Dec 27, 2004|
Indian textile: The next leap
In just few days from now, the textile sector is likely to enter a new phase. The quota-based restriction for textile exports with the US and Europe could be removed. In the existing quota system, Indian textile sector has not been able to realise its full potential on the exports front. But now, we will see Indian textile sector moving towards achieving its export target of US$ 50 bn by the year 2010. We take a look at the current standing of the textile sector on the exports front and what lies ahead?
Earlier, the US and European economies restricted imports of textile products from different countries through a measure called MFA (Multi-Fiber Agreement). India, under MFA, received a market quota of 2% and 3% in the US and Europe respectively (i.e. if the US textile import is US$ 100 m, India can service US$ 2 m). 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 come to an end. This is of particular benefit to developing nations like India, which has a big textile industry set up.
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 countryís 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 in trade. The sectorís 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. The following table shows Indiaís exports in different product category.
India: Textile Exports
Source: Ministry of Textiles
|- Readymade Garments
|- Cotton Textiles
|- Man-made Textiles
|- Woolen Textiles
|- Other and Carpets
|Total (Textiles+ Handicrafts)
Indian textiles is integrated in nature i.e. 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. Despite quota restrictions, Indian textile exports have grown at a CAGR of over 17% in the period FY93 to FY02. 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 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.
Letís look at the cost comparisons of various countries.
Source: Ministry of Textiles
|(% of total cost)
From the above table we can comprehend that the biggest advantage that India has over western countries is labour, while when one compares it with China, the biggest advantage we have is the capital cost. From the last row of the above table, we can see that the total production cost of Indian textile product is about 56% of that of Italy (i.e. 56 upon 100) and about 64% (56 upon 87) of that of the US.
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.
Indian companies have readied themselves for the new quota regime and expanded their capacities to that extent. Arvind Mills for example, is planning to expand its denim capacity to 140 million meters (mm), while Raymond will expand its denim capacity to 30 m meters in FY05 compared to just 10 m meters two years back.
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 multinationals, it is the smaller players (SSI) that will be facing immense pressure. However, smaller players who have access to FDI may benefit on a smaller scale by differentiating their products and catering to niche segment. We believe that the positive impact of new rules will bring in competitiveness and productivity in textile sector in India which otherwise has been marred by inefficiencies.
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