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India Overview

Rising disposable incomes fuel industry growth

Fact fileRepublic of IndiaArea: 3,287,000 sq km (around the size of the EU)Capital: NewDelhiPopulation: 1.1 billionPopulation growth rate: 1.4% per annum (average)System ofgovernment: Parliamentary democracy composed of 228 states, 7 union territoriesHead of state:Mrs Pratibha Devisingh Patil, President of IndiaGDP: $910 billionCurrency: Indian rupeeIndia isthe seventh largest country in the world with one of the fastest growing economies. The currentGDP growth rate is 9%.

The Indian leather sector offersSkilled Labour: Five institutes offering Bachelor's Degrees and Diploma courses.

Low wage cost: around 2.5 million people employed in the value chain. According to CLE,every US$800 invested in the leather sector creates a job.Research and development: about 180 patents filed in the last five years.India is the world's fastest growing democratic economy with a rapidly expanding domesticmarket. The nation's consumption of leather products is expected to grow at around 3-4% perannum in the near future, driven by rising disposable incomes and the increased preference forleather footwear. The government's hope that the country's total exports could reach US$500billion within five years, to be driven by the leather sector (alongside textiles, engineering, andgems and jewellery) has meant substantial investment in infrastructure in the form of leatherparks and SEZ's, as well as training for staff. Leather International takes a look at the latestefforts to support and stimulate the tanning industry

Interest in the International Leather Fair held in Chennai at the end of January wasoverwhelming with aisles and stands busy throughout the three-day event, and a reported 100potential exhibitors turned away through lack of space. According to the Council of LeatherExports, the fair has doubled in size since 2002.India is one of the very few places in the world where business is improving and which has beenable to take some production away from China. A number of very well known brands aresourcing in India, including Next, Versace and Hugo Boss.Leather exports from India account for around 3% of total global leather exports. The sector'smajor export markets are USA, Germany, UK and Spain.Overall, the industry generates approximately Rs250 billion (US$4 billion) accounting for 0.7%of GDP. It is estimated that 10% of the world's supply of leather is processed in India. Export

turnover in the 2005-06 financial year was US$2,694,000,000, which is about 2.6% of India'stotal exports.Between April-September 2006, exports of all categories of leather and leather productsincreased in US dollar terms by 7.4%. This growth was primarily driven by increased footwearand components exports, whilst exports of finished leather experienced more modest growth.Footwear is expected to be the engine of further growth for the Indian leather industry in thecoming years.Current total production is 2 billion sq ft of leather per year. Value added finished products
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constitute around 80% of the total exports, compared with just 7% in 1956-57.The highly fragmented nature of the industry has resulted in strong competition. Most tanneriesare clustered within the states of Tamil Nadu, West Bengal, Uttar Pradesh and Punjab.Raw materialsOf the 185 million hides and skins processed annually, 85% is sourced domestically. Cows

account for 28 million pieces, buffalo 28 million, goat 82 million and sheep 30 million.Cow hides are collected mainly from fallen carcases and illegal slaughterhouses while buffalohides are collected from organised and mechanised slaughterhouses in northern and westernIndia.Most of the medium and large tanners perform customised work for the larger manufacturers andexporters of leathergoods on a fixed margin basis or pre-negotiated price for the finished leather.The need to import more raw hides, skins and wet-blue is growing continuously.Government policyThe Council for Leather Exports (CLE) has set an ambitious target of doubling Indian leatherexports to about US$5 billion by 2010. This would imply an annual growth of 16% between2006-10. In order to achieve this, the sector's 11th five-year plan (2007-2012) focuses on

development of design facilities, human resources, environmental concerns, subsidies for themodernisation of plants and attracting FDI to the sector.Furthermore, duty free import of hides and skins is permitted from anywhere in the world toprovide cheap and readily available raw materials. As the footwear sector is seen as crucial forgrowth, central excise has been reduced from 16% to 8% for items with a retail sales price ofbetween Rs250-350. Present excise abatement of 40% on MRP of footwear has been broughtdown to 37%, consequent to the reduction of excise duty from 16% to 8%.To further promote technology transfer and the development of the sector, 100% FDI and JVsare permitted through the automatic route. Funding is available to enable tanners to modernisemanufacturing facilities. Machinery also benefits from duty-free/concessional import regulationsand there are concessional rates of interest on export credits to mitigate the effects of rupeeappreciation which had led to a tightening of credit.On the smaller scale, under the Support to Rural Artisans' scheme, marketing and technological

support for traditional and ethnic Indian footwear products such as Mojari, Jooti and Kolhapuri isbeing provided.ChallengesChallenges for the country's leather sector identified by the plan include:increasing indigenous supply of raw hides and skins to reduce the need for importsthe need tocreate infrastructure create mechanism for workforce availabilityincrease India's share in exportmarkets and to seek out new markets position Indian leather products in the branded and fashionsegments develop a centre of excellence for design and pattern makingOther major challengesfor the Indian leather industry include effluent management, quality specifications, non-tariffbarriers and cost of compliance to various standards.To this end, CLE have lobbied the government for support in terms of improved infrastructureand the council have also appointed consultants in Spain, France and Brazil to attract jointventures.Currency problemsThe appreciation of the rupee is a further challenge to the sector. Spic Pharma is a large biotechgroup based in Chennai which has been operating for the past twelve years. The group has anannual turnover of US$1 billion. However, according to Abhay Kumar, manager, 33% of the


