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Indian textile industry: Story unfolding - Views on News from Equitymaster
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Indian textile industry: Story unfolding
Dec 26, 2005

Vetted as the sunrise industry in the post quota regime, the Indian textile industry occupies a unique position in the country’s economy. The sector has the potential to generate additional employment of around 12 m jobs, of which around 5 m jobs could be generated in the industry directly while another 7 m jobs could be added in the allied sectors. It is currently the largest employer in the country after agriculture, providing direct employment to over 35 m people. Due to its close linkage with agriculture, the sector provides employment both in the rural and urban areas. A self-reliant industry, the textile sector is spread across the entire value chain from raw materials to yarn to fabrics and further to higher value added products like readymade garments. Its contribution to industrial production, employment generation capabilities, coupled with substantial contribution to the country's foreign exchange earnings, makes the sector significant. In FY05, the sector accounted for around 14% of the total industrial production and around 4% of the country's overall GDP.

Past - Stunted growth
The domestic textile industry underwent a lean phase during the late nineties primarily on account of excess capacity, higher interest costs on account of debt burden, government policies favouring small scale industries, labour laws and slowdown in the global economy among others. The slump in the textile industry took its toll on 2,234 mills in the last five years alone. This led to the process of rationalisation wherein unviable units were disposed off. During FY05 also, 379 spinning mills and 100 composite mills were shut down (Source: Ministry of Textiles).

Future – A sunrise industry
Declining interest rates, growing domestic economy, favourable government policies, revival in the global economy and growing potential post-quota regime, have all augured well for the revival in the domestic textile industry. The lean phase compelled the sector to improve efficiency levels. Better cash flows enabled textile firms to undergo debt restructuring. A number of initiatives by the government for improving the health of the textile industry also eased the rejuvenation process.

Further, the changing dynamics of the Indian economy coupled with the emergence of the upper middle class segment, higher disposable income and increasing consumerism offered demand surpluses to the sector. India's aggregate personal disposable income has been increasing steadily over the years. Despite this, the country has one of the lowest per capita consumption of cloth. India's per capita consumption of cloth stands at 2.2 kg, which is way lower than Pakistan's 3 kg and China's 5 kg. Taking into account the low per capita consumption, rising income levels and changing consumer preferences, domestic demand for clothing is expected to witness significant growth in the coming years.

Also, the textile industry has played a significant role in the country's exports contributing valuable foreign exchange for the country. The sector accounted for nearly 21% of the country's total exports in FY05. During the last decade, from FY95 to FY05, textiles exports have grown at a CAGR of 6.4% to US$ 13.2 bn. For FY06, textiles exports are targeted at US$15.2 bn, translating into a 15.2% YoY growth over FY05. Also, the government has set an ambitious textile export target of US$ 50 bn by FY10. Though, textile exports in value terms have shown steady increase over the years, in percentage terms its share in total exports has declined from 28.7% (in FY95) to 20.7% (in FY04). The fall in contribution to total exports is primarily due to rising contribution from the service sectors like IT to the total exports. To some extent the slowdown in the textile industry is also reflected in these numbers. Nevertheless, the dismantling of quota regime would see the textile sector's contribution to total exports rising in the coming years.

Our view
All said and done, the Indian textile sector has a long way to go to achieve a sustainable competitive advantage. The industry is very fragmented and access to low cost finance and technology is yet limited to a privileged few. This has been affecting growth prospects of the smaller manufacturers. In terms of economies of scale and technological efficiency, a select few companies are in the league of global majors. Not to mention the competition from countries like China, Sri Lanka, Bangladesh, in terms of cheap availability of goods. Having said this, with the Multi Fibre Agreement (MFA) offering the sector a level playing field with its global counterparts, we believe that leaner balance sheets, rationalisation of capacities and low cost advantage can certainly put the textile sector in the reckoning of sectors to be watched out for in the longer term.

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