The EU Due Diligence Directives (Part 2): Demystifying implications for India’s textile value chains

Regulatory and cost implications

Given the complexity of supply chain operations and business dynamics, the principle of "shared responsibility" underscored in the Directive is unlikely to be implemented effectively. Moreover, contractual clauses of the CSDDD impose significant responsibility on suppliers to maintain data and information that adhere to the stipulated disciplines. This requires them to develop, at significant costs, robust documentation and record all activities across supply chains.

Furthermore, T&C exporting firms and industry experts interviewed by the authors in this study pointed out that the CSDDD is not only about additional investment to adhere to due diligence-led regulatory compliance but also about how suppliers sustain greater transparency and visibility along the value chain. This could potentially create the "coordination problem" in complex T&C value chains owing to information asymmetry, capacity constraints, and lack of standardization.

With respect to the existing regulatory framework, industry experts are of the view that many T&C firms already have policies that focus on some provisions of the CSDDD, including those related to child labor and bonded labor prevention. However, these policies are often not implemented effectively because of the weak monitoring and audit systems. Therefore, there is a pressing need to sensitize the industry on the importance of data management tools to capture information and data that minimize regulatory compliance burdens.

Lead firms and supplier relationships

The T&C exporting firms and industry experts contend that the CSDDD's implications for the relationship between lead firms and suppliers are two-fold. First, the Directive may contribute to greater collaboration among larger suppliers willing to invest in meeting requirements. The collaboration of suppliers may enhance their relative bargaining power vis-à-vis lead firms, but this would further depend on how national development policies respond to supporting their suppliers to engage with lead firms.

Second, exporting firms and industry experts emphasized that lead firms will need to invest in the technical and capacity building of suppliers to ensure that they do not need to diversify their supply chain networks to mitigate the potential risk of violation of labor rights and environmental standards. This is imperative for them, as the search for new suppliers will entail significant fixed investment not only in the form of understanding due diligence processes and quality control systems, but also in understanding the trade and regulatory policies of the supplier’s country.

Technical capacity building

T&C exporting firms and industry experts also underscore the importance of technical capacity building in enhancing the capacities of suppliers to understand and implement due diligence measures in their operations. More specifically, such capacity-building programs should focus on identifying high-risk areas (such as waste management, labor, and safety standards) to mitigate the potential of non-compliance. It is important for lead firms to develop manuals, learning materials, and checklists in simple language so that suppliers can integrate due diligence practices into their supply chain networks.

Furthermore, experts contend that the role of industry associations and sectoral bodies is critical in sensitizing the T&C sector to regulatory compliance with CSDDD through capacity-building programs, but they need to be trained beforehand. Experts also emphasize the need to undertake a comprehensive assessment of existing legal, institutional, and compliance frameworks in the country to identify critical areas of improvements to ensure that public institutions are well prepared to respond to the needs of the private sector in the realm of the CSDDD.

Moreover, interviewees are of the view that the nature of regulatory and administrative compliance associated with CSDDD may give rise to the "development of consulting industry." They pointed out the potential risks of data misuse by consulting firms, as large volumes of data and information get generated along the supply chain. The issue becomes even more concerning in the context of a weak digital regulatory framework governing data flows in the country. In addition, the proliferation of consulting firms and their greater influence on business operations could limit the role of industry associations that act as guardians of a specific industry in policy formulation.

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