India - Leather Industry and Export Promotion

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 1208-IN* INDIA LEATHER INDUSTRY AND EXPORT PROMOTION JULY 20, 1976 This document has a restricted distributin and may be used by recipients only In the perfortnance of their official duties. Its contents may not otherwise be disclosed without World Bank authrization. CURRENCY EQUIVALENTS (as at May 4, 1976) Rs 1.00 - Paise 100 US$1.00 - Rs 8.97 Rs 1.00 US$0.1115 Rs 1.million US$111,500 (Prior to September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then, it has been fixed relative to a "basket" of currencies. As these currencies are now floating, the US Dollar/Rupee exchang rate is subject to change.) FISCAL YEAR April 1 - March 31 List of Abbreviations and Acronyms used in this Report UNCTAD - United Nations Conference on Trade and Development GOI - Government of India STD - The State Trading Corporation of-India, Ltd. IIFT - Indian Institute of Foreign Trade DGTD - Directorate General of Technical Development EPC - Export Promotion Council E.I. Tanning - Eastern Indian (Vegetable) Tanning REP - Import Replenishment Licenses FOR OFFICIAL USE ONLY CONFIDENTIAL INDIA LEATHER INDUSTRY ANP EXPORT PROMOTION CONTENTS Page No. SUMMARY AND CONCLUSIONS ................ . i - iii PART I. WORLD TRADE ............................ 1 Changes in Trade Pattern ..........,,......... 1 Demand Pattern and Prospects........... .... 2 Prices .*........................e..o.........t . 5 General Problems Facing New Exporters ......*. 5 PART II. PRESENT STATE OF LEATHER INDUSTRY ...... 8 Availability of Hides and Skins .............. 8 Distribution System ................... 9 .Structure of Leather Industry ............ 9 (A) Tanning . .............. .. , . . . 10 (B) Footwear ....,,............, 11 (C) Leather Manufactures ............... 13 Export Performance .......,......,,........... 14 PART III. INDIA'S LEATHER DEVLOPMENT FRAMEWORK. .. 19 Background ............. ........ .... .... 19 Development Framework ...,,................. 19 Policy Implementation ........................ 22 Institutional Arrangements .. .............. 23 Problems ................................... 24 PART IV. EXPORT PROSPECTS ....................... 28 Appendix I. Hides and Skins Processing Stages II. Types of Finished Leather III. Leather Corporation IV. List of Foreign Firms Scheduled to Visit STC JaV Cooperative Ventures V. Leather and Leather Manufactures - Trade Barriers MAP This document has a restite4 disbution and s e ub i by recIpatg only in itf pgtnatse of their olBcal duties. Its contents may not otetrWes be diwaisd without World a* authoriasion. SUMMARY AND CONCLUSIONS i. The pattern of world leather trade has been noticeably changing during the seventies. Some developing countries are accelerating the product transformation from semi-tanned hides and skins to high value added finished goods for export. The developed countries that are major producers face structural and economic problems caused by high wages, a lack of labor inflow and pollution. These problems increasingly affect the leather industry, and therefore the developed countries are seeking alternative sources of processed leather and leather products. World demand continues to be strong and prices have been rising sharply for some time. ii. India, as one of the most important sources of hides and skins in international trade, should benefit from the present trend. The huge resources in the form of raw materials and labor should enable India to enjoy inter- national comparative advantages in leather production. Taking these factors into account, the Government of India aims to achieve a major shift in India's leather trade from semi-processed leather to finished leather and leather manufactures during the Fifth Plan period. Since there is limited scope for increasing the availability of raw hides and skins in India, the policy is designed to restrict exports of semi-tanned leather and to encourage simulta- neously the production and export of finished products. This is indeed a policy that the Government is actively pursuing, and the leather sector is undoubtedly adapting itself to the policy. iii. The leather industry is widely dispersed, with tanning concentrated in Tamil Nadu and footwear manufacturing in Agra. The tanning, footwear and other manufacturing sectors are equally fragmented; the structure is charac- terized by a predominance of small and cottage operations. There are 23 mec- hanized tanneries (including 15 large-scale firms with capacity for finished leather processing), approximately 80 more so-called "standard units," and about 700 small and cottage tanneries using simple conventional methods to produce semi-tanned hides and skins. To achieve the conversion objective, the industry requires a total finished leather processing capacity of over 60 million pieces of hides and skins as against the existing capacity of 32 million pieces in 23 tanneries. By the end of 1975/76., the capacity ex- pansion, based on the industrial licences issued thus far, will probably reach the level of 43 million pieces. Because of their limited financial resources and lack of exposure to non-conventional production methods, the vast majority of the small tanning units still cannot consider participating in the processing of finished leather. iv. The footwear industry produces about 200 million pairs of various types of shoes each year. The impact of the mechanized sector is still minimal in the production and export activity. Its share is less than 10 percent of the total output and 25 percent of the 8 million pairs of shoes exported. The bulk of exportable shoes is in fact produced in the Agra area, which has the major concentration of artisan footwear manufacturers. In this area nearly 250 small-scale factories, with simple machinery for such opera- tions as upper stitching and cutting, produce 1.5 million pairs of export - ii - products and about 2,000 cottage and household units produce 9 million pairs for domestic consumption. The latter are considered unsuitable for foreign markets. This weak production base inevitably limits the possibil- ity of bulk and standardized footwear production, which is essential in achieving a breakthrough in the international market. v. Among other leather goods, the prospects of augmenting export earn- ings appear most promising in the manufacture of leather garments and gloves. The export target is 2 million pieces of leather garments annually by 1978/79. But this depends heavily on the assumption that fine quality leather will be available indigenously within the next few years. Until now, the most serious constraint on the leather manufacturing sector has been the continuous short- fall in the domestic supply of leather, especially that of the fine quality required for the production of exportable leather articles. vi. As to the export front, since 1973 the Government has emphasized a change in the composition of leather exports of from semi-processed leather to finished leather and leather goods. The immediate result was a set-back in the total export earnings by 16 percent in the first year compared to the preceding peak year. Without adequate machinery and chemicals, the industry could not respond positively to the transformation scheme for production capacity, with the result that the industry was depressed. The Government's determination to bring about a complete shift has recently been well echoed by the competent organized sector. Various incentives have been introduced to enhance the finishing capacity. The new strategy has just begun to have an impact on the resumption of export earnings, which are currently pro- jected to reach the level of Rs 2,000 million in 1975/76. This would mean a growth rate of 28.3 percent in the value terms, representing a substantial increase in finished leather and leather manufactures: 86 percent and 110%, respectively, in one year. But these two groups still constitute less than one-third of the total leather exports. vii. At the different stages of processing, various problems arise and affect the leather industry. The problems are extremely complex, since there are numerous factors associated with the production and marketing of leather and leather manufactures. As far as the well-established large firms are concerned, the most important consideration is that there be an assured pro- fitability to enable them to overcome the various obstacles in the transi- tional period. In addition to the provision of incentives for leather finish- ing facilities, import liberalization is called for to enable securing the supply of high quality dyes, chemicals, and other essential inputs at inter- national prices. To the new companies, the most serious difficulties are in obtaining the quality semi-tanned leather for further processing and in gaining access to marketing channels. viii. For the majority of small and cottage units, there should be in- stitutional assistance by the Government in the organization of production and marketing. Otherwise, it would be extremely optimistic to expect their effective participation in the conversion scheme. There is a proposal to set up Common Facility Centers in every concentrated area to strengthen the - iii - production base of the small and cottage operations and at the same time to organize production and'marketing systems. ix. Under present trade conditions, it is quite difficult to penetrate and capture a significant share of the large markets for finished leather and leather manufactures. Direct selling of finished leather requires a thorough knowledge of the market a.nd the ability to overcome the formidable barriers presented by the existing marketing relationships between agents, tanners and manufacturers in the importing markets. In the case of the footwear trade, the present marketing system precludes direct sales by the exporters, because the market is controlled almost exclusively by specialized agents or firms in the leading importing countries. India's initial emphasis should, therefore, be on the organization of footwear production up to the export capacity. With this production a direct sales system can be created outside the traditional patterns of marketing. x. The obstacles to a major shift from semi-finished to finished pro- ducts are formidable but not insurmountable. The overall strategy is sound. The approach to the development of major constituents (small and unorgan- ized sectors) appears rational. With foreign collaboration in the form of joint ventures and sub-contracting agreements, deficiencies in finishing techniques, shortages in sophisticated machinery and basic inputs, distance from the centers of fast-changing fashions and problems of marketing channels can be well alleviated. The production of finished leather is progressing very well and is in line with the development program. The footwear industry is continuously pursuing marketing expansion in the Eastern European countries through the State Trading Corporation, and is also seeking access to the inter- national market for the export of footwear components. Until the industry becomes completely capable of meeting the specific market requirements, India could benefit much more from exporting footwear components. This would leave the final stage of processing to the importer. Of the leather manufactures, great emphasis is put on the export of leather garments of high unit value. Even if superior quality leather from goat skins becomes available, problems of manufacturing techniques and of sensitivity to fashion-changes will remain crucial. Nevertheless, long-run prospects are good foh the leather manufac- turing sector, provided the development pace is maintained. Perhaps the most feasible initial approach would be to gear production to the markets for a more classical type of leather product, where conditions of access are better and less changeable. Eventually, with experience and a good reputation, India would benefit from higher export earnings of fashion items. There is no reason why India cannot achieve the target In a longer term. I. WORLD TRADE Changes in Trade Pattern 1. Since the mid-sixties, the importance of developing countries as world suppliers of raw hides and skins has been diminishing, and their share in the world leather trade has been rapidly expanding. Continuous development in leather production at various stages of processing has enabled some of the relatively advanced countries to succeed in exporting finished leather and leather manufactures. The reasons for this changing pattern are primarily: (1) the international comparative advantages in leather production enjoyed by developing countries with abundant raw mate- rials and labor, and (2) the structural and economic problems increasingly affecting the leather industry in developed countries. 