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Need for a sensible policy framework ... - Views on News from Equitymaster
 
 
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  • May 20, 2000

    Need for a sensible policy framework ...

    The textile industry basically has two strands: natural and synthetic. While cotton is a natural fibre synthetic fibres comprise polyester, acrylic, nylon or viscose (which gets classified as a cellulosic fibre). Though the world over it is the synthetic textiles (particularly polyester) which forms a major part of the industry's turnover, in India the ratio is still skewed towards cotton. Infact, the proportion of cotton textiles is around 65%, though polyester seems to have caught on in recent times.

    The cotton textile segment was the one segment where India traditionally had a competitive advantage. This was primarily because the cotton production in India is the fourth highest in the world after China, USA, and the CIS countries. However, the policy framework that the government imposed on the industry put paid to the competitiveness of the industry particularly in the fabric segment.

    This was because the government reserved the weaving and processing operations for the small sector. (Raw cotton goes through a process of ginning after which it is spun into yarn, woven into a fabric and processed into garments.) Thus composite mills (which had spinning, weaving and processing under one roof) were prevented from expanding their weaving and processing operations. This had the effect of rendering quite a few of the composite mills unviable since they could not expand their weaving operations to match the expansion in spinning. (It also led to the emergence of specialised spinning mills.) This was exacerbated by the excise evasion done by the small scale powerlooms which affected the competitive advantage of composite mills. The textile strike in Mumbai in the early eighties further crippled the composite mills, which were primarily based in Mumbai.

    Now the wheel has come the full circle. With woven cotton fabrics and woven knitted goods among the items that have to opened up to international competition under the WTO agreement by April 2001 and the dereservation of these items from the small scale sector, the futility of the government imposed segregation is clearly apparent. The present government appointed a panel under comprising Nusli Wadia and Ratan Tata to suggest ways to revive the textile industry. The group has proposed simpler procedures for relocation, de-reservation of the knitting and processing segments of the industry (which would help India compete in post-WTO regime) and formulation of policies to encourage consolidation of the fragmented units.

    Another area where a distorted policy framework has affected the competitiveness of the industry is in the trade policies. The government imposed a ceiling on the export of yarn of 100 m kgs. per annum in the early nineties. This restriction did not apply to the exports from 100% Export Oriented Units. This led to a rash of new export oriented units at a capital cost of around 25,000 per spindle almost 35% of which was for setting up infrastructural facilities. Had the ceiling not been applied it was quite possible that many existing spinning units could have modernised their spindleage and saved on the extra capital cost.

      FY99 FY00 % change
    Cotton Fabrics 46.3 47.4 2.4
    Millmade 20.4 21.3 4.2
    Powerloom 22.9 23.4 2.3
    Knitted 3.0 2.7 -9.0
    Cotton Yarn 59.5 66.8 12.2
    Sewing Thread 0.1 0.1 -35.3
    Madeups 38.0 43.8 15.1

    Yet another irrational restriction the government has imposed on an ad-hoc basis from time to time is the banning of exports of raw cotton. This was done ostensibly on the ground that the exports of the higher value added yarn need to be boosted. A better way however could have been to take steps to improve the productivity of raw cotton itself and allow the imports of raw cotton so that the cotton growers have a window of opportunity and the yarn manufacturers could also be free to import.

    Coming to polyester, the segment is now witnessing a consolidation with the largest manufacturer Reliance Industries taking over the uneconomical capacities of JK group's Orissa Synthetics, RPG group's India Polyfibres, Vijaypat Singhania's Raymond Synthetics, the Thapar group company JCT's polyester division and lately DCL Polyester. All these plants were set up during the license raj when diversification into polyester was the surest way of earning super profits. However, except for Reliance, which backward integrated into purified terephthalic acid and mono ethyl glycol and further into paraxylene and at onetime was the supplier to almost all the units it has now taken over, none of which had the wherewithal to grow to a global player.

    While large parts of the polyester segment of the industry have gone under in part due to the industry's own misjudgments, the fact remains that the cotton mills can be excused if they were to look askance at the government's past policies which affected their segment.

     

     

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