Every year in India, the Finance Minister presents the Union Budget in Parliament. This lengthy article explores the impact of the 2018-2019 budget on activities relevant to this blog like running, rock climbing, mountaineering and cycling. Not to mention sailing and kayaking as viewed through the tax man’s lens. The article seeks to look beyond the obvious, with examples. Will raising import tariffs automatically trigger manufacturing at home? While that does have some effect, there are other steps too which are needed to localize production meaningfully, especially if local manufacturing is to stay relevant to the performance segment in sports.
The 2018-2019 Union Budget’s treatment of sports was a mixed bag. On the one hand, the centralized allotment of funds to the Sports Ministry increased significantly by Rs 258.2 crore to Rs 2196.36 crore. On the other hand, revision of import duty ensured price rise for a variety of imported sports equipment, including running shoes. In sports like kayaking, requests to re-examine existing duty rates went unaddressed.
A sting at retail level
February 1, around noon, the first news flash appeared of potential price rise in sports goods. Are you sure? Just days ago, the government was talking of encouraging sports… – that was the reaction of a Mumbai based-retailer of climbing and outdoor equipment. A few days later, the budget’s fine-print showed price rise in much of what he retailed. Climbing hardware and climbing shoes are almost wholly imported. The relevant customs duty had doubled from 10 per cent to 20 per cent. In footwear there seemed no exception made for sports shoes. A week after the budget, the shop’s owners were still waiting for a picture, clear in every respect. At shop level, clarity takes time to unravel.
For most of us, running is synonymous with freedom. It takes little to run. The growth of competition, including at amateur level, has changed that. Today, running is an industry with events, products and services available for a price. It is as corporate as your workplace; you chase goals, network, market, eliminate errors, advance your prospects, achieve – you do everything pretty much the same Sun Tzu-way you function in office. Our tendencies notwithstanding, running remains still an activity with health benefits and for those who care, a private ecosystem of self and universe. Before the latest budget, a pair of good running shoes cost anywhere between Rs 6000-10,000. The day following the budget, one newspaper picked a distinctly expensive model of running shoes and forecast an addition of Rs 2000 to its price tag. The eventual price was around Rs 17,000. Fact is, sale price of Rs 6000-10,000 is whammy enough. Whether you should use shoes for running or not, will remain a debate. For those who use shoes, finding the right shoe and sticking with it, is a matter of importance. Even runners from financially challenged backdrops, when they are able to afford shoes or access a pair, pick a good brand. As per a recent newspaper report, India’s per capita income in real terms (2011-12 prices) for 2017-18, was projected to be Rs 86,660. That would make it Rs 7221.67 per month. Juxtapose on that, Rs 6000-10,000 for a pair of running shoes! If you go purely by the import duties altered (overlooking how companies plan their sourcing), the 2018-2019 budget has made imported running shoes costlier still. Gym equipment strangely found soft corner as regards customs duty although its applicable domestic tax rate (GST) is high. As product category, gym equipment is more in the realm of institutional purchase than retail. In contrast, running shoes are widely bought.
Footwear is a focus segment under the government’s `Make in India’ program. In his speech, Finance Minister Arun Jaitley mentioned that the duty adjustment in question was done to encourage local manufacturing in a range of products, footwear being one. According to data on statista.com, the world produced 23 billion pairs of footwear in 2016. The top four manufacturing countries were China, India, Vietnam and Indonesia – in that order, with China leading by a hefty margin. If you go to a store in Mumbai that sells running shoes and check models for the ` Made in India’ tag, you will typically find it on cheaper models not associated with high performance. On the other hand, China, Vietnam and Indonesia frequently show up in tags from the performance segment. Clearly there are reasons best known to shoe companies, why this is so.