2. Moreover, the government policy in developing countries of simul- taneously implementing restrictive measures and incentives have facilitated and also stimulated the processing of hides and skins into finished leather and leather products. Especially, the successes of Brazil and Argentina, given the fact that they may not be strictly applicable to other countries, demonstrate the effectiveness of a dynamic policy for the structural change and the export pattern of the leather industry. Among the measures applied by developing countries are the imposition of export duties and quotas, and a complete ban on exports of raw hides and skins. More recently, such res- trictions have been extended in some cases to the export of first-stage pro- cessed leather (for example, pickled and wet-blue products). Generally, these measures are accompanied by various fiscal and monetary incentives encouraging the export of finished products. 3. Another important factor encouraging the export efforts of develop- ing countries is the variety of unfavorable conditions the European tanning industry has faced lately: high wages, a lack of labor inflow, and pollution problems. The developed countries are, therefore, keen to explore the alter- native sources of tanned and finished leather. 4. World leather trade (semi-finished and finished leather) increased at a rate of 12 percent per annum, from US$318 million to US$948 million during the past decade, as against 7 percent in the export of hides and skins. In this period, developing countries contributed more significantly to the changing trade structure as shown below: - 2 - World Exports of Hides, Skins and Leather (in US$ million) World Developing Countries 1961-63 1972 1961-63 1972 Hides and skins: value 588.1 1,144.8 201.6 194.6 % share (64.9) (54.7) (75.5) (41.4) Leather: value 317.7 947.9 65.5 274.9 % share (35.1) (45.3) (24.5) (58.6) TOTAL: value 905.8 2,092.7 267.1 469.5 % share (100.0) (100.0) (100.0) (100.0) Source: UNCTAD, Committee on Commodities (TD/B/C1/163, December 24, 1974). 5. The trade in leather manufactures is international, but takes place mostly between developed countries. In the footwear markets, developing countries made an appreciable impact only at the beginning of this decade. In particular, Brazil emerged as one of the principal exporters to the United States, next to Italy and Spain in this period, and is reaching the level of US$90 million. This impressive development is largely attributable to: (1) the rapid adaptation of the Brazilian shoe industry to the requirements of import markets; (2) the price competitiveness of Brazilian vis-a-vis tra- ditional suppliers of certain types of footwear; and (3) a dynamic Government policy directly supporting export promotion. Demand Pattern and Prospects 6. Leather - World demand tor leather is generally rising. The in- herent superiority of leather as compared to substitutes, growing populations, higher incomes, urbanization, and a greater use of resources in developing countries -- all contributed to this increase. Despite the fact that demand for leather is influenced by synthetic materials, particularly in the markets for sole leather and industrial leather products, international leather markets remain buoyant. The boom started in 1972, when the demand for garment leather coincided with a shortfall in leather supply. 7. Western Europe continues to be a major market for leather and leather products, a situation which offers India a number of favorable conditions for the expansion of leather group exports. These conditions are (a) traditionally established trade relationships, (b) growing difficulties faced by the European tanning sector, and (c) the increasing demand for leather manufactures in European countries. Customarily, the European leather industry does not carry heavy inventories. Even the large-scale shoe factories hardly stock a fort- night's supply, having come to arrangements with local tanners to receive weekly replenishments, particularly of fashion leathers. However, 80% of the market is for finished leather in traditional colors, such as black and brown. - 3 - Production of leather goods from these leathers can be a more or less year- round activity. Importers, therefore, favor storing these types of leather from foreign suppliers. 8. For India as well as other developing export countries, it would be more beneficial to gear production to the markets for the established types of finished leather (in black, brown and white), where fashion changes are unim- portant and conditions of access are less stringent. A continuing transforma- tion of production into footwear and leather goods could be aimed at these stable markets. 9. Footwear - Traditionally, footwear production consumes nearly two- thirds of the entire leather supply. While in developed countries the rate of increase in footwear consumption seems to be decelerating, as more and more high-income countries begin to approach saturation levels for footwear expenditure, in developing countries an increasing demand for leather footwear and other products appears evident, particularly among the fashion-conscious urban population. 10. World footwear consumption is estimated at approximately 2 pairs/ person per year. The consumption levels of OECD countries, i.e., 2 to 3 pairs per person a year, as against less than a pair per person in the case of dev- eloping countries, clearly suggests the importance of OECD countries as the principal market for footwear exports, especially all-leather footwear of fine quality. Most of all, the US market is the largest world import market and has predominant control over the footwear trade. 11. There is a strong demand for leather uppers in both the US and Canada. A number of footwear manufacturers have apparently explored sources in India and have shown a keen interest in kid leather uppers. The pos- sibility of technical collaboration is also implied by those manufacturer- importers, especially in producing the required type of finished leather. The major competitors in this line would probably be Argentina, Brazil, Mexico and Spain. 12. While Italy and Spain still maintain a dominant position in foot- wear exports, some Latin American countries have successfully made headway. This has been accomplished not only by adapting the production structure to the specific requirements of importing markets, but also by developing an efficient marketing network, namely the physical presence in the exporting country of a large number of buying agents and representatives of well-known North American firms. This experience implies the possibility of penetrating the international footwear market and the importance of product adaptation as well as marketing. OECD/Imports of Footwear with Leather--Uppers in 1973 (in US$-million) Import Percent Share Germany 404.7 22.2 Belgium 98.7 5.4 France 87.3 4.8 Netherlands 95.5 5.2 UK 97.0 5.3 EEC total (832.7) (45.7) Sweden 54.8 3.0 Switzerland 70.4 3.9 US 717.5 39.4 TOTAL OECD 1,823.1 100.0 Source: OECD, The Footwear, Raw Hides and Skins and The Leather Industry in OECD countries, 1973. 13. Leather garments - Greater opportunities in the short and medium term seem to be in the field of leather garment exports. Leather apparel has already demonstrated its popularity as fashion and utility wear. Specifically, Spain, Turkey and Finland enjoy high export earnings from these items, while newcomers such as Brazil and Argentina are currently making substantial pro- gress in this field. 14. The strong demand for leather garments in North America indicates a continuously ascending trend, and prospects are definitely promising for the next few years. Although fine quality synthetic leatherette garments offer an alternative source of consumer satisfaction, and the US market is presently more concerned with price than quality, the market for leather garments has not been seriously threatened by synthetics. In sportswear, leather garments are considered durable and distinctive apparel, satisfying demanding consumers who are not looking for cheap alternatives. However, the demand may be affected by changes in the purchasing power of woolens and other fabrics of superior quality. 15. The value of leather per piece is high, yet a price differential is apparent between the product imported from a developing country and the domestic product. European consumers of expensive apparel are very "quality- conscious," therefore, the best market for leatherwear of the intermediate range (price and quality) may initially be North America. 16. Leather goods - The market for leather goods is exceedingly complex, with a wide variety of products in the three main categories: travel goods, - 5 - handbags, and small Leather products. In Western Europe and North America, an excellent market opportunity is open for individually styled hand-tooled articles. As these products are in most cases subject to fast-changing fashions, the type, quality and design of goods required by the market should be promptly adopted by manufacturers and exporters. Requirements differ markedly among the various developed countries. Another problem in fashion markets is the stock required to enable importers to supply the market with a full range of products immediately. Prices 17. The movement of leather prices shows no obvious trend and there are no clearly defined fluctuations. In general, however, the relative amplitude of the price fluctuations for leather appears to be roughly half as great as for raw hides and skins. Footwear prices, on the other hand, have pushed upwards along with other consumer prices, reflecting the considerable cost involved in the footwear manufacture in addition to cost of leather (see Tables 4, 5 and 6). 18. According to the recent UNCTAD study, "the prevailing average prices quoted for the product at different stages of processing suggest that a country's foreign exchange earnings could increase in the following fashion from the base, raw hides = 100": 1/ Hides Skins (%) (%) Raw 100 100 Wet-blue (semi-tanned) 122 153 Crust/ready to finish 184 218 Finished 236 296 The above figures are simply indicative of a broad order of magnitude in the incremental export value at each level of processing. In the case of men's leather shoes of average quality exported by a developing country, subsequent increases could, amount to a value as high as two times the equivalent finished leather, or around six times the value of the original raw material. General Problems Facing New Exporters 19. Under present market conditions, it is undoubtedly desirable for developing countries to move into higher stages of leather processing, but the question remains whether developing countries are capable of undertaking a major shift to the export of finished leather in a given time period. I/ UNCTAD (TD/B/C.1/163), December 24, 1974. - 6 - There are a number of problems that prevent developing countries from pene- trating and capturing a significant share of the market for finished leather: deficiencies in the finishing techniques4 a shortage in sophisticated ma- chinery, materials, and basic inputs; isolation from the international fashion centers; and a lack of structural capacity to adapt particular lines of pro- duction in the time dictated by fashion. There is also a problem of trans- port costs. The high transport costs involved may well outweigh the original advantage of production costs. The inferior quality of the raw material further tends to offset the cost advantage in processing. 20. Another serious limitation is that the tariff structure in the major importing countries tends to escalate as the degree of processing increases. This reduces, to a certain extent, the profitability of finished leather ex- ports over that of exports in the semi-processed form. Furthermore, strongly established marketing links among footwear manufacturers and tanners in the importing countries are not a simple obstacle for exporters of finished pro- ducts in developing countries to overcome (see Table 7). 21. Marketing Systems - In the importing developed countries, the sys- tem is strongly based on traditional links, with middlemen playing a prominent role. Thus it is virtually impossible for a foreign manufacturer-exporter to deal directly with the end-users, i.e., the manufacturers of leather products. The marketing agent generally operates on the basis of a commission, charged to the exporter, which is approximately 2 to 3% of the c.i.f. price or 3 to 5% of the f.o.b. value. The majority of these agents are not specialized traders: they supply the total demand of the leather industry, at each pro- cessing stage, in the countries in which they operate. The agent assumes a vital role, from the exporter's viewpoint, informing him of the needs of the import market and often as the exporter's sole commercial link with the importer. Most important, the agent clearly fulfills a significant financial function in the market, one that is vital to both the individual importer and to the exporter. 