The government’s decision to raise cash incentives for export-oriented garment manufacturers using locally produced yarn from 1.5% to 5% has raised hopes of reviving Bangladesh’s struggling textile sector, but industry leaders say the measure alone will provide only limited relief.
The government is expected to spend around Tk 3,500 crore on the increased incentive. While the move could encourage garment exporters to use more locally produced yarn and provide some additional demand for domestic spinning mills, entrepreneurs say the sector continues to face much deeper problems, including gas and electricity shortages, high production costs, liquidity constraints, high interest rates and difficulties in accessing the incentive.
Speaking to The Daily Industry, industry leaders said the higher incentive could increase sales of locally produced yarn by around 5%, giving some breathing space to spinning mills. However, they stressed that more comprehensive measures will be necessary to reduce dependence on imported yarn, particularly from India, and restore the competitiveness of domestic textile mills.
Incentive raised to 5%: Bangladesh Bank on July 12 increased the alternative cash incentive for export-oriented apparel manufacturers using locally produced yarn or fabric from 1.5% to 5%, replacing the previous system of bonded warehouse and duty drawback benefits.The increased incentive will be available in the current fiscal year to garment exporters using yarn produced domestically.
The Finance Ministry had earlier sent a related directive to the Bangladesh Bank governor on July 9.The decision is aimed at encouraging greater use of domestic yarn and strengthening backward linkages between the textile and apparel sectors.The move comes at a critical time for Bangladesh’s spinning industry, which has been struggling with weak demand, rising costs, energy shortages and increasing competition from imported yarn.
According to the Bangladesh Textile Mills Association (BTMA), the country currently has more than 1,800 textile mills, including 527 spinning mills. Total investment in the sector stands at around $23 billion.Local textile mills currently supply around 80% of the yarn required by the knitwear industry and nearly 40% of the yarn used by the woven garment sector.
Domestic mills under pressure: Despite the size of the industry, many spinning mills are struggling to operate at full capacity.Industry leaders said the crisis is not simply a matter of demand. Production costs have increased significantly because of energy shortages, higher gas prices, expensive financing and inadequate liquidity.Several mills are also facing difficulties obtaining working capital, while some factories have either reduced production or suspended operations.
Former BTMA director Rajib Haider told The Daily Industry that the increased cash incentive could encourage small and medium-sized factories that previously relied heavily on Indian yarn to shift toward domestic yarn.According to him, the higher incentive could increase demand for locally manufactured yarn and potentially create opportunities for some closed factories to resume operations.
However, he warned that the impact would remain limited if garment orders continue to decline and the gas and electricity crisis remains unresolved.The incentive, he said, could provide some relief, but it cannot solve the structural problems facing spinning mills.
Indian yarn dominates imports: The growing dependence on imported yarn has become a major concern for domestic spinning mills. Data from the National Board of Revenue (NBR) show that Bangladesh imported cotton yarn worth Tk 14,410 crore in FY2022-23. The figure increased to Tk 21,142 crore in FY2023-24, before rising further to Tk 26,700 crore in FY2024-25. In the latest fiscal year, yarn imports stood at around Tk 25,864 crore.
Around 90% of imported yarn comes from India, making the neighbouring country the dominant supplier to Bangladesh’s yarn market. Industry stakeholders say the reduction in domestic yarn incentives contributed to the widening price gap between locally produced and imported yarn. When the cash incentive was 4%, the price difference between imported and domestic yarn was reportedly around 10-15 cents per kilogram.
Garment exporters nevertheless preferred local yarn in many cases because it could be obtained quickly after placing an order and involved lower transportation costs. After the incentive was reduced, however, the price difference reportedly increased to around 40 cents per kilogram, making imported yarn increasingly attractive to manufacturers.
Effective incentive lower than 5%: Industry leaders have also questioned how much of the announced 5% incentive will actually reach exporters. Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told The Daily Industry that because of taxation, the effective benefit would be much lower than the announced rate. He said exporters would have to pay 5% tax on the 5% cash incentive, meaning the effective benefit would initially fall to around 2.5%.
After other adjustments and final settlement, the actual benefit could be around 3.2%, according to Hatem. As a result, he believes the new incentive alone will not be sufficient to significantly reduce yarn imports. Hatem called for the government to withdraw the tax on the cash incentive and simplify the process for receiving the benefit. He also suggested that the incentive should be disbursed immediately after exports are completed rather than through a lengthy process.
Incentive does not go directly to mills: Another complication is that the cash incentive for using domestic yarn is paid directly into the bank account of garment exporters rather than directly to spinning mills. Although the incentive is intended to support domestic yarn production, textile mill owners say the mechanism does not automatically translate into sufficient financial support for them. The benefit is supposed to make locally produced yarn more competitive for garment manufacturers, thereby increasing demand for domestic yarn.
However, if the incentive is reduced by taxation or delayed through complicated administrative procedures, the impact on the spinning industry becomes limited. Industry stakeholders therefore want the government to simplify the payment mechanism and ensure that exporters receive the full intended benefit.