Organization and manufacturing culture
This blog couldn’t get a response from the foreign shoe giants dominating the market for running shoes. However, if you track published news reports, a narrative unravels of what happened in the footwear industry. Given its massive population – soon to be the world’s biggest – India is among the world’s biggest markets for footwear. According to a study by Technopak Advisors, cited in the media, the domestic footwear market is growing at 12 per cent per annum; it is expected to vault from $ 6 billion in 2014 to $ 11.5 billion by 2020. A big share of this industry is unorganized; 80-85 per cent of players fall in micro, small and medium enterprise categories. Data published alongside some of these news reports show that 40 per cent of industry sales came from modern retail while 60 per cent came through unorganized retail. Synthetic footwear constituted 80 per cent of sales, leather accounted for 20 per cent. The Indian footwear industry is known for its strength in leather craftsmanship. According to some in the business of making running shoes that this blog spoke to, in as much as India is strong in leather craftsmanship, it has catching up to do in other areas, including ability to produce real performance shoes for use in sports. Inadequacies surface depending on how truly performance oriented you want the shoe you make, to be. If you are aiming high, the Indian manufacturing environment falls short. For example, some of the types of rubber used in the soles of shoes meant for running and found in models overseas, are not yet available here. If your wish, as Indian brand, is to make a product that matches a good foreign running shoe, you end up either importing the whole shoe under your brand or importing the raw materials should you have manufacturing facility here. The market for sports shoes and performance shoes therein are still evolving in India. Consequently the manufacturing ecosystem for these products is also not highly developed. Depending on what type of shoe they wish to make, Indian manufacturers are forced to look overseas. Abroad (in the case of footwear, it is mainly China and South East Asia), the required raw materials are available as are well-appointed factories with skilled manpower, not to mention – the existence of well entrenched manufacturing culture.
It would seem the tariff revision of the 2018-2019 budget coincided with flux already underway in the Indian footwear sector. In the run up to GST, the industry reportedly sought five per cent tax for its products. At least one news report said, the Council for Footwear Leather and Accessories (CFLA) wanted shoe imports from China discouraged as these shipments had come to command “ over 20 per cent of the market by value.’’ When GST was implemented in 2017, the effective tax rate in footwear was five percent for shoes costing not more than Rs 500 a pair and 18 percent for the rest. GST is expected to be a game changer for Indian industry. The footwear industry was unhappy with the polarized tax rates of five per cent and 18 per cent. Revisions to GST announced in November 2017, brought no relief for footwear. If you go through media reports quoting footwear industry officials from mid-2017 onward, you will also find another aspect mentioned – the 18 per cent rate would be tough for those making shoes in the price range of Rs 500-1000. These points illustrate the industry backdrop against which, customs duty on imported footwear increased to 20 per cent in the 2018-2019 budget. Besides discouraging imports from China as sought, the move potentially opens up possibilities for domestic manufacturers to tap any tariff inspired-drive to manufacture locally; it also allows existing local players to grab volume in the middle segments of the market using cosmetic additions to what technologies they already possess. To note: the middle segment is not the performance segment. “ Everything therefore depends on what specific product you wish to make; how high you are aiming,’’ one manufacturer this blog spoke to, said.
Perhaps the most confusing part of the shoe story was the situation at retail stores selling imported running shoes. Two weeks after the budget, we visited a couple of stores at a leading mall. None of them knew of the customs duty hike. They spoke of prices revised after GST for the ongoing season, even prices reduced in the recent past. “ Maybe the impact of duty revision will show up in the next season when fresh stocks arrive,’’ one shop assistant speculated. But as of mid-February 2018, there is a caveat we should consider before reaching any simplistic conclusion on the budget’s impact on running shoes. January 26, 2018 was notable; a host of ASEAN heads of state attended India’s Republic Day parade. Almost fifteen years earlier, in October 2003, the initial framework for the ASEAN-India Free Trade Area (AIFTA) was signed. The final agreement was signed in August 2009 and the free trade area became effective in January 2010. Major exporters of footwear – including running shoes – like Vietnam and Indonesia, are members of ASEAN. At least one news report said that those from the Indian footwear industry requiring still to import, hoped that AIFTA would provide an alternative, cost effective route to the barrier of 20 per cent customs duty imposed by the 2018-2019 budget. Till these options play out, it is probably too early to speculate about prices of running shoes. A more relevant question is whether altering customs duty for protection, really triggers domestic manufacturing and if so, what the nature of that manufacturing is. The pattern of domestic manufacturing industry chasing volume and continuing to lag in technology was witnessed earlier in another budget, which tampered with customs duty.