22. On the other hand, the disadvantages to the exporter are undeniable: dependence on agents does not lead to a stable or permanent market pene- tration by the leather exporter; the market is influenced more by the agent than by the exporter; and this is likely to adversely affect the exporter's level of profits. 23. Nevertheless, faced with such a marketing system in importing countries, it would be extremely costly and,risky for exporters in developing countries to become involved in the direct selling of finished leather to the end-users in the importing markets. This would require a thorough knowledge of the market and the ability to deal with the existing links between agents, tanners and manufacturers in the importing markets. 24. In the case of the footwear trade, the market is controlled almost exclusively by the specialized agents or buying chains and department stores in the importing countries, notably the US, which is by far the largest im- porter of footwear in the world. The competition among them is extremely keen. - 7 - The leading exporting countries (Argentina, Brazil, Italy and Spain) experience a marketing operation in which the importing agents are physically established in the exporting countries. The agents perform the marketing function, includ- ing the choice of supply sources and the fixing of prices in advance for every season. 25. The exclusive agents operate on a varying commission rate, depending on the type of footwear, the import volume and the relevant market segment. The rate is usually between 5 and 6% of the f.o.b. value, but can be as high as 8 or 10% for certain types of footwear. Importers generally manage to negotiate arrangements with suppliers concerning the exclusive right to sell particular models and the use of trademarks. 26. There are two distinct markets for footwear: the market for clas- sical types, which is characterized by a high-quality product of a certain design, and the market for fashion footwear, which is characterized by fre- quent changes in design and color. In the latter, the importer does not expect the same high quality as for the standard lines. What matters is attractiveness in appearance and color, in line with the current fashion. 27. The importers usually fix the prices of the products they sell to retailers. These prices are usually based on the prevailing market situation and the limits of the f.o.b. import price are established accordingly. There is apparently an accepted rule of thumb within the industry that the retail price of a pair of shoes should be approximately four times the f.o.b. import price. 28. Substantial changes in the market situation seem unlikely in a short or medium term, as a result of the high degree of fragmentation, of the indus- try and the insufficient financial resources necessary to establish a modern system of product distribution. In such situations, an ideal solution for the new exporting countries may be the creation of cooperatives or pools of exporters under the principle of decentralized production, and centralized marketing. It is also important for the successful matket operation that provisions be made for support financing devices to allow exporters on credit terms. - 8 - II. PRESENT STATE OF LEATHER INDUSTRY Availability of Hides and Skins 29. India maintains 12.5% of the world livestock. India's shares of the world cattle and goat.populations, 15% and 17% respectively, are parti- cularly important. The total supply of hides and skins in India is, however, considered rather inelastic. Over the last decade, the sheep population has been stagnant, the growth rates of the goat and cattle populations have gra- dually diminished, and the buffalo population has grown only modestly. Like many of the least developed countries, India's off-take rates for hides and skins (i.e., slaughtering as a percentage of herds) are in the very low range of 35-40 percent as compared to the world average of 60-65 percent. Such low rates are attributable to a combination of factors: (i) inadequate develop- ment of the meat processing industry and (ii) insufficient facilities for the recovery of hides and skins from fallen animals. In the case of sheep and goats, the recovery rate compares more favorably with the trend in major pro- ducing countries. On this basis, only a marginal increase is projected in the production of raw hides and skins during the Fifth Plan period. They are projected to increase from 88 million pieces in 1973/74 to 97 million pieces in 1978/79. Availability of Hides and Skins (in million pieces) Additional Item 1973/74 1978/79 Quantity Cow hides 19.8 21.3 1.5 Buffalo hides 8.8 9.9 1.1 Goat skins 41.4 46.2 4.8 Sheep skins 18.2 19.4 1.2 Source: Ministry of Commerce (on the basis of 1972 census). 30. The annual production of hides and, skins is three times greater than domestic requirements. As shown in Table 9, exports constitute a large proportion of the production of goat (90%) and sheep (60%) skins, and a relatively constant share of cow and buffalo hides (20-30%). These shares seem likely to remain unchanged at least for the next several years. 31. The quality of Indian hides and skins varies from item to item based on international standards: cow hides are generally of very poor quality; buffalo hides are of good quality, but are not yet widely used in the leather industry; goat skins are of high quality and are mainly used for shoe uppers - 9 - and leather garments; and sheep skins are also classified as high quality, but are generally smaller than those of other countries. Distribution System 32. In India, raw hides and skins are collected and supplied by a great number of small dealers, businessmen, and merchants who come from almost all the villages, towns and cities. Improper flaying and curing often damage the hides and skins. While there is no single marketing and distribution system common in the country, the system predominatly used is namely the "traditional" or "middleman" system, in which hides and skins pass through the hands of various types of middlemen before reaching a domestic tannery or an export merchant. 33. Through this marketing chain, the hides and skins are sold in bulk, by weight, on a mixed quality basis; generally no premium is paid for quality. The primary producer receives relatively little value and suffers from insuf- ficient information regarding prices. The influence of large tanners appears quite significant in price formation. This situation affects the entire mar- keting and distribution chain, providing incentives or disincentives at each level of activity. 34. Large tanners, in general, have established their own networks for the collection of the basic raw materials. These tanners are linked with big dealers in the countryside who, in turn, collect in smaller areas. Some tan- ners obtain part of their supplies from auctions in the large marketing centers. The tanning process is followed up to the ready-to-finish stages. In most cases, the finished leather from hides of relatively inferior quality is ab- sorbed by the footwear industry and is used for domestic consumption. Structure of the Leather Industry 35. The processing of hides and skins involves broadly four stages: (i) recovery and initial preparation of raw hides and skins; (ii) production of semi-tanned hides and skins; (iii) production of finished leather; and (iv) manufacturing of leather products. India's large-scale production of finished leather is a fairly recent development, encouraged by the Government policy that aims to expand export earnings by increasing the value added to the virtually given supply of raw hides and skins. While the large tanners process semi-tanned goat and sheep skins into finished leather for export, the footwear industry itself produces the finished cattle and buffalo leather required for their footwear production. Since there is no systematic informa- tion available, it is exceedingly difficult to estimate the value added at each stage from the semi-processed to the final leather goods. But according to some sources, the value added is assessed to 40 to 45% for the vegetable tanning of raw hides and skins, 30 to 35% for the chrome tanning, and double or more for finished leather. - 10 - (A) Tanning 36. India's centuries-old leather tanning industry consists of about 800 predominantly small-scale tanning units that are spread throughout the country. Mainly concentrated in the area of Tamil Nadu (433 units), West Bengal (200 units), Uttar Pradesh (25 units in Kanpur and Agra), and Maha- rashtra (10 units), the tanners have developed important centers for chrome tanning in Calcutta and Kanpur and for vegetable tanning in Tamil Nadu. Of these tanneries, only about 100 units are classified as "standard tanneries" (a unit which is at least semi-mechanized and is widely known for its opera- tion in the leather industry). The tanning industry employs around 160,000, which is 16% of the one million employment in the leather industry as a whole. No details are available on the current employment position, though some examples of the large tanneries in Tamil Nadu indicates a typical employment level of 700 to 1,200 per large unit: 50% represents unskilled labor at an average wage of Rs 200-300 per month, and skilled labor Rs 350 to 450. 37. Two tanning methods are employed in India: the first, Eastern Indian (vegetable) tanning, started two centuries ago, uses the bark of indi- genous "Konan" and "Avaram" bushes, as well as wattle bark; the second, the wet-blue process, uses bichromate and other chemicals to produce semi-tanned leather. Many tanners in India utilize both methods. As all the raw hides and skins are first converted into semi-tanned leather in India, there no doubt exists a processing capacity up to the level of the raw hides and skins that are available each year. There are 23 DGTD 1/ registered tanneries with the capacity to produce 30.8 million pieces of semi-tanned leather; and about 80 licensed small units 2/ with the capacity of 32.5 million. On this basis, it is estimated that the remaining one-third is produced by a large number of cottage and family operations. 38. At present, the production of finished leather depends on the exist- ing capacity to process around 32.9 million pieces of semi-tanned hides and skins into finished leather. This process is carried out.in 23 tanneries, including 15 large units. Indeed, the recent Governmeit policy designed to encourage the conversion continues to make a significant impact on the capacity of the tanning sector to undertake finishing. The licenses issued thus far indicate that the total authorized finishing capacity will probably reach the level of 43 million pieces by the end of 1975/76. Evidently, this capacity expansion has been created only by the large and medium size tanners who have some degree of competence in production, marketing and management. 39. Most small tanners are still not in a position to adapt their opera- tions to processing of finished leather. They operate with limited financial resources and employ simple conventional methods of production. Without some 1/ Directorate General of Technical Development. 2/ A small unit, in terms of output, operates typically with the tanning capacity of 1,000 skins (4,000 sq. ft. in area) or 200 hides (4,000 sq. ft.) per day in an average of 2 to 3 shifts. - 11 - form of institutional assistance, their active involvement in the production and marketing of finished leather seems doubtful. The investment requirement for the conversion ranges between Rs 1 to Rs 3 million (depending upon the capacity and kinds of hides and skins to be processed). In most cases, it is neither possible nor economical for small-scale tanners to make an investment of this magnitude. Recognizing the situation, the Government has been promot- ing the concept of Common*Facility Centers in every concentrated area, to which small units can be attached as cooperatives or consortia (see Part III). 40. At present, the capacity utilization of the tanning industry appears to be still as low as 45-50 percent of the installed capacity. The under- utilization of capacity is largely a result of the difficulties that the tanner-exporters have encountered since 1972/73. Producers engaged in the production of finished leather must concentrate almost exclusively on exports to the highly competitive markets of developed countries. Unlike the situa- tion with semi-tanned leather, which is easily tradable, the export of finished leather requires direct marketing channels providing close links between pro- ducers and importers, and finishing techniques comparable to those of developed countries. The end product is extremely sensitive to market specifications, which are dictated by frequent changes in fashion. Indeed, the higher the processing, the higher the risk, especially in the absence of domestic markets. (B) Footwear Industry 41. The principal categories of footwear manufactured in India are shoes, sandals and chappals, mostly for domestic consumption. The manufac- turers, dispersed throughout the country, have their main production centers in Agra, Miraj, Bombay, Calcutta and Kanpur. A great number of cottage and household units, as well as eight large machanized factories, form the structure of the industry. 