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company's export market has disappeared due to the currency crisis which has made indigenouschemical products more costly than imported ones.At the IILF, Mukhtarul Amin, CLE chairman, stated that growth in the leather sector over thelast year had not been as great as expected for the same reason. Last year there was a 9% growthin exports in US$ terms, but this translates to just 3% in rupee terms. However, it is thought that

the US recession' will not affect India's leather sector directly as only 10% of exports are boundfor the USA.Although rising labour costs, particularly in Dongguan and Shenzen, have dented Chineseproduction cost advantages, Rafeeque Ahmed president, All India Skin and Hide Tanners andMerchants Association, predicts that competition from Vietnam will increase as Chinese andTaiwanese investment increases in that country.The importance of the footwear sectorGrowth in the footwear sector has averaged 26% over the past three years. 909 million pairs ofleather footwear and 100 million pairs of leather shoe upper are produced each year. It is amajor employer in the Indian economy.79% of Indian footwear exports go to the European Union and 10% to the USA. In 2006-07

footwear exports were valued at US$1.2 billion. However, 95% of Indian footwear production isfor the domestic market, underlining the sector's importance to the economy.Rafeeque Ahmed told the LERIG meeting in January that domestic markets had become thefuture focus of the industry. Indian companies make about two billion pairs of shoes annually forthe domestic market while exports amount to less than 100 million pairs.Despite the small proportion of exports a lot of effort has been made to develop the exportmarket. With more international players looking at investments in India, the industry here is seenas a market for inputs and raw materials because of its production strengths.There are also plans for a number of leather parks to provide improved infrastructure andeconomies of scale to the industry. A 153 acre footwear park is to be constructed adjacent to thefootwear component park in Irungattukottai, 25 km from Chennai. The footwear park will beestablished as a special economic zone (SEZ) and will incorporate facilities such as a designstudio, testing laboratory and training centre.Ten footwear component manufacturers are setting up production units at present and accordingto the State Industries Promotion Corporation of Tamil Nadu, the park will provide an idealopportunity for overseas investors to set up units either through FDIs or joint ventures withIndian companies.Under the sector's five year plan, the establishment of ten small integrated leather parks rangingin size from 25-100 acres is being considered by the government with an announcement expectedshortly.The Andhra Pradesh Government is planning to develop a 413 acre International LeatherComplex at Krishnapatnam in the Nellore district of Hyderabad. The project report submitted byCLRI estimates the cost at around Rs180 crore, of which central government will provide a grantof Rs30 crore, and further funding is hoped for from the state government.The footwear manufacturers of Agra in northern India will soon have a new leather park to helpthem meet their supply needs and to enable them to present their products to buyers moreeffectively. The state of Uttar Pradesh will invest $50 million in the project according to chiefminister, Mayawati Naina Kumari. She added that the 4% rate of vat currently levied onfootwear costing up to $10 would be abolished.The city of Agra has long had a reputation for skilled leather workers and footwear producers,


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but most businesses have operated on a small scale. It is hoped that this development could helpthe local industry move to the next level.Problems faced by the safety footwear industryIndia is the major supplier of leather for safety footwear and uppers to European countries andproduction is mostly concentrated in Kanpur/Unnao. As manufacturing in Europe has fallen

considerably, the consumption of leather and uppers by European safety footwear manufacturershas gone down. However, demand for this type of product has increased many fold in recentyears. In spite of abundant raw materials and production capabilities India's export share remainsunremarkable.In contrast, China's exports of safety shoes has increased significantly. Most Chinese safetyfootwear manufacturers import leather from India, produce footwear in China and then export toEuropean markets.Indian producers face problems with the exchange rate and a lack of infrastructure. The fact thatduty drawback is calculated on the basis of casual footwear where the inputs are less costly andmostly available on the domestic market also creates problems as safety footwear manufacturershave to use imported CE Certified inputs. The main components are protective steel toe caps and

