Dbarta24 Special Report – In a major bid to revitalize the country’s flagging primary textile sector, the government of Bangladesh has significantly raised the cash assistance rate for local yarn usage from 1.5% to 5%.
While this policy shift is expected to inject roughly Tk 3,500 crore into the economy, industry insiders caution that the financial shot in the arm may only offer marginal relief.
A toxic combination of acute gas and electricity shortages, severe liquidity crunches, and administrative bottlenecks continue to cripple local spinning mills.
Textile entrepreneurs speaking to the media noted that while the enhanced incentive might bump local yarn sales up by around 5%—giving factories a momentary breathing room—broader structural reforms are urgently needed.
Industry leaders stress that to effectively curb cheap Indian yarn imports and genuinely boost domestic market share, the government must roll out far more comprehensive policy measures.
Incentive Rollercoaster and the Import Surge
The policy adjustments follow a central bank directive issued on July 12, acting on an instruction from the Ministry of Finance sent on July 9.
Under the new rules, readymade garment (RMG) exporters who utilize locally manufactured yarn will receive the enhanced 5% alternative cash assistance instead of relying on duty bonds or duty draw-backs.
This sector has endured a turbulent regulatory ride. Two and a half years ago, cash assistance for utilizing local yarn stood at 4%.
As part of Bangladesh’s graduation preparation from Least Developed Country (LDC) status, it was slashed to 3% in January 2024, and drastically cut further to a mere 1.5% just six months later. Compounding the problem, exporters faced a 5% tax on this assistance.
As local incentives evaporated, cheap imports flooded the market. According to National Board of Revenue (NBR) data, cotton yarn imports skyrocketed from Tk 14,410 crore in FY 2022-23 to Tk 21,142 crore the following fiscal year.
By FY 2024-25, imports peaked at Tk 26,700 crore, settling slightly at Tk 25,864 crore in the recently concluded fiscal year—with nearly 90% of the imported yarn originating from neighboring India.
Bureaucracy and Price Disparities
Though meant to rescue local spinning mills, the financial benefits are credited directly to RMG exporters’ bank accounts.
When the incentive sat at 4%, the price gap between imported and local yarn hovered around a manageable 10–15 cents per kilogram.
The speed of local procurement and lower transport overheads gave domestic mills a competitive edge.
However, when the subsidy dropped to 1.5%, that price gap ballooned to 40 cents, driving apparel makers straight to foreign suppliers.
Furthermore, legal complexities threaten to dilute the new stimulus. Mohammad Hatem, President of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), pointed out that red tape will eat into the profits.
“Even though a 5% cash assistance is being offered for using domestic yarn, only about 2.5% to 3.2% will actually end up in hand due to legal loopholes and the 5% tax structure,” Hatem said. “To truly make an impact, the government must withdraw the tax, simplify the payout process, and ensure funds are disbursed immediately after export.”
Mills Crippled by Chronic Energy and Capital Deficits
According to the Bangladesh Textile Mills Association (BTMA), Bangladesh is home to over 1,800 textile factories, including 527 spinning mills, representing a massive collective investment of $23 billion.
These domestic mills supply roughly 80% of the yarn required by the knitwear sector and 40% for woven garments. Yet, operational capacities are free-falling due to poor utility infrastructure.
For instance, Mosharraf Composite Textile Mills in Gazipur boasts a daily production capacity of 160 tons of yarn.
Despite having gas-fired captive generators and rural electricity connections, the factory experiences gas pressure as low as 2–3 PSI during the day, alongside 5 to 7 daily load-shedding instances that cut power for hours.
“Because of the gas and electricity crisis, our production is down by 20%, which hikes up the manufacturing cost per kilogram of yarn,” lamented Mosharraf Hossain, Chairman of Mosharraf Group. “A higher cash incentive will mean very little if factories cannot get the gas they need to run. Many firms are facing severe capital shortages and desperately need loans on flexible terms.”
Similarly, Savar’s Little Star Spinning Mills invested Tk 12 crore in alternative solar and battery backup systems out of sheer desperation. While this allowed them to maintain 80% capacity, it significantly drove up production costs.
Khorshed Alam, a BTMA Director and Chairman of Little Star Group, emphasized the steep uneven playing field:
“India supports its textile mills with up to 13% assistance in various forms. After massive negotiation with the government, ours has reached 5%, yet we are still lagging far behind. High gas prices, supply shortages, and skyrocketing interest rates are pushing up our production costs. To keep the textile sector alive and increase value addition in the RMG industry, the government must stop the abuse of bond facilities for yarn imports and ease the conditions for local and foreign Letters of Credit (LCs).”
While the government’s Tk 3,500 crore stimulus underscores its recognition of the textile sector’s strategic importance, raising financial incentives addresses only half the equation.
Without systemic fixes—specifically stabilizing industrial gas and electricity supplies, tackling the misuse of import bonds, and easing banking liquidity constraints—local spinning mills will remain heavily disadvantaged against foreign competition.
For the sector to truly turn around, financial incentives must be matched by structural execution.