The example of cycling and 2012 budget
The 2018-2019 budget and its impact on running shoes, brought memories of a budget tabled by Pranab Mukherjee in 2012, wherein the import duty for bicycles and bicycle parts was hiked. That was the first budget-induced jolt to cycling since the arrival of a slew of foreign brands revitalized Indian cycling. Six years after that budget, there has been change. Indian bicycle manufacturers have more models sporting better specs, in price brackets leading up to the performance category (also called super premium). This is where the market’s volumes are for now and into the near future. Two other aspects are visible alongside. Performance models continue to remain the domain of imported brands. It takes a combination of factors – ranging from a cycling culture that pushes itself to manufacturing that pushes itself – to develop performance DNA. That is a choice independent of manufacturing economics and love for tariff driven-protectionism; it is a commitment. Second, within the world of bicycle manufacturing, technologies relevant for the performance category are still not accessible in India or when accessible, not cost competent. New Indian bicycle brands – from the driven lot that is – do their own product designing but make their aluminum-bicycle frames overseas. The larger companies with big brands to protect are comparatively opaque. How much of their aluminum frames in the costlier models are made in India, how much is sourced from abroad – we have little idea of that.
Before the foreign brands entered, India was an all-steel bicycle market. Talk in the trade is that aluminum bicycle frames are still a matter of import. Butting and well finished welding – these are the two main challenges while fabricating aluminum bicycle frames. Butting requires you to hollow out aluminum tubes such that they are structurally strong at critical points even as they are light overall. This is done through the creation of varying wall thickness within the tube. Done improperly (aluminum is tricky material to work with), a tube can develop weak spots. You can cover up your deficiency by not pushing the limits in butting and retaining a heavy tube, which in turn makes for heavy frame. Word on the street is that Indian manufacturers are also hampered by their inability to do aluminum-butting and welding cost effectively at home. Result – aluminum frames continue to be imported. In the global bicycle industry, aluminum frames are a notch above steel. Stacked above aluminum are frame technologies using materials like titanium and carbon fiber. In the aftermath of the 2012 budget, bicycle prices rose, there was alteration of specs to suit price points – all this happened; in other words a giant ripple triggered, takes time on water to play itself out and strike fresh equilibrium. What improved in the process were products in the market’s middle – the volume category or what is called mass premium segment. As for performance products; what the shoe manufacturer said stays true across product categories: if you are customer, it depends on what you are looking for; if you are manufacturer, it depends on what you wish to make. This is where we stand in bicycles the budget of 2012 notwithstanding.
A sample of the new entrants – who are they, what are they like?
New industry players are different from the earlier lot. They don’t necessarily hail from industry. Some have a background in sports; others are deeply interested in the activities they cater to.
According to Wikipedia, Siddharth Suchde was once ranked number 39 in the world, the second highest ranked squash player from India. He grew up in India, Scotland and Switzerland and went on to attend Harvard University. The year he graduated from Harvard, Siddharth was national champion in college level squash in the US. In 2016, sometime after he retired from professional squash and commenced an e-commerce company, Siddharth started a private label in performance gear focused on serious athletes. It is called Azani Sports. In footwear, the company makes running shoes. Siddharth had no previous knowledge of footwear manufacturing. Entering performance shoes straightaway is a risky gamble; you can make or break your reputation. But Siddharth said that as an athlete, exploring ways to improve is what he has done all along. He has cut up shoes, taken them apart to see what goes into making them. He can talk of grades of rubber, raw materials for running shoes and manufacturing processes. His wish is to offer shoes that perform really well at reasonable price. So far, Azani has done its own designing and got the shoes made in Vietnam and China. They test the shoes in India and abroad. Post 2018-2019 budget, import duty for raw materials relevant to Azani’s manufacture rose by five per cent while fully built shoes were candidate for customs duty of 20 per cent. On the bright side, in a few months’ time, the company’s factory will be commissioned in Bengaluru, Siddharth said.