steel midsoles which have a duty structure of 24.42%. The duty drawback rates need to bereviewed.The chemicals industryIn addition to government investment in the sector, the European chemical industry is alsoinvesting heavily in India. As well as BASF, TFL and Stahl, (see articles in this edition) KemiaTau have inaugurated their first technical service laboratory in South Asia, located in Chennai.The lab, which will cover the full range of Kemia Tau products from wet-end to finishing, wasinaugurated in January by Dr Alberto di Giovanni, director, Kemia Tau Italy.EnvironmentAttention is being paid to the environmental consequences of the industry and progress is beingmade. The zero liquid discharge requirement (see Leather International June 2007) is beingintroduced in Tamil Nadu and safe landfill has already been completed in ten places according toRafeeque Ahmed. He added that this process will make the water source safe for the future as itleads to a reduction in the quantity of dyes and fatliquors consumed due to the consistent qualityof recycled water for the tannery.Leather regionsTamil Nadu in the southern region is India's foremost leather producing area and has a majorfocus on finished leather and footwear components. Tamil Nadu comprises nine leather clustersat Chennai, Ranipet, Ambur, Vellore, Pernambut, Vaniyambadi, Dindugul, Tiruchirapalli andErode. Together they produce 855 million sq ft of leather, 59 million pairs of footwear, 7 milliongarments and 30 million items in the leathergoods category.The eastern region including Kolkata in West Bengal has a two-thirds share of the country'sleathergoods exports. Its share in India's tanning capacity and production stands at around 22%.Cheap raw material, abundant water supply, skilled labour and low operating costs are theimportant factors that make the state an attractive destination for leather based industries. WestBengal has over 500 tanneries and a large number of leathergoods manufacturing units, most ofwhich are small enterprises.The world's largest integrated leather complex is being set up at the outskirts of Kolkata on aBuild-Operate-Transfer (BOT) basis. The US$78 million Bantala project is a joint venturebetween M L Dalmiya & Company and the West Bengal Government. The complex covers an


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area of 440 hectares. It will have a process capacity of 1,000 tonnes of rawhide per day.When fully functional, the park is expected to generate approximately US$111 million worth ofexports and employment for 10,000 people. It also features a design and training studio. Of the600 unit capacity, 180 tanneries are currently operational with a daily production of 500 tons offinished leather.

According to West Bengal Chief Minister, Buddhadeb Bhattachjee, the government, encouragedby the uptake at Bantala, has decided to build a tanning complex at Panjipara in West Dinajpurdistrict, primarily to process raw hides. The complex, to be developed under public privatepartnership (PPP) involves investment of about Rs30 crore in two phases.Elsewhere in the region, the Tata Group has agreed to help update the teaching processes of thestate's leather training institute. This is considered a major breakthrough towards creatingadequate highly skilled manpower for the industry.The northern region (dominated by Agra and Kanpur) leads in the export of leather garments,saddlery and harness and footwear. According to Dr K Elangovan, executive director of CLE,growth is particularly strong in the Kanpur tanning cluster. The region is home to many of thisyear's CLE export award winners including Superhouse, Mirza and Model Tanners.

The history of manufacturing of leather and leather products in Kanpur dates back 150 years towhen the British set up factories for production of shoes and saddlery items with which toprovide the military. Tanneries were originally set up on the banks of the Ganga in the Jajmauarea, 10 miles from Kanpur.Tanners in this area began to export from the 1960s. The area is particularly focused on saddleryand safety footwear. Its 342 tanneries and manufacturers registered with CLE export goodsworth around US$663 million per year with particular emphasis on tanning buffalo.The government and tanneries in Kanpur have taken necessary initiatives in dealing withenvironmental pollution. Under the Indo-Dutch Project, a CETP has been set up which takes careof 175 tanneries located there.The area's 300 acre Banthar technology park is partly functioning, housing nearly 158 leatherunits and 44 tanneries with the remainder for leathergoods manufacturers. According to CLE 24units are currently producing finished leather, footwear uppers, safety and fashion footwear onthe site.To the east of the subcontinent, in Tamil Nadu, the Tiruchi Tanners' Association is lobbying forthe removal of export duties on East India leather, a type of semi-processed leather. According toV S M Varis Mohideen, secretary, EI tanning capacity accounts for less than 5% of the totalcapacity of the leather industry in India. Although the Ministry permitted the resumption ofexports of EI leather in January 2000, the imposition of 15% export duty has reportedly crippledthe industry.This sector also suffered from the decline of the leather garment industry between 1990-2000.Exporters of finished leather and leather product manufacturers opted to import raw skin andother crust types after the government permitted duty free import of raw skins and leathers.As a result, the capacity of EI tanneries is under-utilised, stock has accumulated and tanners facedifficulties in upgrading effluent treatment plants by adopting membrane bio reactors and reverseosmosis technology despite the 50% subsidy offered by the government.According to Mohideen, nearly 50% of tanning capacity in Tiruchi and Dindigul has been lost astanneries closed on account of non-compliance with pollution control measures and the exportduty.Meanwhile, in the Punjab, 70 tanneries have relocated to the Jalhandar leather complex


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