42. The footwear industry produces an annual average of 200 million pairs of various types of shoes, of which the share of the mechanized sector has represented less than 10 percent during the past few -years. For the small-scale and household units, official production data.are unavailable, but rough estimates for 1972/73 show output levels at around 60 million and 100 million pairs, respectively. Clearly, the impact of the mechanized sector (large units) is still minimal in India's footwear industry. - 12 - Footwear Production: Mechanized Sector (million pairs) Western Type Indian Type Total 1968 9.60 8.55 18.15 1970 7.74 7.75 15.49 1973 7.22 7.14 14.36 Source: Indian Institute of Foreign Trade. 43. Agra, as the major center of artisan footwear manufacturing, produces about 12 million pairs a year. Centered there are two categories of footwear makers: 200-250 small scale factories, i.e., units employing 10 workers or more and operating simple machinery for upper stitching, cutting, etc.; and about 2,000 cottage and family units. The small-scale factories produce one million to 1.5 million pairs per year, most of which are exported to Eastern European countries. The family and cottage sector caters entirely to the domestic markets, with an annual output level of 9 million pairs of a type of shoe totally unsuitable for foreign markets. 44. Typically, the production of the small-scale factory is 100-150 pairs per day, and household units 2-3 pairs per day. This weak production base definitely limits the possibility of bulk and standardized footwear pro- duction, which is essential in achieving a breakthrough in the Western market. Nevertheless, there has been an interesting development in establishing links between some of the small units and the large mechanized factories, based on the principle of decentralized production and centralized marketing and tech- nical assistance to the small shoemakers. For instance, Bata (the largest manufacturer) procured an average of 20,000 pairs per week from 28 small units in 1974; and Corona and TAFCO 1/ arranged an offtake of 15,000 pairs a week from 15 units. Designs and specifications of the types of material were all provided by the contractors. The procurement prices of shoes, normally determined by adding 10% margin to the production cost, ranged from Rs 30 to Rs 40 per pair in 1974. 45. Another large center, Miraj in Maharashtra, is the production center of Kohlapuri Chappals. Here cottage units manufacture chappals under the management of cobbler-artisans who secure orders from merchant exporters. There are approximately 1,000 units in this State engaged in making Kohlapuri chappals, each employing 3-10 artisans. The total output reaches the level of one million pairs a year. The main raw materials are upper leather (cow hides) and sole leather (buffalo hides). The hides are usually supplied by 1/ Tannery and Footwear Corporation, Kanpur. - 13 - the local dealers. In addition to their commercial functions, merchant ex- porters play an important role in the marketing of Kohlapuri chappals, pro- viding the necessary finance to the artisan. The lightweight and low price made chappals very popular in the US for casual indoor wear. Although the current export consists of only one variety, called "Athani," 1/ a high-heel Kohlapuri chappal has been introduced to the US market. 46. At present, there is a serious shortage in the fine quality leather available to the footwear manufacturer. The Chinese Tanneries in Calcutta supply their leather to the footwear sector whose production is almost totally exported to Eastern European countries (mainly to the USSR) through the STC operation. Except for a few large scale manufacturers, most of the shoe producers without tanning facilities of their own depend on the tanneries for leather supplies. Normally, only the inferior grade of leather is left to the domestic footwear industry, because tanners feel reluctant to supply footwear leather to domestic manufacturers, even if prices are comparable to those of exports. The reasons are that they prefer to maintain their identity an exporters; they are anxious to retain credit facilites available only to exporters; and they enjoy import privileges provided to exporters. (C) Leather Manufactures 47. Leather products include primarily (i) Shantiniketan leather pro- ducts, 2/ (ii) travel kits, (iii) wallets, purses, key cases, etc., (iv) gar- ments and gloves, (v) saddlery items, and (vi) industrial leather goods. The sector consists of four large scale manufacturers and innumerable small and cottage units, a structure very similar to that of of the footwear industry. Heavy concentration is in Calcutta, Bombay and Madras. The annual production values at an average of Rs 200-300 million a year. 48. Shantiniketan leather manufacturers, numbering approximately 150 small and cottage units, are centered in and around Calcutta and employ about 10,000 workers. Total production during 1974 accounted for about Rs 35 million in value terms. Several manufacturer-cum-expprters supplement their production with procurement from small and cottag&-units whenever neces- sary. Wages are paid on a piece rate basis for different operations, such as coloring, stitching, embossing, glazing and polishing. Most of these oper- ations are carried out by female workers earning around Rs 6-8 per day. 49. The immediate problems for the Shantiniketan producers are: (i) in- sufficient availability of E.I. tanned leather, the principal raw material; (ii) a shortage of "spirit," which is another important raw material for these 1/ The shoe upper is connected with a toe-ring by a lace. 2/ The products comprise shopping bags, ladies' handbags, purses and wallets, which are made of lower grade E.I. (East Indian) tanned leather embossed in multi-color motifs. - 14 - particular products, and thus commends, the high prices (the open market rate is Rs 15-18 per litre, as against the control price of Rs 3.65 per litre); and (iii) lack of a formal source of guidance for desian and market diversi- fication, etc. 50. Other major items are industrial leather gloves, with a production of 2-2.5 million pairs a year; harness and saddlery items with an output value of Rs 10 million a year; and various travel goods, wallets, handbags, etc. The total annual production of the latter group is estimated at around Rs 200 million. Wallets account for 40% of this production, ladies handbags 30%, waist belts 20%, and travel goods 10%. 51. An essential raw material for the manufacture of leather goods is is the finished leather, particularly light leather. Although manufacturers face little difficulty in fulfilling the requirements of the domestic market, they are constrained by the acute shortage of the special quality leather needed for export products, due to either the strong foreign demand for India's quality leather or the total unavailability of certain special types of leather in India. Export Performance 52. India is one the principal suppliers of semi-processed leather to the world markets. Over the years, India's leather export composition has changed from a large proportion of raw hides and skins to a large proportion of semi-finished leather, which currently accounts for about 70%. Until 1970 exports of leather groups averaged around Rs 1,000 million, and the highest level of export earnings exceeded Rs 1,850 million in 1972/73. This level was sustained throughout 1973/74. 53. Since 1973, at the recommendation of the Seetharamiah Committee (see Part III), a change in the leather export composition has been em- phasized. At first, the immediate implementation of the quota system im- posed on semi-tanned leather, combined with a rather ineffective response from leather producers, caused a decline in the total export earnings (Rs 1,660 million) of 16 percent in 1974/75 from the preceding year. The increase in finished leather exports was not sufficient to offset a decline in semi-finished leather from the level attained in the previous period. The quota system to restrict semi-tanned leather exports, as well as the 20% export duty, was designed to generate an excess domestic supply of hides and skins for further processing. The objective was not only unfulfilled, but the measures upset the entire industry, particularly exporters who enjoyed relatively high profits from the shipment of commodities in the universally tradeable semi-finished form. Manufacturer-exporters were reluctant to risk a large investment in finished leather processing. Without adequate machinery and chemicals, a significant transformation of production capacity could not take place. The majority of the small-scale tanners were financially incapable of participating in the conversion scheme. - 15 - Exports of Semi-Pressed and Finished Leather Year Total Semi-Processed Leather Finished Leather Rs Crores /a Rs Crores (% Share) Rs Crores (% Share) 1970/71 82.2 68.8 (84) 1.9 ( 2) 1971/72 100.9 .85.4 (85) 4.3 ( 4) 1972/73 187.5 152.4 (81) 17.2 ( 9) 1973/74 184.6 147.4 (80) 16.8 ( 9) 1974/75 155.9 109.3 (70) 26.9 (17) /a One crore equals 10 million. 54. While the first reaction of Indian leather exporters resulted in an irregular supply of semi-finished leather to world markets throughout 1974, a sudden increase occurred in the supply of hides at low prices, resulting from a mass-slaughter in Argentina brought about by a drought and high cattle feed costs. Consequently, even the traditional importers of Indian leather turned to alternative sources. In 1974, although India's export of finished leather rose, quality was not quite comparable to international standards, especially in terms of regularity in substance and selection of the right colors. The situation clearly ,called for the development of suitable tech- nology and the supply of necessary tanning materials, chemicals and auxi- liaries which would promote the production of quality leathers and goods. 55. As a promotional measure for finished leather exports, the Govern- ment has recently introduced various incentives, including a 5.5 percent drawback, a 10 percent Import Replenishment Licence, and a 40 percent air freight subsidy on the basis of f.o.b. export value. The new strategy has just begun showing its impact on the resumption of export earnings which are projected to reach level of Rs 200 crores in 1975/76. Leather Export Earnings (Rs Crores) 1974/75 1975/76 /a Increase Semi-tanned leather 109.3 110.0 1 Finished leather 26.9 50.0 86 Leather footwear components 13.5 27.0 110 Others 6.2 13.0 110 Total 155.9 200.0 28.3 /a Projection. - 16 - 56. While the UK, Italy and-West Germany are the major markets for India's E.I. tanned leather, the USSR market plays a predominant role in India's chrome tanned hides and skins. On the other hand, US imports of finished leather from India suddenly tripled to the value of Rs 69.3 million in 1973/74, as compared to Rs 24.7 million in the previous year. Its market share accounted for 41.3% of the total for finished leather exports, which was Rs 167.8 million. Major Markets in 1973/74 E.I. Tanned Leather Chrome Tanned Leather Finished Leather (% share) (% share) (% share) UK 27.5 USSR 65.0 US 41.3 Italy 22.1 Italy 7.1 UK 14.2 W. Germany 14.8 Czechoslovakia 3.0 Italy 12.3 Source: Indian Institute of Foreign Trade, "In Country Study on Finished Leather and Leather Manufactures," 1975. 57. India's export of footwear currently represents only 2% of world trade, and less than 5% of domestic output. Of the total production (200 nillion pairs), only about 10 million pairs were exported, equivalent to 9% Df the total leather export earnings in 1974/75. Although three-quarters of Eootwear exports originate in small units, a substantial increase from this 3ector in the coming years appears unlikely in the present context. The fragmented production base, consisting of small and household operations, Ioes not permit bulk and standardized production of shoes suitable for Western markets. Exports of Footwear Year Quantity Value (million pairs) (Rs. million) 1970/71 7.0 90.9 1971/72 7.4 86.8 1972/73 7.5 103.0 1973/74 7.9 112.8 1974/75 10.0 135.0 1975/76 (Proj.) 13.5 180.0 - 17 - 58. The State Trading Corporation canalizes the entire footwear exports. In practice, however, the canalization affects only exports to Eastern European countries because in the case of exports to other markets, the role of the STC is limited to simple formalities, such as the collection of a serv- ice charge-levied on the exports. Its marketing efforts contribute to a great extent of the rise in foQtwear exports in the recent past. These efforts were especially important in developing the markets for the footwear manufactured by small and cottage units. Imports by Eastern European countries (including the USSR) currently account for over 40% of the total, with the balance more or less evenly spread over North America, Western Europe and other regions. During the past several years, the USSR has emerged as the largest importer of India's footwear. These imports comprise mainly conventional men's shoes in the price range of Rs 25-35 per pair, while other important markets (the US, the UK, Australia, and Canada) import from India such items as children's shoes and low price chappals and sandals (Rs 10-15 per pair). The marketing effort of the mechanized sector, though it represents only 20%, has created an access to the important markets of Western Europe and North America. Considering India's extremely small share in the total US imports and limited exposure in terms of variety, there is enormous scope for India to increase exports to these markets, as quality finished leather becomes available in India. Exports of Footwear by Destination (Rs. million) Country 1970/71 1971/72 1972/73 1973/74 USSR 45.7 33.6 41.7 33.8 Australia 2.3 5.3 4.3 14.0 US 22.8 25.8 31.9 25.0 UK 4.5 5.4 4.9 6.4 Canada 2.3 4.1 3.5 5.9 Total 90.9 86.8 103.0 112.8 (inc. others) Source: EPC, Kanpur and IIFT, New Delhi. 