For a couple of years now, an engaging story in cycling has been Pune based-Psynyde Bikes. Founded by cycling enthusiasts, who grew up in the era of well entrenched Indian manufacturers of steel cycles and limited product portfolio, they pushed their rides to their limits, took them apart and modified them – till, they began designing and building custom bikes themselves. Soon they were ready to risk the numbers game. Psynyde designs in India, builds overseas and ships the products back for sale in the domestic market. It is a fledgling company with two factory built-models and different finish levels thereof. As products like running shoes and climbing gear took a hit in the 2018-2019 budget, cycling was breathing free. “ Bicycles seem to have been spared in this budget,’’ the country head of a leading foreign bicycle brand, said.
Indigenous manufacturing of climbing and outdoor gear has always been a tricky business because safety is critical in this line of sport. Climbing equipment in particular has to be tested and certified to international norms. Few knew of Gipfel till its crash mats lined the floor at the 2016 and 2017 World Cups in bouldering held in Navi Mumbai. The company with factory in Meerut now makes a range of products including climbing harness. When the 2018 budget rolled out, Gipfel was sitting pretty. Aapar Mahajan, CEO, said that up to 95 percent of Gipfel’s products are locally made. He said the budget hadn’t changed duty rates for imported raw materials Gipfel used. Asked about GST, he said, “ our sales have increased from last year but that is probably because we are a new company and constantly introducing new products. We are not sure if the sales would have increased faster if GST was lower. It is true that GST was 28 percent in July for most of our items and we did experience a slow momentum initially but it helped after GST was revised to 18 percent. I still wish that GST was 12 percent like in many other conventional sports equipment such as cricket because 18 percent is too high for this industry. Some sports equipment is taxed at 12 percent and the rest at 18 percent. This is not so motivating.’’
Elements important for change that budgets overlook
February 2018; Shailesh Krishna was in Mumbai to explore the possibilities of pursuing a PhD in product design / industrial design (human powered mobility). He started out studying automobile engineering. By the time he finished his engineering course, he had lost his admiration for IC engine-based transport (in fact, while studying engineering he conceived the blue print of “ a new kind of IC engine, which would leave behind many of the course properties of existing technology’’). He wanted to be a designer in the transport space but could see nothing heart-warming in the prevailing state of Indian roads. Where people once walked comfortably, there was an explosion of vehicles, terrible congestion and serious pollution. Even if you shift to clean technologies, you still won’t address traffic congestion. Further, there was something deeply disturbing about the idea of traveling in caged private space within a closely knit social fabric that is city. As the model perpetuates itself, insularity takes hold. On the other hand, cycling is exposed to world and universe. “ Bicycles work as a positive force in society. When I ride, my bicycle gives me freedom, it also connects me with people,’’ Shailesh said.
His next academic stop after engineering was the MIT Institute of Design in Pune. There, he started a cycling club called Ridea and when the time came for his final year project, he chose to work with TI Cycles. The company was planning to roll out a new road bike (it would debut under the Montra brand) and Shailesh contributed much to the program; he addressed aspects like bike geometry and ergonomic fit. He rode various models from international manufacturers, used as benchmark, over long distances to experience their ride firsthand. He cycled so from Chennai to Puducherry and from Chennai to Sriharikotta. He also put in a brief stint as business development manager covering markets in western India. Moving around at ground level, he saw how retailers of bicycles paid little attention to sizing bicycles properly to riders, he saw how badly designed many of the bicycles in the Indian market were. Even children’s bikes weren’t spared – some of the designs therein could potentially hurt riders. Interested more in making dealers understand the products they sold and not cut out to drive sales volume, it wasn’t long before Shailesh realized he wasn’t the man to grow business, do marketing or sell. His interest was in “ driving ethical design.’’
Shailesh has high regard for TI Cycles. But he does not let that interfere with his views on how design is treated in India. If you think about it, all change starts with design. To design, you must have the ability to comprehend multiple requirements; for instance, there’s what the customer seeks, there’s what engineering can do, there’s how much capital will be assigned, there’s the present as starting point and product lifecycle extending into the future (you need to have a sense of how trends may evolve) and then, there’s the challenge of how you can address all these expectations. It is an exciting, convergent process. But the Indian approach to manufacturing relegates design to the realm of looks and styling; it attaches premium to making money. “ Quality takes a backseat at most companies. Priority is for what can be produced fast and cheap,’’ he said. Result – designs get watered down; limits emerge on how much you can push boundaries. In an oblique manner, this probably explains why the classic Indian business play is around garnering volumes and not improving performance. If you want to improve performance, then user, product, design – they all assume significance as subjects to understand.
