Garment sector: How far could Tk 35b in cash incentives revive the industry

The government has increased the cash incentive for export-oriented factories using locally produced yarn from 1.5 per cent to 5 per cent in an effort to revitalise the country's textile sector.

The move will cost the government an estimated Tk 35 billion (3500 crore). However, industry stakeholders say the increased incentive will only provide limited relief to the country's spinning mills.

They cite persistent gas and electricity shortages, as well as liquidity constraints affecting most factories in the sector. In addition, exporters continue to face several complications in accessing the cash incentives.

Several textile entrepreneurs expressed these concerns to Prothom Alo. They said the higher incentive could increase sales by around 5 per cent, giving spinning mills some breathing space.

However, they stressed that the government must introduce several additional effective measures to reduce imports of Indian yarn and encourage greater use of locally produced yarn. Only then, they believe, will the country's textile sector be able to recover.

On 12 July, Bangladesh Bank raised the alternative cash incentive for export-oriented ready-made garment manufacturers using locally produced yarn or fabric from 1.5 per cent to 5 per cent, replacing the bonded warehouse and duty drawback facilities.

During the current fiscal year, ready-made garment exporters using locally manufactured yarn will qualify for the increased cash incentive. Earlier, on 9 July, the Ministry of Finance sent the relevant directive to the Governor of Bangladesh Bank.

According to the Bangladesh Textile Mills Association (BTMA), the country currently has more than 1,800 textile mills, including 527 spinning mills.

Total investment in the sector stands at approximately USD 23 billion. Local textile mills supply 80 per cent of the yarn used by the knitwear industry and nearly 40 per cent of the yarn required by the woven garment industry.

Razeeb Haider, former director of the BTMA, told Prothom Alo, "Small and medium-sized factories that previously relied almost exclusively on Indian yarn will now become somewhat more interested in using locally produced yarn because of the higher cash incentive. This will increase demand for yarn to some extent and create opportunities for idle factories to resume operations. However, if purchase orders for ready-made garments continue to decline and the gas and electricity crisis remains unresolved, the sector will not benefit significantly."

Until two and a half years ago, exporters received a 4 per cent cash incentive for exporting ready-made garments produced with locally sourced yarn.

As part of Bangladesh's preparations for graduation from the Least Developed Country (LDC) category, the government reduced the incentive to 3 per cent in January 2024.

Six months later, it cut the rate again to 1.5 per cent. Exporters must also pay a 5 per cent tax on the incentive. Since the government reduced the cash incentive to 1.5 per cent, imports of yarn into the country have increased.

According to data from the National Board of Revenue (NBR), Bangladesh imported cotton yarn worth Tk 144.1 billion (14.41 crore) during the 2022–23 fiscal year.

Imports rose to Tk 211.42 billion (21.142 crore) in the following fiscal year and reached Tk 267 billion (26.7 crore) in the 2024–25 fiscal year.

In the most recently concluded fiscal year, the country imported yarn worth Tk 258.64 billion (25.864 crore). Around 90 per cent of the imported yarn came from India.

Although spinning mills benefit from incentives for the use of locally produced yarn, the cash incentive is deposited directly into the bank accounts of ready-made garment exporters.

Discussions with several garment exporters revealed that when the cash incentive stood at 4 per cent, the price difference between imported and locally produced yarn was only 10 to 15 US cents per kilogramme.

Faster delivery after placing orders and lower transportation costs encouraged manufacturers to use locally produced yarn.

However, after the government reduced the cash incentive, the price difference widened to around 40 US cents per kilogramme, leading to a significant increase in yarn imports.

Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told Prothom Alo, "Although the government has announced a 5 per cent cash incentive for using locally produced yarn, legal complexities mean exporters will ultimately receive only about 2.5 per cent. This is because exporters must pay a 5 per cent tax on the incentive, and that is not the final settlement. In the end, the effective benefit may stand at around 3.2 per cent. As a result, yarn imports are unlikely to decline significantly."

Mosharaf Composite Textile Mills, located in Bhabanipur, Gazipur, has the capacity to produce 160 tonnes of yarn per day. The factory operates gas-fired captive generators to produce electricity and also has a backup connection to the Rural Electrification Board's power supply.

At present, gas pressure at the factory remains between 2 and 3 PSI during the day and rises to 4–5 PSI at night.

Meanwhile, the factory experiences power outages five to seven times a day, leaving it without electricity for approximately two to two and a half hours daily.

Mosharaf Hossain, chairman of Mosharaf Group, told Prothom Alo, "The gas and electricity crisis has reduced our production by 20 per cent. As a result, the production cost per kilogramme of yarn has increased. Even though the government has raised the cash incentive, yarn sales may increase only marginally because factories are still not receiving gas according to their requirements. At the same time, many businesses are suffering from a shortage of capital. Therefore, the government should provide loans on easier terms."

Little Star Spinning Mills in Savar has struggled with gas shortages for a long time. Unable to obtain gas in line with its operational requirements, the company invested Tk 1.2 billion (12 crore) in a solar power system and battery-based electricity storage.

Although the investment has enabled the factory to utilise 80 per cent of its production capacity, production costs have increased.

Khorshed Alam, chairman of Little Star Group and a director of the Bangladesh Textile Mills Association (BTMA), told Prothom Alo, "India provides various forms of support amounting to around 13 per cent to its textile mills. After extensive negotiations with the government, our incentive has increased to 5 per cent. Even so, we remain behind India."

He added, "High gas prices combined with supply shortages, elevated interest rates and several other factors have pushed up our production costs. Therefore, the government must provide broader support to sustain the textile sector while also increasing value addition in the ready-made garment industry."