59. Leather goods exports totalled Rs 91 million in 1973/74, nearly 30% of the production in value terms, being primarily various Shantiniketan leather products (about Rs 30 million). No export statistics by item are available, and therefore it is not possible to identify the major items causing the dec- line to Rs 62 million in 1974/75. In the current fiscal year a phenomenal increase in the export earnings of this group is projected reaching the level of Rs 140 million. - 18__- 60. About six manufacturer-exporters, each with an export value of Rs 2-3 million a year, have actively engaged in promoting the export of the Shantiniketan products. Nevertheless, in 1974/75 the slackening demand in the major market of Japan and in the US resulted in a setback by about 25 percent or Rs 22.5 million as against an average Rs 30 million in the preced- ing three years. Lack of product innovation and adaptation seriously limits sustained export growth in this group. It is most essential to keep abreast of changing fashions and to secure specialized marketing channels for the products based on Indian motifs and designs. 61. Among other leather goods exports, harness and saddlery items demonstrate a significant expansion in exports and represented nearly 75% of the total output in 1973/74. In view of the growing demand, it is envisaged that exports of this item alone will exceed Rs 10 million in 1975/76. Exports of Harness and Saddlery Quantity Value (tonnes) (Rs. million) 1970/71 113 2.58 1971/72 108 2.70 1972/73 214 5.73 1973/74 n.a. 8.80 Source: EPC, Kanpur and IIFT. 62. The target for 1978/79 aims at an increase in leather goods exports to Rs 680 million, assuming that future export patterns of this group comprise mainly leather garments and gloves, in line with the world market prospects. According to OECD data, world exports of leather goods and leather garments almost doubled from Rs 3 billion (US$400 million) in 1970 to about Rs 5.5 bil- lion (US$710 million) in 1972. Moreover, the sustained market buoyancy is an encouraging sign of the greater use of finished leather for manufacture of leather garments and gloves. - 19 - III. INDIA'S LEATHER DEVELOPMENT FRAMEWORK Background 63. In 1972 the Committee on the Development of Leather and Leather Manufactures for Exports (Seetharamiah Committee) investigated the state of the leather industry to consider what steps should be taken to accelerate the shift in export consumption. The committee recommended implementation of measures to discourage the export of semi-processed leather exports and, at the same time, adequate investment in the leather sector for processing facilities. 64. Among other things, the introduction of quantitative restrictions was intended to reduce progressively the export of semi-finished leather which, in turn, was expected to induce tanners to develop production of highly pro- cessed leather and leather goods. However, in the absence of simultaneous implementation of investment schemes, the restrictive measures alone caused serious difficulties in India's leather industry and trade in the initial two years. Development Framework 65. The development target for the Fifth Plan period is based entirely on the Seetharamiah Committee recommendations (i.e., a production of finished leather equivalent to 75% of the volume of semi-tanned leather exports in 1972/73). This would require a finished leather capacity of 60.3 million pieces of hides and skins (including additional availability of 8 million pieces by 1978/79). Production Target of Finished Leather 1978/79 Quantity (million numbers) Hides Skins 75% of E.I./Chrome tanned exported in 1972/73 7.3 45.0 Additional availability 3.3 4.7 Total 10.6 49.7 66. Of the estimated volume of finished leather available in 1978/79, 50% is expected to be for direct export and the remaining 50% to be further processed into various leather manufactures, such as footwear, garments, and industrial leather goods. The plan envisages that export earnings in 1978/79 would amount to Rs 150 crores from finished leather exports and Rs 243 crores from the export of footwear components and leather goods. - 20 - Export Target, 1978/79 (Rs. million) 1974/75 1978/79 Semi-tanned hides and skins 1,093 380 Finished leather 269 1,500 Footwear and components 135 1,755 Other goods 62 715 Total 1,559 4,350 Source: Ministry of Commerce. 67. To develop the tanning sector, the Government considers a two-fold approach: (i) to encourage higher utilization of existing capacity by a set of export incentives, and (ii) to provide common facility centers in areas where there are concentrations of small scale tanners. Currently, 23 units have the total existing capacity to process 32.6 million hides and skins into finished leather. In addition, certain small tanners, using the traditional methods, could produce some fully-tanned leather. Thus, there is a shortfall in the capacity requirement amounting to 27.4 million pieces. The crucial issue is organizational support in the form of processing and marketing services to the small scale and cottage producers of semi-finished leather. 68. The provision of Common Facility Centers will enable small tanners to utilize the services at the Center in order to further process their semi- tanned hides and skins into finished leather. In other words, semi-tanned leather is the raw material input brought to the Center where it is converted into finished leather. The units have an option of exporting directly or through any centralized agency. In addition to the two existing Centers in Tamil Nadu established by the Central and State Governments, nine other locations have been identified as suitable sites for such Centers. Chrompepet, Madras (Chingleput District) 1 Ranipet (North Arcot District) 1 Vaniyambadi (North Arcot District) 1 Ambur (North Arcot District) 1 Pernambut (North Arcot District) 1 Dindigul (Madurai District) 1 Kanpur (Uttar Pradesh) I Calcutta (West Bengal) 2 Total 9 69. The financial requirement of each Common Facility Center varies according to the types of leather to be processed: - 21 - Chemicals Land and Machinery Working (Foreign Annual Capacity Building Imp. Ind. Capital Exchange) Output (pieces/day) -------------------(in Rs. million) ------------ Cow hides 600-1,200 1.5 1.5 1.0 2.0 0.8 10.0 Buff-calf skins 600 1.5 1.5 0.5 1.5 0.4 10.0 Goat skins 3,000 1.5 0.7 1.3 0.5 0.4 15.0 Sheep skins 3,000 1.5 1.5 0.7 0.5 0.4 25.0 Source: Leather Export Promotion Council, Madras; Indian Institute of Foreign Trade. Nearly half of the total investment consists of machinery and chemicals, of which import requirements account for around 75 percent. The indigenous ma- chinery industry lacks the capacity to supply the wide range of machinery and equipment required for the finishing process. Most of the necessary chemi- cals are costly, as well as unavailable indigenously. In fact, the avail- ability and cost of important chemicals and auxiliaries are likely to become binding constraints on the growth of the finished leather and leather goods industry. 70. Based on the plan, 30 million pieces of finished leather should be further processed into various leather manufactures. The target aims at expanding production capacity through 1978/79 in the following magnitudes: Product Production Export Target Footwear 85 million pairs 30,nillion pairs Shoe uppers 15 " " 1 "i" Garments 2 million pieces 2 million pieces Other leather (To utilize 12 million square feet of leather, goods about 775 cottage units to be partially mechanized and 25 large units to be established) 71. The basic approach proposed for the footwear sector involves the establishment of export-oriented large scale manufacturers in association with the internationally-known shoe manufacturer-cum-distributors and the organization of the 2,000 or so cottage and family units on the basis of decentralized production and a centralized marketing and distribution system. The principal operational method comprises dividing production processes into (a) components (uppers and sole materials) and (b) shoe assembly which enables bulk production of standard quality shoes, retaining the character- istics of small-scale artisan products. - 22 - 72. As a pilot project, the possibility of broadening and strengthening the Agra production base has been explored. The objective of the Agra Inte- grated Leather Complex (according to the Pre-Feasibility Report prepared by the STC) is to develop an export-oriented footwear industry by providing common service facilities, under the ownership of an autonomous corporation (e.g. Leather Corporation of India), but for lease to individual small entre- preneurs. The Government envisages the creation of six more integrated leather development centers in the major concentrated areas, along with the concept of the Agra Complex. The location and suitable products for each center are also identified. 73. Among other leather goods, leather garments and gloves are considered important export products, especially in view of their growing popularity in world markets. The export target for all leather goods is set at a level of Rs 72 crores in 1978/79 as against the earnings of Rs 6.2 crores in 1973/74. Attainment of this ambitious target depends heavily on the assumption that fine quality leather will become available indigenously within the next few years. Policy Implementation 74. On the basis of major recommendations made by the Seetharamiah Committee, the Government has taken the following steps: (a) Quantitative restrictions were placed on semi-tanned leather exports effective April 1973. The quota ceiling for 1973/74 and 1974/75 amounted to 20% on hides and 10% on skins out of the export level achieved during the calendar year 1972. Further changes 'will be made in the quota allocations on the basis of an estimated difference between the total availability of hides and skins and the finished leather production capacity each year. (b) Licensing policy - No new license for finished leather is required to the extent of up to the existing capacity for semi-finished. Letters of intent/licenses are issued to new units for the production of finished leather, with an export obligation of 50-60%. For the small-scale sector, the provision of common facility centers is planned under the auspices of the recently approved Central Leather Development Corporation, and various State Leather Corporations. (c) An export duty of 20% on semi-processed hides, skins and crust leather. (d) Canalization for exports of footwear and all categories of semi-tanned leather, including crust leather, through the State Trading Corporation of India, Ltd. - 23 - (e) Import Replenishment Licenses (REP) are available against the exports of semi-tanned leather at 3%, with a stipulation that two-thirds of the REP should be used for imports of the machinery and equipment necessary for modernization and ex- pansion. Against the finished leather and leather goods exports, REPs are issued at 10% and 15-20%, respectively. (f) Cash compensatory support was introduced to the leather ex- porters effective October 1, 1975, in order to augment export profitability and to finance market development expenses. The rates are: 5% f.o.b. for crust and finished leather, 10% for shoe uppers and 15% for footwear and other products. (g) Leather Development Fund administered by the State Trading Corporation (accumulated from a 0.75% service charge levied on exports of semi-tanned leather) is released for the establishment of common finishing centers, shoe upper centers, and regional testing laboratories, etc. It amounts to Rs 10.8 million. (h) Imports of listed machinery and auxiliary are allowed for registered exporters against their REP without prior DGTD approval. Imports from an expanded