It provokes a question in the context of budgets periodically revising import tariff to encourage local manufacturing. How effective is raising import barriers if it is not accompanied by domestic industry’s willingness to introspect and change? I asked Shailesh what the ideal work environment for a designer like him would be. “ I would like to work for a brand that allows me the freedom to make things happen and yet lets me stay in their space, working on what I want to be involved with. I don’t want to be converted into what they define as work because that is what the market wants. I want the room to design and build without the company’s business or its fear of losing market, interfering,’’ he said.
The wall new ideas encounter
By virtue of the fact that it represents alternative perspective, creativity has always had a rough ride. Yet at every juncture when difference is sorely needed, it is creativity that comes to our rescue. Do we have an environment supportive of creativity?
A key component in manufacturing and localization is engineering. India is among the largest producers of engineers in the world. Around 1.5 million engineers are released into the job market every year in the country, a 2016 media report said.
In the nineteenth century, Sir James Thomason was the lieutenant-governor of north western provinces in British India. According to Wikipedia, under the system of project implementation used by the British, superintending engineers came from Britain; craftsmen, artisans and sub-overseers were recruited locally. The need to make the latter category more efficient led to the setting up of industrial schools and other related engineering establishments. The Upper Ganges Canal Project was a major assignment taken up by the British. Thomason proposed that a civil engineering college be started at Roorkee. The resultant Thomason College of Civil Engineering signified the start of formal engineering education in India; years later it became the Indian Institute of Technology (IIT), Roorkee. Under the British dispensation, ideation was their domain, the locals were trained to implement. Although it is now slowly changing, this approach has remained the bedrock of Indian engineering education.
Now retired, Dr R.V.G. Menon studied at IIT Kanpur, spent many years teaching mechanical engineering at engineering colleges in Kerala and eventually took his PhD in a line of research related to solar energy. Author of a book on the history and philosophy of science – it is part of engineering curriculum in Kerala – he has also been president of Kerala Sastra Sahitya Parishad (KSSP), one of the biggest grassroots level science movements in India. I asked him how valued tinkering is in India, as aptitude / ingredient in the making of an engineer. After all, curiosity for product and the tendency to take things apart; understand materials, craftsmanship, product architecture and assembly, build upon that knowledge – this is what you find common in earlier mentioned examples like the folks at Psynyde Bikes, Siddharth Suchde or Shailesh Krishna.
“ Our engineering education has traditionally straddled two levels. The more common, basic level restricted itself to the application of available knowledge. The higher level, wherein you try to acquire new knowledge is where creativity comes to play. As of today, the bulk of our engineering education is partial to the former,’’ he said. Altering this is tough because there is considerable resistance within the system; the majority of teachers belong to the old block. This is an issue in engineering education unlike in science or humanities, where research done or PhD earned, are respected for the value they hold. Currently, appreciation for creativity in engineering is more overseas. “ Things are slowly changing but given Indian context, it will take time,’’ he said. In practical terms, that delay is a measure of how long it will be before we become sufficiently sensitive to notice and appreciate creativity.
For Indian sports, even the existence of IITs hasn’t always been helpful. If you look up the story of Shiva Keshavan (veteran Indian luger who is Asian champion, participated in six Winter Olympics and coincidentally retired from the sport at the 2018 PyeongChang Winter Olympics, days after the 2018-2019 budget) on this blog, you will see there was a phase when he tried unsuccessfully to get his new luge built in India. The sport has product specifications that must be met. Shiva had approached one of the IITs to see if they would make his luge. Very simply put, a luge is no more than a fast, responsive sled. But to get those attributes correct, you should know materials, design and fabrication well, plus have empathy for intended application. The luge for Shiva couldn’t be built in India. It was finally built by former American competition luger Duncan Kennedy in league with the New York based-Clarkson University.
