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Textiles: Advantage India - Views on News from Equitymaster
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Textiles: Advantage India
Jan 5, 2006

With the dismantling of the quota regime in 2005, the Indian textile industry embarked on the threshold of rapid growth. India is targeting to double its 4% global market share over the next five years. The industry foresees strong growth in exports of value added products like apparels and home textiles propelling growth across the textile value chain. Also, the outlook for the domestic apparel industry is improving with focus on retailing. Some of the key reasons that position India favourably in the global textile industries are as follows: Ample availability of raw material: India is the third largest producer of cotton in the world after China and US and has the largest area under cultivation. Cotton, a key raw material in the textile and garment industry, accounts for about 30% of the fabric cost and 13% of the garment cost. India has an abundant supply of locally grown long staple cotton. This is used for home apparels and provides India with a competitive edge in this segment of fabrics. Other countries, like China and Pakistan, have relatively lower supply of locally grown long staple cotton. Moreover, low cotton prices due to a bumper cotton crop would enable India to lower its production cost and sustain pricing pressure. Further, efforts on improving the yield per hectare would ensure higher productivity and production, thereby providing the much-needed security of raw-material supply to textile producers.

Low Cost Skilled Labour: India is enriched with ample skilled manpower and labour costs are lower as compared to other textile exporting countries. Labour costs constitute around 20% of the total cost of production in the textile industry. As a result, skilled and cheap labour provides significant competitive advantages especially in a highly competitive environment post the dismantling of quotas. Apparels and garment manufacturing segments are particularly labour intensive, which would be one of the major beneficiaries of the quota dismantling. As is evident from the adjoining chart, India has a distinct edge over other players (including China) in terms of lower labour costs.

The apparels & garment segment calls for a higher degree of skilled labour with good designing capabilities. The said segment is highly fashion driven, which requires proper understanding of the buyer’s designing specification. It also warrants keeping a tab on global fashion trends and regular interaction with buyers and designers as well. Furthermore, care also needs to be taken in maintaining consistency in quality, adhering to delivery deadlines and keeping rejection levels to the bare minimum, which again warrants for skilled labour. Thus, India has got an edge in terms of its low cost skilled labour coupled with English speaking abilities as compared to China.

Lower scale of operations - tailor-made for flexibility: Relatively lower scale of operations as compared to large capacities installed in China could favour India to an extent. China's capacity would be capable of meeting large sized mass products' order. However, India could grab the lower sized orders meeting specific design needs. Lower scale of operations offers flexibility in changing the manufacturing process, thereby meeting the customer's requirements.

The deterrents…

Fragmented industry: The Indian textile industry is highly fragmented due to government policies and the reservations for small-scale sector. The fragmented structure of the industry has also stood in the way of achieving true integration between various links in the supply chain. The industry has one of the longest and most complex supply chains in the world, which results in longer lead-time and higher costs. Realising the significance of composite units, larger players have started integrating their operations and improving efficiency levels.

Labour laws: The labour laws in India have been traditionally less favourable to the industry. In the absence of concrete labour policies, the industry has often got paralysed due to labour strikes, thereby compromising on efficiencies of scale of operations. However, the government is now considering labour reforms, which would offer a level playing field to both the employers and employees.

Under penetration of modern technology: Indian textile Industry has been unable to appropriately upgrade its technology levels. Lack of state-of-the-art technology poses the most serious challenge to India's attempt to increase its exports. The total number of shuttleless looms as a percentage to total looms in India in 2003 was 9.5% as against 94.8% in USA and 95.2% in Austria (Source: Ministry of Textiles). India's number of shuttleless looms as a percentage of total looms is the lowest, next only to Pakistan with 7.6%.

Geographical Location: India also has logistic disadvantage due to its geographical location. Its location is distant from major markets as compared to its global competitors like Mexico, Turkey and China, which are relatively located in close vicinity to global markets like the US, Europe and Japan. As a result, the cost of shipments is higher. Also, lack of proper infrastructure facilities like poor state of roads and inadequate facilities at ports act as hindrance in augmenting Indian exports.

In the light of the above pros and cons, we believe that while the domestic textile industry has a long way to go in terms of establishing itself as a ‘supplier of choice’ in the post quota regime, prompt and prudent capitalisation of the opportunities will stand the sector in good stead in the long term. In other words, the sector needs to mould itself as per its ‘India advantage’.

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