list of chemicals and dyes are also allowed now against the REP. (i) Air-freight subsidy is available for exports of finished leather, footwear and components, and leather goods at 40% of the air-freight paid, or 7% of f.o.b. value, whichever'is less. 75. The Government, with this set of policy instruments, has attempted simultaneously to accomplish (a) the restriction of export of semi-tanned leather by the progressive reduction of export quotas and the enhancement of export duties on semi-tanned leather; and (b) encouragement of the production and export of leather and leather manufactures, especially footwear and com- ponents by export incentives and import liberalization schemes. To support the effective transformation of the leather industry, the Government has recently approved a new institution, Leather Corporation of India Ltd., under the Ministry of Industry and Civil Supply. Institutional Arrangements 76. Various organizations support and extend assistance to the leather industry for export promotion: Export Promotion Council (LEXPROCIL). There are two councils: Leather Export Promotion Council in Madras and Export Promotion Council for Finished Leather and Leather Manufactures in Kanpur. LEXPROCIL is the Govern- ment sponsored organization with the objective of promoting leather and leather product exports. It supports the leather sector with various services relating - 24 - to export management, and also performs an important runction as the source of information on markets and related issues. It has a duel function of linking (1) Indian traders and overseas buyers, and (2) Indian traders and Government policy-makers. Central Leather Research Institute (CLRI). The CLRI provides tech- nical and training inputs.to the leather sector, and also extends assistance in the field of product diversification and promotion, along with the intro- ducting of new techniques for leather processing. The research program of the Institute is reviewed every two years in an effort to incorporate recom- mendations of the industry and allied organizations. State Trading Corporation of India (STC). As the canalizing agency for the export of semi-tanned leather and footwear, the STC plays a signifi- cant role in marketing footwear manufactured by small and household units. At present, the STC secures export orders and allocates them among 11 groups (each consisting of 1-15 units). In addition, the Corporation represents several major exporters who procure footwear from cottage and family units. The STC is also involved in the creation of common facility centers with the Leather Development Fund. Development Commissioner, Small Scale Industries (DSSI). The DSSI is located within the Ministry of Industry and Civil Supplies, and is in charge of the Small Scale Industries Development Organization. Its primary function is of an advisory and promotional nature. For the leather industry, the DSSI has backed various development schemes, such as Common Facility Centers for finished leather processing and the schemes for semi-mechanization of foot- wear manufacturing. Leather Corporation of India Limited. The Corporation is a new cen- tral institution under the Ministry of Industry and Civil Supplies. It has principal objective of integrating Government's approach to the leather in- dustry (see Appendix III). State Leather Corporations have already been established in some States and are pending in others, with the objective of assisting industrial development at State level. Problems 77. Various problems arise and affect the leather industry at the different stages of processing, apart from the heterogeneous characteristics of hides and skins. The problem is extremely complex since it relates to the diversity of the factors associated with the production and marketing of leather and their effects on price levels. Based on the present state of India's leather industry and its development plan, some of the main con- straints and the strategy to achieve industrial transformation in the leather sector are discussed below. 78. First, in anticipation of no basic changes in traditional customs regarding animals, the availability of hides and skins will presumably be - 25 - inelastic, and of low quality, particularly in the case of hides. Thus, pro- blems of raw material supply and quality exist. The success achieved by some leather exporting countries clearly demonstrates, however, the possibility of overcoming these obstacles by the development of leather processing techniques and the diversification of end-uses. A lower and medium quality leather does not preclude its uses in some sectors of the leather manufacturing industry. 79. Added to the problem of unavailability of superior machinery, equip- ment and basic inputs, India's leather industry suffers the problem that finishing techniques are not yet as highly refined as in the developed coun- tries. To alleviate the handicap, recently the Government, through the STC, has recently been actively seeking some sort of foreign collaboration (such as joint ventures, sub-dontracting or bilateral agreements) which would econo- mically facilitate the necessary infrastructure for the conversion scheme and at the same time promote production techniques adequate to meet the specific market requirements. Such a collaboration would also facilitate a breakthrough in world leather markets. For the small and cottage units, the Government has been pursuing a program to set up an official coordinating body to link these small units together in leather processing and the footwear production and to assist in arranging domestic subcontracts with the larger firms. 80. The first instance as a result of the STC efforts is the EEC involve- ment in determining the possible collaboration. The findings of the EEC mem- bers indicate that there is the possibility of forming a joint India-EEC com- mittee of tanners for collaboration in leather production and marketing; that India's footwear units have a limited scope for entering into the high-fashion area immediately; and that there are positive prospects for the exports of footwear uppers- a-ndard- and medium-fashion lines. 81. Second, while India's determination to move into the higher stages of leather processing is justified, and the time for action seems propitious, the question remains as to what would be the most appropriate policy devices to achieve the development objective. The underutilization of the existing leather-processing capacity should be corrected by the provision of incentives, import liberalization and financial assistance. 82. The Government has devised a new quota system on the basis of an estimated difference between the total availability and the existing finishing capacity in the period under consideration. It implies a substantial increase in the internal availability of hides and skins, because it assumes full util- ization of existing capacity, i.e., 21 milli6n pieces of hides and 25 million pieces of skins in 1976/77. The question still remains whether the industry will be able and willing to raise its capacity utilization enough to absorb the newly generated supply without adequate incentives. To the well- established large sector, profitability should be ensured to enable them to overcome various obstacles in the transitional period. Unless there is an initial support by the Government to compensate for the probable reduction in returns to the industry, resulting from risks and marketing costs, it is extremely difficult to expect an effective conversion in the leather process- ing. For, unci today, India's finished leather exports have been limited to - 26 - experimental or sporadic purchases oy certain manufacturers to meet their immediate needs. Clearly, to succeed a breakthrough in any market requires a strategy to create a sustained demand for the products that India is able to export. For this reason, initial marketing costs should not be under- estimated. MAXIMUM QUOTA RECOMMENDED FOR 1976/77 Total Hides Total Skins -------(million pieces)-------- Availability 30.74 62.95 Finishing Capacity 21.00 25.00 Maximum Quota 11.74 37.95 Existing Quota 9.54 59.43 Changes in Quota X 21.48 (36%) Source: Ministry of Commerce. 83. The import requirements are undoubtedly well recognized in the course of leather processing transformation. To accelerate the production capacity building, the industrial licensing policy is simplied such that an existing manufacturer of semi-tanned leather can undertake finished leather production to an extent equal to the existing capacity without licensing ob- ligations. New units are licensed only under the condition that the producer should manufacture finished leather using semi-tanned hides and skins as the raw material. As to the import of leather machinery, the step to facilitate Open General Licence for actual users is taken to encourage finished leather and leather goods exports. While such a licensing policy leaves few alter- natives to the manufacturers, the problem of the high import duty levied on machinery (40%) and auxiliaries (as high as 200%) clearly discourages invest- ment in the capital goods required for carrying out modernization. 84. The shortage and high cost of certain principal chemicals and aux- iliaries will become a major constraint to the industry. The problem will get accentuated with a progressive increase in the manufacture of finished leather. Since most of the sophisticated chemicals are not indigenously available, the industry has to depend on imports. It is reported that the costs of chemicals range from 18 to 35% of f.o.b. value in the case of fin- ished leather, as against 5 to 20% for semi-processed leather. In the short term, a flexible policy for imports of essential chemicals and dyes seems of the utmost importance. While the recent expansion of the list of chemicals that can be imported against the REP is a positive step, this does not provide adequate flexibility in regard to types of dyes required by the industry. As the dyes and pigment materials are critical inputs and are scarce indigenously, it is reasonable to make special provisions enabling the manufacturers (1) to respond quickly to the color specifications of the importers in line with the trend prevailing in the international markets; and (2) to secure the supply of dyes at international prices, so they can produce competitive export goods. - 27 - 85. Third, the domestic supply of footwear leather will probably be another serious problem in a longer term. Even now, with the exception of a few large-scale footwear manufacturers that possess tanning capacity, the majority is facing a shortfall in the supply of quality leather for the production of exportable footwear. In fact, tanners heavily concentrated in the South customarily export directly, and there are problems of trans- portation and communication between the widely dispersed areas. The de- velopment plan envisages that 50% of the total finished leather available by 1978/79 will be put into the manufacture of various leather products, largely footwear for export. Unless the tanners receive incentives compar- able to or compensatory for the loss of benefits that the leather exporters currently enjoy (in terms of the exporter's identity, financial and import privileges), the tanners will continue to be reluctant to create a domestic market for finished leather. In this respect, the means of lessening this supply constraint is properly conceived in the concept of the integrated leather development complex which will be established in six regions. 86. Last, there are several crucial matters to be tackled - marketing, quality control and design. The marketing system of major importers seems unlikely to change. As discussed earlier, the marketing agents will remain playing a vital role even with a significant financial function. Thus, it appears most advantageous for exporters to secure a close association with importers by having their own offices or representatives in the importing markets or alternatively by entering into sub-contracting agreements. Such arrangements would also facilitate the market specifications as to quality, design, and style. The Leather Corporation of India is expected to assume primary responsibility for design and quality control. India certainly has the resources to achieve the targets. Most important is, therefore, the organization of production and marketing as promptly as possible. - 28 - IV. EXPORT PROSPECTS 87. Given the GOI's emphasis on and support of export development or leather and leather manufactures, the prospects for achieving Zhe Plan tar- get depend largely upon a specific strategy to effectively tackle the present production and marketing problems. The overall strategy is sound. The approach to integrated leather development appears rational. However, the Plan target envisaged seems somewhat optimistic, especially in terms of the time specification, i.e., by the end of 1978/79. 