A Study on Environmental Compliance of Indian Leather Industry & its Far-reaching Impact on Leather Exports

AuthorChandan Roy
Published date01 July 2012
DOI10.1177/0015732515120201
Date01 July 2012
Subject MatterArticle
3
A Study on Environmental Compliance of
Indian Leather Industry & its Far-reaching
Impact on Leather Exports*
Chandan Roy
Indian Leather Industry is recognized as one of the most
promising foreign exchange earning sectors since early 1970s.
The industry was hard hit by two consecutive foreign
environment bans since 1989. Along with that, few domestic
environmental regulations also resulted into closure down of a
number of leather tanneries during this period. However, the
government intervention and the successive compliance measures
adopted by the firms ultimately helped the industry to gain
momentum in its export sector. This paper analyzes the far
reaching impact of these environmental regulations on export
sector of Indian Leather Industry. Whether this boost in leather
export marks a trade-off relation between environmental quality
and volume of exports is a matter of debate, which is attempted
in this paper. This paper, within the limitations of data
availability regarding environmental statistics, has determined
a positive relation between environmental quality and volume of
leather exports and justified that instead of Pollution Haven
Hypothesis, Indian Leather Industry rather confirms Porter’s
Hypothesis.
Keywords: Leather Exports, Environmental Regulations,
Compliance, Pollution Haven, Porter’s Hypothesis, BOD,
CETP, ETP.
1. Introduction
INDIAN Leather Industry is recognized as one of the most promising
foreign exchange earning sectors since early 1970s. In terms of
percentage share, leather export earnings accounted for 7 per cent of
* A preliminary version of this paper was presented in a UGC Sponsored National
Seminar, namely “Environmental Audit” organized by the Department of
Commerce, Kaliyaganj College, West Bengal, during 22-23 March 2012.
FOREIGN TRADE REVIEW
4
the total foreign exchange earning sector (and occupying the 5th place
in terms of export earnings) in 1989-90, when the first environmental
ban was imposed by its major export absorbing country, Germany.
However, even after ten years (CLE, 2008-09) with annual earnings
of US$7 billion, the Industry has reached such a stupendous height of
success, which made it the 6th largest foreign exchange earning
country in the world. On one side, the export generating potential to
boost the growth rate of the economy and on the other side the
pollution intensive nature of the industry – has made this sector distinct,
specially when the “pollution haven” hypothesis emphasizes that
under free trade the exports of dirty industries increase in the
developing countries (Copeland and Taylor, 2003). The Indian Leather
Industry has been hit by several foreign environmental bans and
domestic environmental regulations since 1990s. The ways of
compliance adopted by the firms and interventions made by the
Government have helped the industry in restructuring its technology
and perhaps as a consequence an apparent growth in exports sector
has been experienced. This again challenged many so-called hypotheses
which show a trade-off between environmental compliance and
export competitiveness (Chakraborty, 2011) and supports Porter’s
Hypothesis (1991), which states strict environmental regulations do
not inevitably hinder comparative advantage against foreign rivals,
rather often enhance it.
On the other hand, Sankar (2006) showed that if a country is
required to meet an environmental standard which is higher than
that appropriate for the country, the social cost of compliance becomes
higher too. In fact, the situation turns into worse compared to that
under autarchy with existing domestic environmental regime. In fact,
Chakraborty & Chakraborty (2007) explain that efficiency level of
firms have decreased in the post 1998 period, using the all India farm
level data for leather sector during 1995–2003. This suggests that
adoption of higher environment standard requirement erodes the
technical efficiency and thereby the export competitiveness of the firm.
However, the non-deniable fact is that export earning of the Indian
Leather and Leather Manufacture has almost quadrupled from 1987-
88 to 2010-11. From US$964.4 million, the export earning reached to
US$3,789 million during this period.
On one hand, the apparently bright export scenario (as cited by
Council of Leather Exports), and on the other, change in environmental
INDIAN LEATHER INDUSTRY 5
quality due to compliance measures adopted by this so-called polluted
industry, have motivated many experts to prioritize this issue for
analysis. This paper will trace few relevant matters of environmental
standards imposed on leather industry and the consequential impact
on export prospects of Indian leather industry, highlighting on
different polluting stages of the industry and examining whether this
impact of compliance measure on exports has evidenced “Porter’s
Hypothesis” or “Pollution Haven Hypothesis” or none of these in
Indian Leather Industry. Thus the far reaching impact on the export
sector of Indian Leather Industry in respect to environmental
compliance has been studied.
2. International Environmental Bans & Domestic Compliance
In 1989, Germany had imposed a ban on all items in which the
PCP (pentachlorophenol) content is more than 5ppm (mg/kg), as PCP,
which was widely used as an anti-fungal preservative in different
industries including leather industry, was suspected to be carcinogenic.
Instead of making it a stringent international imposition, Germany
passed this new standard as domestic legislation aimed at protecting
the health of its own citizens. Thus under Article 20 of the GATT/
WTO this approved restriction had turned out an equivalence of
environmental ban to all the exporting nations including India, which
used to export 18 per cent of its total leather export to this particular
destination. Ban of Germany was supported by Denmark, Holland,
the Netherlands, Luxemburg, the US, Japan and most of the European
countries besides France. PCP was the cheapest anti-fungal
preservative which costs about `30/kg. According to many analysts,
the alternative to PCP was TCTMB (Thiyocyano Methyl thiobenzo
thiazole) and PCMC (Parachlorometacresal) which cost as much as
`390/kg and `445/kg. According to secondary information, the
world’s largest manufacturers of these alternative chemicals are BASF,
Hochest, Zschimmer and Schwarz, all of which are the German
companies. This clearly indicated a trade oriented approach which
was discussed by its health concern regulations.
After five years, the second ban on Azo-dyes came into effect
during 1994-95. A class of 22 Azo-amine dye was suspected to be
carcinogenic by German Health Ministry and hence restriction was
imposed on the products which use these dyes. Like PCP, Azo-amine
dye is also an “easy-to-produce” chemical that is widely used in dyeing

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