Kitex saga: As Telangana gains, how much does Kerala stand to lose?

With the Kitex Group announcing its Rs 1,000 crore project in Kakatiya Mega Textile Park, it has all become certain that Telangana has gained from Kerala’s loss. The announcement that Kitex was moving its Rs 3,500-crore worth project from Kerala followed a series of inspections and raids on its garment manufacturing/processing units in the state by various government departments. In the last six months, there have been 11 raids by various departments on the company.

Prior to his departure for meeting the Telangana government, Kitex Garments MD Sabu M. Jacob had stated that the company was being hounded out of Kerala. “We have already spent Rs 200 crore for the proposed project, which would have given employment to 30,000 people, apart from developing 600 small-scale ventures in the sector,” he said.

There’s no doubt about the fact that Kitex Group is one of the few success stories in the manufacturing sector from Kerala. Kitex Garments manufactures cotton and organic cotton garments, especially infant wear, for exports, and is a major supplier to US and UK brands such as Gerber, Walmart, Carters, The Children’s Place, Amazon, and Target, among others. The company is also the world’s second-largest manufacturer of kids’ apparel. Kitex Garments had a turnover of Rs 783.57 crore in 2019-20 before Covid-19 hit the market. Its net profit had touched a high of Rs 108.67 crore.

However, the company’s yearly sales fell by 60 per cent and profits by 80 per cent in the last financial year due to COVID-induced pains. Kitex Garments posted Rs 111.70 crore in Q4 sales in the fourth quarter of 2020-21 compared to Rs 120.9 crore reported in the previous quarter and Rs 146.32 crore in the year-ago quarter. The net profit was at Rs 9.72 core against Rs 16.8 crore reported in the previous quarter and Rs 19.22 crore posted in the year-ago period.

Notwithstanding the huge loss in terms of jobs when the state’s unemployment is already at a high of 40.5 per cent compared to a national average of 21 per cent, the Kitex Group’s decision to look outside its home state is a significant setback for Kerala, both in terms of economics and optics. “One of the consequences of this move is the erosion of the state’s tax base and its subsequent impact on revenue mobilisation. Besides the estimated loss of 35,000 direct employment from the proposed projects, the withdrawal of such a large investment from the state would send a wrong signal to the investor class and may trigger a domino effect,” said Nissy Solomon, Senior Associate, Research at Kochi-based Centre for Public Policy Research.

“When local businessmen move out of the state, it’s sending a strong narrative that the climate is hostile to investment. And when that happens, it’s unrealistic to expect outside investors to show interest in the state. This is startling, especially at a time when the state is facing an unemployment crisis and is in dire need of more investments to stimulate the business development process. The ripples will also be felt in ancillary units of the garment industry,” she explained.

For the uninitiated, Kerala does not have an industry-friendly image in the country, thanks to a strong presence of labour unions. Excessive state dominance, regulations, licences, and procedural delays have undermined market-led competition by raising the cost of capital and cost of borrowing. While the Pinarayi Vijayan government is doing its best to shed the unpopular image, the Kitex saga has proved to be a party pooper at a time when the economy has hit the deceleration button.

As of January, exports from Kerala during the last financial year stood at $3.36 billion, with marine products and spices forming a major part of the exports. In 2018-19, Kerala accounted for 2.9 per cent of India’s total merchandise exports, which is far below its share of 4 per cent in India’s total GDP. However, there has been a steady growth in exports from the state. According to an EXIM Bank report, the state’s merchandise exports stood at $9.8 billion in 2018-19, registering a CAGR of 17.86 per cent from 2013-14 to 2018-19, which is higher than the CAGR of 0.97 per cent in India’s merchandise exports during the same period.

At the same time, the report suggests that Kerala has much room to diversify into high value-added products, including the textile sector. In 2018-19, Kerala’s $133.40 million worth export of readymade garments of cotton comprised only 1.36 per cent of the state’s total exports, and 1.53 per cent of India’s exports. The state left an exports-oriented company dejected even as it sits on an untapped merchandise export potential of nearly $ 6.7 billion.

“For a state that has been trying to undo its anti-business tag to attract investors, this departure of one of the largest private employment providers will definitely come as a big blow to the government. Kerala should seriously consider reconciliation to restore investor’s confidence and bring this matter to a settlement with the concerned party,” feels Solomon.

She suggests that the Kerala government should, perhaps, initiate dialogues with the party concerned and resolve this by reassuring and building confidence in the investor class. “The government needs to work towards implementing steps to reduce bureaucratic interference, excessive regulations and also limit its role from being a market participant in order to attract future investment.”

This article was published in The Week.