing firms in the clusters to take advantage of pooled resources and incentives, as well as ensuring availability of skilled manpower. The close geographical location of similar manufacturers within a cluster enables flexibility and capacity pooling to better handle uncertain demand.
  • Taxation/Regulatory Issues
    • Bring footwear at par with the apparel industry: Footwear is part of the basic attire globally, i.e., Footwear and Headgear, Clothing classified are under-Class 25 of Trade Mark Act, 1999. Though clothing is exempt from Excise Duty, the same is not true for footwear and leather.
    • The challenge of low abatement rate: The low abatement rate has resulted in an exorbitant effective rate of excise duty on footwear. The problem of high effective rate is further exacerbated by a fractured credit system and fragmented nature of production processes, resulting in break in CENVAT chain and limited availability of CENVAT credit on raw materials and other components.
    • Minimize Chinese low quality products invasion into Indian markets: The government should enhance the existing anti-dumping provisions on footwear from low cost countries such as China and Vietnam and provide an added incentive to domestic manufacturers.
    • Bring the unorganized sector into mainstream for greater Tax Revenue: The Budget proposal to reduce the excise duty on footwear with leather uppers and having retail price of over INR 1,000 will help increase competitiveness. The move will provide boost to the domestic leather footwear industry and help it compete globally and it would also help provide a level-playing field for the organised sector and would result in integration of unorganised sector into organised sector
  • Skill building – As a step towards having a highly skilled and productive workforce in this industry, there should be focus on vocational training through the existing institutions, especially in the areas of manufacturing, quality control and designing. The industry needs mass training programmes in the areas of cutting, stitching, Assembly, Lasting/Soling, QC & Packing.
  • The ‘Make in India’ vision for Indian footwear – The footwear industry provides a realistic opportunity to implement and sustain the “MAKE-IN-INDIA” program in true spirit. To realize this potential, there is an urgent need to encourage investment in the footwear industry to tide over the dis-economies of scale and loss of competitive edge in the Indian Footwear industry.

How the footwear industry is one step ahead of others

  • Footwear is a non-polluting industry and falls under the green category. There is no effluent or waste discharge, it being a dry industry. In addition, there is almost no noise pollution.
  • Very low intensity of electricity is required, hence there is no significant burden on the power grid.
  • Land requirement for setting up a footwear manufacturing unit is very low compared to other industries such as automotive, refining, electronics, etc. A SME start up needs just a 20 x 20 square meter shed to start manufacturing.
  • Easy to skill and start operations. Footwear units in the SME category can start operations within 6 months of approvals, including skilling workers, which typically takes only between 6 to 8 weeks.

India Footwear, Leather & Accessories (Domestic Sector)

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