Bangladesh's textile sector is getting a policy lifeline, but it may come with thorns. The FY2026-27 budget draft proposes tax cuts and energy subsidies for the apparel industry, aiming to revive a struggling economy. Yet, underlying structural contradictions could turn this stimulus into a trap.
Background
The draft plan reduces corporate income tax for textile exporters from 12% to 10% and expands energy subsidies covering natural gas and electricity. Textiles account for over 80% of Bangladesh's exports, making them the backbone of foreign exchange earnings. However, global inflation, the taka's depreciation, and sluggish demand from key markets like the EU have squeezed profit margins.
Additionally, the budget proposes a tiered reduction in import tariffs on textile machinery, from the current 5%-15% to a flat 3%. This aims to encourage factory automation, but industry analysts warn that Bangladesh's labor-intensive sector could face job losses from excessive automation.
Industry Impact
On the cost side, tax cuts and energy subsidies will directly lower factory operating expenses. For a mid-sized garment factory with annual exports of $50 million, the 2-percentage-point tax cut saves about $1 million. Energy costs, which represent 15%-20% of total production costs, could drop another 2-3 percentage points with subsidies.
But risks loom. Bangladesh's fiscal deficit stands at 5.5% of GDP, and energy subsidies may worsen the situation. Moreover, if electricity subsidies are not precisely targeted, conflicts between industrial and residential energy use could arise. A 2025 incident in Dhaka saw industrial power cuts due to subsidy mismanagement—a lesson worth heeding.
For buyers, short-term price negotiation room improves. However, long-term capacity expansion driven by subsidies could lead to price competition, undermining efforts to upgrade into sustainable certifications and high-end fabrics.