88. Leather exports are projected by the Ministry of Commerce to amount to Rs 3,180 million (US$357 million) valued at 1975/76 prices. This comprises Rs 900 million in semi-finished leather (28% of total), Rs 750 million each in finished leather and footwear (23.5% each), and Rs 780 million in leather goods (25%). Compared to the percentage distribution of the 1974/75 exports, the projection implies a pronounced increase of the earnings from footwear and other leather manufactures. Although a recovery evidently took place in 1975/76 from the setback of the first two years of the transition, the ex- tremely high growth rates anticipated (55% per annum for footwear and 77% per annum for other manufactures) are significantly out of line with the growth pattern since 1970/71 of 14% and 47% respectively. 1974/75 1978/79 (Rs million) (%) (Rs. million) (%) Semi-finished leather 1,093 70 900 28 Finished leather 269 17 750 23.5 Footwear and Components 135 9 750 23.5 Other Goods 62 4 780 25 Total 1,559 100 3,180 100 89. While finished leather processing is progressing satisfactorily in providing increased exportable finished leather, the production base for foot- wear manufacture has yet to be strengthened with sufficient capacity to absorb an excess domestic supply of footwear leather. Associated problems, such as the need to understand the type, quality and design of products required in foreign markets and appropriate trade channels should also be effectively tackled. The ambitious target set for leather manufactures stems from the expected expansion of leather garments of the high unit value. Here the pro- blems of manufacturing techniques and the sensitivity to fashion changes need to be examined. Assuming continuous efforts, there seems no reason why the targets cannot be achieved in the longer term. 90. The Bank mission, therefore, estimates that growth in these two categories might proceed at approximately 40% per annum over the next three years. On the other hand, finished leather exports are projected to exceed the GOI target of Rs 750 million (US$84 million) and reach a probable Rs 1,000 - 29 - million (US$112 million), representing a real growth of 25% per annum. For the reasons discussed above, the Bank's projections assume that more finished leather might become available than the quantity which would be utilized by the domestic manufacturers of leather products. Consequently, an aggregate estimate for 1978/79 would amount to Rs 2,900 million (US$326 million) which implies a compound annual growth rate of 12.4% from 1975/76. 91. The long-term prospects are good. The timely implementation of dev- elopment schemes is most essential in securing the benefits from the current buoyancy of the world leather market. The problems of manufacturing tech- niques and market expansion will be alleviated considerably by the promotion of foreign collaboration in the form of joint ventures. It is clear that GOI is actively pursuing the development objective for this export-oriented industry. However, its impact will probably become more appreciable in the 1980s. Appendix I Hides and Skins Processing Stages 1. Pickled: the process in which raw hides and skins are first treated with acid and usually confined to skins alone. 2. Rough tanning: a process involving the chemical conversion of raw hides and skins into leather; this process uses vegetable or mineral tannin to produce "wet-blue" or "blue-chrome" leather. Rough tanned hides and skins may be dried after tanning (resulting in so-called "crust" leather) and exported, in which case they can easily be re-wetted in the tanneries of importing countries and retanned, either with vegetable or with chrome tannin. 3. Crust-tanning: processing (either chrome or vegetable tanned) before export can be carried one step further, resulting in crust-ready-to-finish leather. At this stage tanning is virtually complete and the leather requires only dyeing and finishing in the importing country in the grain pattern and color the manufacturer requires. 4. Finished leather: leather used to manufacture footwear, garments, handbags and numerous other end-products. Appenalx II TYPES OF FINISHED LEATHE-R A. Finished Leather from Hides and Skins (cow, buff and calf) - upper - suede/nappa - lining - others B. Finished Leather from Sheep Skins - suede/nappa - lining - others C. Finished Leather from Goat Skins - suede/nappa - glazed kid - lining - upper - others D. Other Categories - buff sole leather - case sides - diaphragm leather - parchment leather Appendix III LEATHER DEVELOPMENT CORPORATION OF INDIA INTR3DUCTION The proposal for the establishment of the Leather Corporation of India under the Ministry of Industry & Civil Supplies was approved by the Cabinet Committee on Economic Policy and Coordination at their meeting held on the 25th of March, 1975 subject to the following directions: (i) Care should be taken to see that small entrepreneurs do not get displaced; and (ii) The new Corporation should establish a suitable working relationship with STC to take full advantage of its expertise and facilities in effecting export of leather products. FUNCTIONS The objective of the Corporation is overall development of the leather industry in the country. The detailed functions of the Corporation are as follows: (1) Development of - (a) leather and leather goods industry; (b) leather goods machinery; (c) manufacture of leather auxiliaries, chemicals, etc. (d) manufacture of leather goods, fittings, grinders)etc. (2) Establishment of production-cum-service .centers for finished leather and leather goods; (3) Promotion of research and development in leather and leather manufactures. (4) To advise, assist, help and guide - (a) implementation of ISI standards; (b) training and employment of technicians, designers, etc. (c) establishment of capacity for tanning and finishing by organizing tanners and manufacturers. Appendix III Page 2 (5) Promote the formation of cooperatives of village level workers and small entrepreneurs to ensure that no leather resources go to waste and that all hides and skins drawn at the village level find their way into organized sector. (6) Organize and promote the setting up of raw material banks for the supply of machinery spares and raw materials. (7) Conduct and organize research in marketing and disseminate market intelligence for development of the industry vis-a-vis export needs. (8) Arranging and financing, where required, the building up of infrastructure for the development of the industry. CAPITAL STRUCTURE The initial capital requirements of the Corporation may be of the order of Rs 5 crores of which 50% will be equity to be subscribed by the Gov- ernment of India and 50% may be loaned to be advanced by the Government of India. The authorized capital of the Corporation may be raised to Rs. 10 crores. An amount of Rs 5 lakhs 1/ has been provided in the BE 1975-76 for investment in the Corporation. PRESENT STATUS The Memorandum and Articles of Association of the Corporation have been circulated to the Ministry of Finance, B.P.E. and Department of Company Affairs for their comments. The Corporation is likely to be registered shortly. The question regarding location of headquarters of the Corporation is under condsideration with the Ministry of Works and Housing. The appointment of the Chairman of the proposed Corporation is also under active consideration in consultation with the Ministry of Finance. (State Trading Corporation of India, 1975) 1/ A lakh equals 100,000. Appendix IV LIST OF FOREIGN FIRMS SCHEDULED TO VISIT STC FOR COOPERATIVE VENTURES Foreign Party Item Concerned 1. ETS Lecomte, Paris Finished leather. Also interested to work as an agent for the Indian finished leather. 2. ETS Plot, Paris Finished leather. Also has a proposal for running a finishing plan on a turn-key basis and underwriting 60% of the pro- duce for export. 3. Exner & George, London Leather uppers. Also interested in the manufacture of football shoes with a technical-cum-marketing collaboration. 4. Cora et Cie, Paris Finished leather and leather footwear uppers. 5. Netter et Cie, Paris Leather footwear. 6. Groupe Sac, Paris Leather footwear uppers and finished shoes and boots. 7. Schmengers, W. Germany Finished leather and stitched. 8. Schwann, W. Germany Finished leather, stitched components. 9. Reinhard & Schuh Co. Footwear components and footwear. 10. Emgee International, Finished leather West Germany 11. CHARVO, Grenoble, Sale of tanning machines, establishing France of technical-cum-marketing tie-up in India ,6nd finally interested in the manufacture of machines in India for the tanning industry. The above encouraging response was a result of the discussions at the European Common Market with representatives of various European Federa- tions such as the Tanners Federation of Europe, the Footwear Manufacturing Association of Europe, the Machinery Manufacturing Association of Europe, and the Morraccian Association of Europe wherein the proposal for marketing tie-up was thoroughly discussed and the representatives in their individual capacities decided to try out the Indian merchandise. Appendix IV Page 2 In order to acceLerate Ene process, une needs of the Indian tanners and leather goods manufacturers including footwear manufacturers are identified as: 1. Marketing intelligence and marketing. 2. Styles and designs. 3. Techneal know-how. 4. Marketing tie-up. 5. Chemicals. 6. The mechanization process could be further accelerated if one wants to consider the transference of tanneries and footwear manufacturing plants which had to be closed down in Europe. The machinery manufacturers of Europe were most enthusiastic and were prepared to sell the machinery on a deferred payment basis and decided to show the capacities of their plant at the Madras Fair in January, 1976. (State Trading Corporation of India, 1975) Appendix V Leather and Leather Manufacturers Trade Barriers 1. Non-tariff barriers In OECD countries, protection of the leather industry, with the notable exception of Japan, is provided mainly by tariff. The non-tariff restrictions imposed by these countries are very limited: (i) the US observes health and safety standards on certain types of imported semi-tanned bovine skins and leather; (ii) Switzerland applies sanitary regulations and taxes to imports of raw hides and skins; and (iii) Japan imposes the quantitative restrictions on all categories of bovine leather, as well as certain types of sheep and goat leather. 2. Tariffs A general feature of the tariff structure in OECD importing coun- tries is the escalation of the rate of import duty, as the degree of pro- cessing embodied each product increases. The Kennedy Round resulted in the virtually complete removal of tariff barriers to imports of raw hides and skins into OECD countries. A few exceptions are the MFN duty fares ranging from 1 to 8 percent ad valorem by Spain and zero to 2 percent by the US. The estimates of MFN tariff protection for leather, footwear and other leather goods in the OECD countries are as shown in the following table: Appendix V Page 2 Estimated Average Nominal and Effective Rates of MFN Tariff Protection a/ for Leather and Leather Products in Selected OECD Countries Leather Footwear Other Leather Goods Nominal Effective Nominal Effective Nominal Effective ---------------(percentage rate of protection)------------- Austria 8.5 25.3 25.3 40.8 9.9 15.7 Canada 10.7 30.7 25.0 39.2 17.7 30.8 EEC b/ 7.0 21.4 9.4 12.0 7.1 10.3 Japan 17.8 57.4 22.4 32.5 12.8 15.2 Sweden 7.3 23.1 14.0 24.4 7.0 12.5 US 6.2 18.6 10.5 15.4 4.3 4.3 a/ All the country averages under each heading relate to a standard group of products and are based on world trade weights: the estimates are based on the nominal duties in application in 1971. b/ Relates to the enlarged Community of nine members. Source: UNCTAD Secretariat estimates. For developing countries, all kinds of leather and leather goods, being semi-manufactured or manufactured products, should in principle be covered by GSP schemes. In practice, however, many preference-granting countries have excluded some leather products from their schemes. INDIA LEATHER INDUSTRY AND EXPORT PROADTION LIST OF TABLES Table No. WORLD LEATHER TRADE 1. World Livestock Population and India's Position. 2. Turnover Rate of Hides and Skins. 3. Exports of Hides, Skins and Leather from Developing Countries, 1961-63 to 1972. h. Price Trends for the Main Types of Raw Hides and Skins (OECD). 5. Price Trends for the Main Types of Leather (OECD). 6. Price Trends for Footwear (Selected Countries). 7. Tariff lNDIA'S LEATHR 8. Availability of Raw Hides and Skins. 9. Pattern of Domestic Consumption and Exports of Hides and Skins. 10. Exports of Leather and Leather Manufactures, 1969/70 to 1975/76. 11. Exports of Footwear, 1970/71 to 1973/74., 12. Exports of Selected Leather Manufactures, 1970/71 to 1973/74. 13. Leather Export Projections, 1978/79. 14. Tariff Concession under GSP. 15. Typical Examples of Cost Structure, Semi-Tanned Leather. 