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Indian Textiles: 2005 and beyond - Views on News from Equitymaster
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  • Jun 23, 2003

    Indian Textiles: 2005 and beyond

    The Indian textile sector is due for a sea change from January 1, 2005. This is when the sector will be free from quotas and India will be free to import and export textile goods. This is a very important development for the Indian textile industry. In this article, we try to look at some of the aspects of the post-WTO scenario for the sector.

    Top textile & clothing exporting countries
    Country Share in total world exports
    China 14%
    US 5%
    Korea 5%
    Hong Kong 3%
    India 3%
    Japan 2%
    Note: The above is not a rankings table
    What is the MFA?Just to brush upon the history briefly, trade in textiles and clothing was governed by the Multi-fibre Arrangement (MFA) prior to 1995. MFA was an instrument under the garb of which, developed nations protected their domestic textile industry by imposing quotas on imports from other countries. However, in 1995, a new agreement, Agreement on Textile and Clothing (ATC) was signed. This was aimed at phasing out the MFA over a decade. Thus, in effect, on December 31, 2004, the quota regime would die a silent death, and countries would be free to trade. This is of particular benefit to developing nations like India, who can then have free access to the developed world.

    Textiles is a very important sector for the Indian economy. It is the second largest in terms of direct employment (about 35 m people). Besides, it has a very important role to play at the country’s macro economic level. Just to put things in perspective, the sector contributes to almost 14% of the industrial production and about 35% of the gross export earnings. The sector’s contribution to the GDP stands at over 6%. Due to all of the above, the growth of the industry has a bearing on the development of the economy, especially exports.

    India: Textile Exports
    (US$ m) Target for 2002-03 Achievement 2002-03 (E) Proposed 2003-04
    Textiles 12,550 11,648 13,625
    - Readymade Garments 6,000 5,500 6,250
    - Cotton Textiles 4,250 3,879 4,775
    - Man-made Textiles 1,500 1,520 1,750
    - Woolen Textiles 350 300 350
    - Silk 450 449 500
    Handicrafts 2,455 2,390 2,685
    - Other and Carpets 2,170 2,134 2,350
    - Jute 85 71 85
    - Coir 200 185 250
    Total (Textiles+ Handicrafts) 15,005 14,038 16,310
    Source: Ministry of Textiles

    Indian textiles is an integrated sector, as the industry not only grows its own raw materials (cotton, jute, silk and wool) but also processes the same into high value products like fabrics and garments. India exports a large portion of its textile produce. Despite quota restrictions, Indian textile exports have grown at a CAGR of over 17% in the period FY93 to FY01. Our main competitors in the textile sector include countries like China, Bangladesh, Indonesia, Sri Lanka and Pakistan. Like India, these countries too are cost-effective textile producers due to the advantage of lower labour costs, which account for a significant portion of the cost of converting fabrics into garments. The major markets for India have been the US and the EU (despite having quota restrictions). UAE, Japan and Switzerland are amongst the top non-quota export destinations.


    The implications of quota removal will be tremendous. For India, the phase out of the quota regime by 2005 would boost the fortunes of the domestic textile industry. One big advantage for India, in fact the whole of Asia, would be from outsourcing. Post-2005, manufacturers in the US and EU will look at lowering costs by outsourcing garments from countries like India. Currently, Asia contributes to over 1/3rd of total US textile imports.

    But is India really competitive?
    Not exactly. There are countries, which are as competitive as India is, and some even better. On the competition front, we have a long way to go. Consider a couple of facts below:

    • Despite having the largest cotton crop area in the world (9 million hectares), per hectare yield of cotton is only 300 kgs compared to world average of over 550 kgs. Of the total area used for cotton production, just 36% is irrigated. India’s share in global textile exports is only 3.1% and in order to take advantage in the WTO regime of liberalized trade, the country will have to immensely increase its quality and productivity. This remains a key area of concern.

    • The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. However, the above can be achieved only if Indian textiles sector is competitive on operating parameters (labour, power and capital). Moreover, countries like Bangladesh will have an advantage of having the Least Developed Country status and thus might be the preferred source for trade by developed nations. Refer to the table below which compares India to other nations on various parameters.

    Competitiveness: Total Costs of Woven Textured Yarn Fabric - 2001
    (% of total cost) Brazil India Indonesia Italy Korea Turkey USA
    Packing 1% 1% 1% 1% 1% 1% 1%
    Labour 9% 6% 4% 28% 18% 9% 25%
    Power 8% 16% 8% 26% 10% 14% 26%
    Auxiliary 13% 13% 15% 7% 15% 11% 7%
    Capital 43% 35% 50% 22% 28% 44% 23%
    Raw Material 26% 29% 22% 16% 28% 21% 18%
    Total 100% 100% 100% 100% 100% 100% 100%
    Source: Ministry of Textiles

    However, the government is putting in efforts at lending a helping hand to the textiles industry, which has been in doldrums for quite a few years now. In order to achieve the growth target, a few important initiatives have been taken by the government:

    • National Textile Policy was set up in 2000 to focus on the textile industry and provide it with certain advantages. One of the measures taken was the government reducing customs duty, which made import of textile machinery easier.

    • One of the most important tasks was technology upgradation of the textile sector. The whole industry is technologically backward, which in turn affects the quality and productivity of the sector. In fact, a major share of the market is controlled by small-scale industries. And to combat this problem, the government set up a Rs 250 bn Technology Upgradation Fund Scheme (TUFS) under the National Textile Policy 2000. TUFS is basically a textile package to give encouragement to the textile industry. It aims at conversion of certain ordinary machinery into automatic/semi-automatic machines. Also, TUFS offers a 5% interest subsidy on loans/ finance raised from designated financial institutions.

      China India
    Total exports (US$ bn) 50 6
    US import quota 19% 2%
    EU import quota 26% 4%
    Thus, to conclude, post 2005, there lies a tremendous opportunity for Indian textile manufacturers, as the markets will no longer be restricted. At the same time, it has to be remembered that there could be a huge influx of imports. Though the larger players in the industry are well placed to compete with the multi-nationals, it is the smaller players (SSI) that will be facing immense pressure. Keeping this issue in mind, the final word would be that competitiveness is of prime importance and a key factor, which will ultimately decide the fate of the industry and its players.



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