Make it easier to set up and run businesses. Don’t play with sports
Early February, when the Finance Minister was presenting the 2018-2019 budget in Parliament, an India-built sailboat – INSV Tarini – crewed by a team of women officers of the Indian Navy would have been making its way across the Atlantic Ocean, headed for Cape Town. For Goa based-Aquarius Shipyard, it was the second sailboat they built based on a Dutch design, out on circumnavigation. That is no small statement about Indian manufacturing; circumnavigation challenges boat and build quality. However, you would be getting it completely wrong if you concluded the Aquarius story is all about India’s wizardry with budget and tariff-inspired protectionism. Building INSV Mhadei – the first sailboat for circumnavigation the yard made – was passion and adventure, right from the retired admiral who conceived the project (Vice Admiral Manohar Awati [Retd] – he wanted India to succeed at solo circumnavigation with a boat built in India) to the naval officer who was her first skipper (Capt Dilip Donde [Retd]) to the yard that built her. In 2018, Commander Abhilash Tomy, the first Indian to do a solo nonstop circumnavigation (Mhadei’s second such voyage), will participate in the 2018 Golden Globe Race (GGR), yet another solo nonstop circumnavigation. His boat – Thuriya – has been built by Aquarius. That’s three boats for circumnavigation built at the same yard. Years ago, after the Mhadei was constructed and handed over to the Indian Navy, the guardians of India’s finances left their stamp on the mission to realize India’s first solo circumnavigation. Taxmen raided Aquarius; they were followed by the Customs. Their imagination revolved around `yacht,’ which was how the vessel was described in tender documents; yachts are taxed heavily. That episode – the yard got back what it was forced to pay – is now a forgotten snippet but one which clearly shows how narrow a book keeping-perspective of human pursuits can be.
The problem of being taxed on par with luxury yacht is also felt in kayaking. Kayaks meant for the performance category, capable of being used in white water rapids, have to be imported. Imported kayaks stand up to the stress and abuse that turbulent waters and rocky rivers throw at them. They are also designed such that it is easy for paddler to roll over and revert to surface should the kayak capsize. Currently the cumulative tax impact on these types of kayaks aggregates to 53 per cent; 25 per cent customs duty plus 28 per cent GST. Reason – tax officials include them in the same bracket as luxury yachts. According to one Bengaluru based-kayaker, the situation is so bad at times that authorities tax kayaking accessories also at the same rate. “ We had given representations to government but the rate enforced on us remains unchanged,’’ he said almost two weeks after the 2018-2019 budget.
If you read the history of foreign climbing gear-brands, you will see that many of them began as cottage industry. Interest in sport drives curiosity for improvement, quest for apt gear, design, testing and manufacturing – historically in sport, that’s the chain. In bicycles and running shoes, internationally there have been new brands that cultivated a following. Some of the younger bicycle brands were born through committed cyclists getting into design and manufacture. In running shoes, there are stories overseas of brands which began as retailer of performance footwear, got into customization of shoes (improving the fit of other brands) and slowly transformed to outfits designing and making their own shoes. The best way to encourage manufacturing of sports gear is to desist from denting the fun in sports by raising access cost, including such things like cost of running shoes. People playing more and more translates to more experience compiled, more curiosity provoked and the search for right gear fueled. Policy-makers should focus on angles like – what it would cost to start a manufacturing unit, how easy the process of setting up business is, how affordable the capital goods relevant to manufacture those products are, how supportive community and local administration are of first generation entrepreneurs, whether proper labs for testing equipment quality are available or not etc. Perhaps, most important of all, they must realize that affordable life all around is critical for cost competitiveness in manufacturing. The domestic environment is actually far more important to motivate a citizenry and its creativity than import tariffs fiddled with. If you take the 2012 budget as example, aside from spurring domestic bicycle manufacturers to do what they should have done earlier as natural course of business, there is little dramatically different in the industry, we can claim for budget’s legacy. Aluminum frames continue to be imported because others make it better. Viewed so, what can we hope to see as legacy for 2018’s dose of protectionism?
(The author, Shyam G Menon, is a freelance journalist based in Mumbai.)