16. Cost Structure - Finished Leather. TABLE 1 WORLD LIVESTOCK POPULATI ON AND INDIA ' S POSI TI ON (in million heads) Share of World India India Cattle 1961-65 (av.) 1,016.2 175.7 17.3 1270 1,125.9 176.5 15.7 1972 1,165.h 176.8 15.2 Buffalo 1961-65 115.6 51.9 44.9 1970 124.8 54.2 43.4 1972 126.5 54.8 43.3 17eep 1961-65 992.4 40.9 4.1 1970 1,063.1 42.8 4.0 1972 1,056.7 43.0 4.1 Goat 1961-65 371.6 62.3 16.8 1970 394.2 67.5 17.1 1972 396.2 68.5 17.3 Total 1961-65 2,495.8 330.9 13.3 1970 2,708.0 340.8 12.6 1972 2,7L4.8 343.1 12.5 Source: FAO, Production Yearbook and Indian Institute of Foreign Trade. TAT.R -2 TURNOVER RATE OF HIDES AND SKINS (P) - Production in million pieces (T) - Turnover Rate (%) 1961-65 1970 1972 (PT ( T) (P) ( T) (P) (T) Cow Hides World 474 46.6 543 48.2 550 47.2 India - - 20 11.3 20 11.3 USA 96 92.3 103 91.9 105 88.2 Argentina 32 74.4 39 81.2 29 53.7 Brazil 24 30.3 32 33.6 34 34.3 Buffalo Hides World 28 24.1 33 26.4 34 26.9 India - - 8 14.8 9 16.4 China 6 21.4 6 20.0 6 20.0 Sheep Skins World 914 92.1 1025 96.4 1017 96.2 India - - 21 48.8 22 51.2 Australia 814 2.2 113 62.8 108 66.2 New Zealand 82 52.1 114 63.3 111 68.0 Goat Skin World 265 71.4 288 73.1 295 74.5 India - - 45 66.2 47 68.1 China 48 88.9 51 89.5 52 89.6 Niglria 15 71.4 17 73.9 17 70.8 Source: Same as Table 1 TABLE 3 DEVELOPING COUNTRIES: EXPORTS OF HIDES, SKINS AND LEATHER, 1961-63 TO 1972 1961-63 1970-72 1972 $MIl.T mil.- $ $ Mil. Hides & Skins 201.6 75 190.9 44 194.6 41 Leather 65.5 25 238.2 56 274.9 59 TOTAL 267.1 100 429.1 100 469.5 100 Source: Table 4. TABLE 4 PRICE TRENDS FOR THE MAIN TYPES OF PAW HIDES AN SKIS (First-quarter 1972 to first quarter 1971) 1972 ----------------------- 1973 ----------------------- 1974 First First Second Third Fourth First Country - Items quarter arter Cuarter Quarter Ox Hides Germany 30 - 39.5 117 208 Austria 40 - 49.5 97 158 141 115 132 Franc 34 - 34.5 278 205 192 181 Italy-/ 40 - 50 227 170 176 157 Norway 26 - 35 80 202 188 158 149 Netherlands 26.5- 29.5 122 194 162 151 122 115 Switzerland 35 - 39 108 184 127 122 119 118 Cow Hides Germany 25 - 29.5 106 197 139 132 105 128 Austria 30 - 39.5 104 171 136 116 117 133 B.L.S.U. 30 - 34.5 135 239 166 171 159 Finland 22 200 329 244 247 226 229 France 22.5- 2.5 141 293 217 185 Ital;r less than 30 248 175 188 169 Norway more than 18 74 215 200 170 161 Netherlands 26.5- 29.5 138 220 184 171 138 131 Switzerland 35 - 39 131 206 143 143 136 134 United States 15 - 17 129 269 206 207 199 211-' Bull Hides Germany 30 - 39.5 108 212 144 1.16 102 124 Nethe }ands 26.5- 34.5 123 226 160 159 134 153 Ital' 30 312 261 272 238 Finland 17 - 24 165 274 219 219 160 214 Switzerland 40 - LL9 117 191 134 124 2.08 124 United States 101 234 192 189 181 18612 Light Calfskins Germany less than 4.5 51 84 59 57 .50 56 Austria less than 4.5 79 97 95 3.L.E.U. less than 7 84 136 98 84 Finland 11 - 17 1.45 262 208 219 199 206 France less than 6 90 107 89 83 87 Italy2/ 4 - 6 163 178 182 146 Norway less than 7 63 .09 107 103 100 Netherlands less than 4 2.06 133 Switzerland less than 6 86 130 96 105 105 110 United States less than 4 82 131 123 122 122 122L/ Sheenskin She%:-lings B.L.E.U. 87 104 98 Italy 1.3 - 1.8 184 203 200 202 146 Norway 108 171 166 156 1.56 Lambskins B.L.E.U. 86 168 145 137 109 109 Italy2/ 223 241 241 241 191 Norway 122 244 237 222 222 January-February onlj. ifst Qarter 19 2.100 Source: OECD TABIZ 5 PRICE LRLL; FOR THE MAIN TYPES OF LEATM. (First quarter 1572 to first quarter 1974) 1972 ..........--------------- 1973 -------------------------- 1974 First Firs t Second Third Fourth First Country - Item Quarter Quarter Quarter Roll Buts Germany 113 170 153 145 131 134 Austria 115 183 173 154 146 154 B.L.S.J. 170 195 180 185 180 185 Spain 112 186 169 164 164 164 France 147 281 224 207 '200 216 Italy 1 236 189 186 182 Norway 130 187 178 170 160 Netherlands 114 164 148 144 143 143 Portugal 101 Switzerland 124 186 165 161 157 164 Australia 129 Box Calf Germany 93 116 123 117 104 107 Austria 112 125 117 107 103 113 B.L.E.U. 150 185 170 175 170 175 Spain 143 204 190 191 189 206 Finland 167 France 118 165 164 158 157 175 Iale/ 187 184 179 179 Portugal 99 Switzerland 115 145 124 120 124 124 Box Side Germany 89 130 126 117 107 107 Austria 99 B.L.E.U. 130 195 180 175 180 180 Spain 126 Finland 172 France 123 193 169 157 155 167 Italy;' 193 170 167 167 Norway 180 258 244 233 220 Portugal 91 Australia 212 SheeDskin Linings B.LI.U. 134 180 180 170 175 170 Spain 171 197 197 197 205 217 Finland 117 168 187 201 205 194 ita1 208 198 198 198 Portugal 227 Kid for Glove-Making Soain 154 227 227 234 248 265 Italyl/ 178 174 174 174 Portugal 116 1 First Qarter 1966 a 100 Source: OECD TABLE 6 PRICE TRENDS FOR FOOTdEAR (SELECTED COUNTRIES) CONSUMER PRICE INDICES 1974 1969 1970 1971 1972 1973 (1st quarter) Germany (1970=100) 94.2 100 109.7 119.2 131.0 140.1 Austria (1966=100) 104.3 106.8 111.6 122 136 142.5 United Kingdom (1963=100) 115 121 130 140 153 168 Netherlands (1963=100) 142 151 174 192 215 224 France (1970=100) ----- 100 111.7 125.4 136.3 Switzerland (1966=100) 107.6 112.3 121.3 121.7 136.3 152.8 United States (1967=100) 111.8 117.7 121.5 124.9 130.2 Japan (1970=100) ----- 100 105.7 113 137 162.9 Italy (1970=100) ----- 100 105 111 ----- ---- Spain (1963=100) 132.8 140.5 149.6 171.1 214.7 22j.o' Source: OECD, The footwear, Raw Hides and Skins, and Leather Industry, 1973-74. TABLE . Tariff Treatment of Hides, Skins and Leather in Selected OECD Countries (MFN - most favoured nation rates; CSP - rates under generalized system of preferences scheme; all rates are per cent ad valorem) EEC Japan United States United Kingdom Canada Spain Sweden BTN Items MFN GSPV MFN GSPI! MFH GS,214/ MFN GSP- MN GSPA MN GSP MFN CSP-2 '1.01 Raw hides and skins 0 0 0to2 0 0 0 1 to 8 0 .1.02 Bovine, buffalo and equine leather - Pre-tanned 0 to 8 15 7.5 ) ( 8 7.5 to 12.5 15 0 ) 4.5 to 9 0 ( - Tanned 8 0 20-1 10 ) (8 to 16 0 to 12 10 to 17.5 20 6 0 .1.03 Sheep and lamb skin leather - Pre-tanned 0 to 3 7.5 3.75 6 0 0 0 7.5 to 10 15 0 - Tanned 5 0 203' 10 6 0 12 0 17.5 10 to 20 6 0 41.04 Coat and kid skin leather - Pre-tanned 0 to 3.5 7.5 3.75 4 0 8 0 7.5 to 10 15 0 - Tanned 5 0 203/ 10 5 to 6 0 8 to 12 0 17.5 10 to 20 6 0 Source: National tariff schedules and GSP schemes. iote: Vnere no GSP rate is shown the item concerned has not Oeen granted preferential treatment under the CSP scheme of the country in question. 1/ Imports at GSP rates subject to quantitative ceiling 2/ Subject to safeguard conditions. 3/ - Subject to discretionary import licensing. 1l Schemes of the United States and Canada not yet initiated; GSP rates for Canada not yet available, Table 8 Availability of--Raw Hides and Skins (in million pieces) Increase (%) 1970/71 1973/77 to to Item 1970/71 1973/74 1978/79 1973/74 1978/79 Cow Hides 19.6 20.7 22.2 1.06 1.07 Buffalo Hides 8.1 9.2 11.0 1.14 1.20 Goat Skins 45.3 48.5 52.4 1.07 1.08 Sheep Skins 20.9 22.4 23.2 1.07 1.04 Total 93.9 100.8 108.8 Source: Ministry of Commerce, New Delhi January 1976 Table 9 Pattern of Domestic Consumption and Exports of Hides and Skins (based on 1970/71 data) (in million pieces) Exports Total Domestic % of Tota Category Availability Consumption Quantity Availabili Cow Hides 19.6 15.5 4.1 20.9 Buffalo Hides 8.1 5.6 2.5 30.9 Goat Skins 45.3 4.1 41.2 90.9 Sheep Skins 20.9 8.2 12.7_ 60.8 total 93.9 33.4 6o.5 64.4 Source: Ministry of Commerce, New Delhi January 1976 Table 10 INDIA: EXPORTS OF LEATHER AND LEATHER MANUFACTURES (in Rs. crores) Estimat( 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/7 1. E.I. taned hides & skins h9.7 44.4 63.6 100.4 85.0 72.5 75.0 2. Chrome taned hides & skins 27.2 24.4 21.8 52.0 62.4 36.8 45.o 3. Finished leather 2.2 1.9 4.3 17.2 16.8 26.9 50.0 4. Footwear & components 7.0 9.1 8.7 10.3 11.3 13.5 20.0 5. Industrial leather manuf. and other goodsl/ 3.4 2.4 2.5 7.5 9.1 6.2 14.0 87E2.2 100.9 187. 4 207. 1/ Including furs and lizard skins Source: Export Promotion Councils and ,DGTD Table 11 Exorts of Footwear Qty: '000 pairs Value: Rs. millie 1970/71 1071/72 1072/73 1973/74 All leather closed Q: 2,585 1,684 2,010 2,309 toe footwear V: 55.7 38.3 51.4 51.1 All leather open Q: 2,095 3,405 3,771 3,783 toe footwear V: 18.2 29.6 32.5 37.3 Leather sole Q: 152 204 47 98 footwear V: 2.3 2.5 0.4 1.0 Rubber sole upper Q: 1,849 2,041 1,639 1,745 leather footwear V: 13.5 15.3 13.2 14.5 Leather sole embroidered Q: 109 24 36 19 upper V: 1.2 0.2 0.4 0.3 Total Q: 6,790 7 358 7,503 79 V: 90.9 0t.9 97.9 104. 2 Source: EPC for Finished Leather and Leather Manuf., Kanpur. Table 12 Exports of Selected Leather Manufactures- (in Rs. million) 1970/71 1971/72 1972/73 1973/74 Harness and saddlery 2.59 2.70 5.73 8.82 Travel goods 0.14 0.14 1.99 2.20 Handbags, wallets, etc. 0.24 0.29 15.95 22.25 Leather apparel 1.26 0.84 1.17 3.07 Industrial leather goods 1.67 1.73 1.71 8.64 Total 13.61 19.90 36.04 61.78 (incl. others) Source: EPC January 1976. TABLE 13 Leather Ecport Projections, 1975/76 to 1978/79 (Ks million : 1)75/76 prices) 1975/76 Aission (Estimate) 001 Es&-imate Estimate Semi-finished 1200 900 950 E.I. (750) (650) (650) Chrome (450) (250) (300) Finished Leather 500 750 1000 -ptwear 200 750 Other c-anufactures 140 70U Tocal 2040 3180 2900 Source: GOI; iission Estimates. - -,L 14 ITDIA: LEA'TI T'.L Tariff Concession Under OSP (197/1) EEF EFTA USA Janan Vegetable tanned Buffalo calf 8% 0-7.5% -7*4 Cow calf 8 0-7.5 - 7.5 Sheep/lamb skins - 0-7.5 - 3.75 Bark tanned Cattle hides - 0-7.5 - 7.5 Buffalo hides . 8 0-7.5 - 7.5 Goat/kid skins - 0.75 - 3*75 Chrome Tanned Buffalo calf 8 0-7.5 - 7.5 Cov calf 8 - - - Cattle hides 8 - * Buffalo hides 8 - -- Sheep/lamb 3 - - 3.75 Goat/kid 5 0-7.5 - 3.75 Crust Leather Chrome tanned 8 0-6 - 10 Bark tanned - 0-6 - 10 Lining leather Sheep/lamb skins - 0-6 - 3.75 Finished leather Sheep/1amb 5 N.A. - 3.75 Chrome sheep suede 5 - 5 3.75 Goat liring & glazed kid - 0.75 - 3.75 Goat & kid - N.A. - 3.75 Others, n.e.s. 0-5 0-4.2 - N.A. Footuear Leather footwear - 0-22.5 8.5 13.5 (exc. embroid.) Leather sole & embroid. upper - 0-20 8.5 - Leather sole footwear, n.e.s. - 0-22.5 8.5 5 Rubber sole & leather upper - 0-20 2.5 13 Footwear components - - O 20 Saddlery & harness - - - - Leather Travelgoods - - - 6.25 Leather handbags, - - - 5 Wallets, etc. Belts, watch straps, - - 20 etc. Leather apparel - N.A. - N.A. accessories Leather goods, n.e.s. - - - 6.52 Industrial leather goods N.A. Source Report of "The Development of Leather and Leather Manufactures for Exports", India, Ministry of Foreign Trade. Sen-Tanned Leather Typical Examples of Cost Structure (Rs. per piece) E.I. Goat Skins I II Goat skins 18.00 16.00 Tanning agents/chemicals 1.75 (8.2%) 1.00 (5.3%) Labor 0.50 1.25 F. Overheads 0.40 0.50 S. Overheads 0.50 0.50 Ex-Factory Cost 21.15 19.25 S.T.C. charge) 5.85 5.2 Export Duty ) FOB Cost 27.00 24.45 E.I. Sheep Skins I II III Sheep skin 15.00 18.00 14.00 Chemicals/Tanning agents 1.50 (3%) 1.00 (5%) 2.00 (10.5%) Labor 0.50 1.00 1.50 F. overheads 0.50 0.50 1.00 S. overheads 0.50 0.50 0.50 Ex-Factory Cost 18.00 21.00 19.00 S.T.C. charge) 4.75 5.50 6.20 Export duty ) FOB Cost 22.75 26.50 25.20 E.I. Tanned Cow Hides I II Cow hides 45.00 35.00 Tanning agents/chemicals 3.75 (7.7%) .75 (11.7%) Labor 0.50 0.75 F. overheads ) S. overheads )12.00 9.5 STC charge ) Export duty ) bOB Cost 61.25 50.00 January 1976. - 2 - Semi-Tanned Leather Typical Examples of Cost Structure (Rs. per piece) Wet-blue Goat Skins I II III IV V VI Goat skinT. 20.00 18.00 20.00 18.00 16.00 16.00 Chemicalsf/ 2.00 3.00 1.00 2.00 4.00 1.50 Labor 0.30 1.00 0.30 0.70 0.25 0.30 F. Overheads 0.30 0.25 0.10 0.20 0.25 0d.5 S. Overheads 0.80 0.75 0.40 0.70 0.50 0.50 Ex-Factory Cost 23.40 23.00 21.80 21.60 21.00 18.80 S.T.C. Charge 0.23 0.20 0.20 0.22 0.20 3.20 Export duty 4.72 4.60 4.30 4.38 4.20 FOB cost 28.35 27.80 26.30 26.20 25.40 22.00 Wet-blue Cow Hides I II Cow hides 25.00 30.00 Chemicals2/ 10.00 8.00 Labor 0.30 0.60 F. Overheads 0.20 0.25 S. Overheads 0.50 0.50 Ex-Factory Cost 36.00 39.35 S.T.C. charge 0.36 0.39 Export duty 7.212 7.94 FOB cost 43.60 47.68 1/ % of Ex-Factory Cost I (8.5%), 1(13%), III (h.5%), IV (9.2%), V (14.3%), VI (8%). 2/ % of Ex-Factory Cost I (25%), II (20%). F. - Factory; S. - Sales. January 1976. Table 16 Finished Leather Cost Structure (Rs. per piece) (1) Zuggram Leather for Uppers I II Hide 35.oo 30.00 Chemicals 15.00 (26.7%) 20.00 (34.7%) Labor 3.00 4.00 F. overheads 0.50 0.50 S. overheads 2.50 3.00 FOB Cost 56.00 575 (2) Glove Leather from Goat Skin Skin 18.00 15.00 ChemicaLs 5.00 (20%) 4.00 (18%) Labor 1.00 1.00 F. overheads 0.25 0.25 S. overheads 0.75 2.00* FOB Cost 22.50 * includes rejects and non-exportable quality. (3) Plain Chrome Upper Leather (Rs. per sq. ft.) Hides 2.00 2.50 Chemicals 1.10 1.50 Labor 0.20 0.17 F. overheads) S. overheads) 0.35 0.38 FOB Cost 3.65 4.55- (4) Lining Leather (5) Glaced Kid Leather Skin 22.00 18.00 Chemicals 6.00 (19%) 3.00 (11.5%) Labor 3.00 ( F. overheads) 0.50 5.20 S. overheads) EB Cost 31.50 26.20 IBRD IO483R} 斗