Gas crisis cuts production: The energy crisis is another major obstacle to the revival of the textile sector. Mosharraf Composite Textile Mills in Bhabanipur, Gazipur, has the capacity to produce around 160 tonnes of yarn per day. The factory operates a gas-powered captive generator for electricity and also has a Rural Electrification Board connection as an alternative source.
However, the mill currently receives only around 2-3 PSI of gas pressure during the day, rising to around 4-5 PSI at night. The factory also experiences power outages five to seven times a day, with electricity unavailable for around two to two and a half hours in total.
Mosharraf Group Chairman Mosharraf Hossain told The Daily Industry that the gas and electricity shortages have reduced the company’s production by around 20%. He said the lower production level has increased the cost of producing each kilogram of yarn. According to him, even if the cash incentive increases yarn sales, the benefit will remain limited because factories are unable to secure sufficient gas to meet production requirements. He also pointed to the liquidity crisis affecting many textile companies and called for loans on easier terms to help businesses survive.
High costs remain a major problem: The experience of Little Star Spinning Mills in Savar further demonstrates the severity of the energy crisis. The mill has been suffering from gas shortages for an extended period. To cope with the situation, the company invested around Tk 12 crore in solar power and battery-based electricity storage.
The investment has allowed the factory to utilise around 80% of its production capacity, but it has also increased overall production costs. Little Star Group Chairman and BTMA director Khorshed Alam told The Daily Industry that Indian textile mills receive various forms of support amounting to around 13%. Although Bangladesh has increased its incentive to 5% after prolonged discussions with the government, he said local mills remain at a disadvantage compared with Indian competitors.
Bangladesh still trails India: Khorshed Alam said Bangladesh’s textile mills face higher production costs because of expensive gas, inadequate gas supply and high interest rates. He argued that the government needs to provide broader support not only to keep textile mills operational but also to increase value addition in the garment sector. The comparison with India is particularly important because Indian yarn has captured a dominant share of Bangladesh’s import market. If domestic yarn is to compete effectively, local producers must be able to offer competitive prices without sacrificing quality or delivery speed.
Industry leaders therefore believe that cash incentives should be accompanied by measures to reduce production costs. Financing crisis deepens pressure: The liquidity crisis is another major challenge facing spinning mills. Textile production requires substantial working capital because mills must purchase cotton and other raw materials well before receiving payment from buyers.
High interest rates have made bank financing increasingly expensive, while weak demand and delayed payments have further squeezed cash flows. Industry leaders therefore want access to affordable financing for textile mills. They have also called for easier terms for both domestic and foreign letters of credit to facilitate the import of essential raw materials and equipment. Without improved access to financing, many mills may struggle to take advantage of the higher demand that the cash incentive is expected to generate.
Bond misuse needs to stop: Industry stakeholders have also urged the government to prevent misuse of bonded warehouse facilities for yarn imports. They argue that stronger monitoring is necessary to ensure that bonded facilities serve genuine export-oriented manufacturers rather than creating unfair competition for domestic producers.
At the same time, they want the government to simplify legitimate import procedures for textile manufacturers. A balanced approach, they say, is needed to prevent abuse while ensuring that export-oriented industries can obtain necessary raw materials without unnecessary delays.
Can Tk 3,500 crore revive the sector: The government’s additional spending of around Tk 3,500 crore on the increased incentive could provide some immediate support to the textile industry. Higher demand for locally produced yarn could help increase capacity utilisation and potentially reopen some idle spinning mills. But industry leaders are sceptical that the incentive alone will be enough to revive the sector.
The underlying problems-energy shortages, high production costs, expensive financing, liquidity constraints, weak garment orders and complicated incentive procedures-remain unresolved. The higher incentive may therefore serve as a temporary breathing space rather than a comprehensive solution.
Broader policy needed: Industry leaders believe Bangladesh needs a broader policy package to strengthen its textile sector. Such a package should include reliable gas and electricity supply, affordable working capital, reduced financing costs, simplified cash incentive procedures, tax relief on incentives, stronger monitoring of yarn imports and reforms to the bonded warehouse system.
The government should also ensure that local textile mills can compete on a level playing field with imported yarn. The objective should not merely be to reduce imports but to make domestic yarn sufficiently competitive in terms of price, quality, availability and delivery time.
LDC graduation adds urgency: The issue is also closely linked to Bangladesh’s preparations for LDC graduation. As the country moves away from some of the trade preferences and support mechanisms available to least developed countries, strengthening domestic backward linkages will become increasingly important. A competitive local textile industry can help Bangladesh retain more value within the country and reduce reliance on imported inputs.
However, if domestic mills remain burdened by high energy and financing costs, increased competition after LDC graduation could place additional pressure on the sector. For this reason, industry leaders argue that the government must treat the 5% cash incentive as only one part of a wider strategy. The Tk 3,500 crore incentive could give the textile industry some much-needed breathing space.
But whether it can genuinely help spinning mills "bounce back" will ultimately depend on whether the government addresses the deeper structural problems that have pushed the sector into crisis. As one industry concern highlighted by The Daily Industry makes clear, cash support can raise demand, but without reliable energy, affordable finance and competitive production costs, the textile sector’s recovery will remain limited.
