Weaving the fabric of growth

Fe Icra Study

INDIAN TEXTILES INDUSTRY



Increase in productivity and overseas expansion in conformity with WTO regulations still pose a challenge



WEAVING THE FABRIC OF GROWTH INDUSTRY STRUCTURE

The textiles industry accounts for around 20% of India's industrial production and 25% of its total exports. Besides, it provides employment to over 20 million people. Cotton is the most important segment of the textiles industry, accounting for around 55% of the domestic fibre consumption and exports. With over 9 million hectares under cotton cultivation (which is the largest area employed for the purpose throughout the world) and an annual crop of over 3,500 million kg, India is the third largest producer of raw cotton in the world, after China and the US. However, during the last decade, while the production of cotton fabric has stagnated, the manmade fibre based fabrics have shown a strong growth. Currently, with a significant portion of cotton being exported in the form of yarn, fabrics and apparel, manmade fibre-based textiles have a nearly 60% share in the household market.

The textile and clothing industry is highly fragmented. Even Vardhman group, which is the leading player in the cotton yarn segment (yarns are less fragmented than the other segments of the textile and clothing market) has a small share of only 2%. The other major players include Forbes Gokak, Madura Coats, GTN Textiles, etc. The degree of fragmentation is even higher in the fabrics segment, wherein the small-scale sector accounts for 93% of the production. The production of denim fabrics is, however, dominated by large players like Arvind Mills Ltd.

The decentralised sector is the largest segment of the Indian fabrics industry in terms of employment, income and exports, and accounts for 93% of the total fabric production.

The role of the organised sector in fabric production has diminished over the years with its contribution declining from 70% in the 1950s to 7-8% in 2004-05. This has mainly been on account of policy restrictions relating to labour laws and the fiscal advantages enjoyed by the small-scale and powerloom sectors.

The small-scale nature of India's apparel industry has been shaped directly by policies that restricted woven and knitted apparel firms to the small-scale-industry (SSI) sector. For instance, the apparel industry has around 27,700 domestic manufacturers, over 48,000 fabricators, and around 1,000 manufacturer-exporters. Most apparel manufacturers (80%) have small operations (with <20 sewing machines) while 99% of them are proprietorship-/partnership-type establishments. The technologies for processing cotton textiles and apparel in India also cover a broad range of technological sophistication Because of the predominance of very small-scale fabricators in the apparel sector, most apparel is produced on a contractual basis for large manufacturers/ exporters. The fabricators specialize in low-wage, labour-intensive sewing and have the flexibility to meet small custom orders but are much less competitive with large orders and those typically involving high levels of automation. While it is not unusual for apparel manufacturing to be both relatively small-scale and independent from the upstream segments of the textile supply chain, India's apparel firms are smaller and more labour-intensive than other major exporters.

The domestic Indian clothing market is estimated to be close to Rs 1,000 billion. Being new, the readymade garments industry is estimated currently at 25% of this and has increased at a rate of 13% per annum. The branded readymade garments are estimated to be close to Rs 70 billion. The share of premium & super-premium categories has been increasing at a much faster rate as compared to the overall apparel market and would continue to do so as the base is still very low.

Indian textile and apparel exports have increased at a CAGR of 8% during the period 1997-98 to 2004-05. With India already occupying a large share in global cotton yarn market, the major growth areas during the recent past has been knitwear and cotton madeups. India's share of apparel exports is low at around 3%. Indian apparel is exported to over 120 countries, the most significant among which are nations that were parties to the Multi-Fibre Arrangement (MFA) which was in existence prior to accession of textile trade to WTO. Amongst the regions, the most important export destinations for Indian apparel are the US and Western Europe, which together account for over 60% of India's total exports.

Reforms

While the quotas put restraints, they also protected the share of developing country in textile and clothing exports. While Indian yarn exports have a large share in the world, same is not true about the apparel sector. Thus, the industry needs to add significant value to its product profile. In November 2000, the Government of India came out with a new textile policy that outlines the direction of policy reforms to be followed in the near term. The steps outlined in the policy are geared mainly towards removing the bias in policy towards the small-scale sector and promoting modernisation. The government removed readymade garments subsequently from the list of products reserved for the small-scale sector.

The government announced the technology upgradation fund scheme (TUFS) in 1998 that provides for soft loans to textile companies so as to enable them to improve their productivity. The government has also announced several fiscal steps in the last five years’ budgets aimed at improving the efficiency of the textile sector (refer following table). With the removal of the protectionist bias in favour of the small-scale sector, the long-term impact of the reforms on the industry is expected to be significantly positive.

POST-QUOTA PERFORMANCE

The international textile and apparel trade has been driven by quotas provided by importing nations to the exporting nations and has been outside the purview of Gatt (General Agreement on Trade and Tariffs) and later on, WTO. Initially, the MFA (Multi Fibre Arrangement) governed the textile trade between 1974 to 1994.

The Agreement on Textiles and Clothing (ATC), the successor to the MFA, has given way to the WTO. The complete transition from MFA to WTO is expected was envisaged in four phases as the following figure shows.

At the start of each phase, apart from the removal of items under quota, the quota levels were also proposed to be increased significantly by 16%, 25% and 25% in each of the three phases. However, notably, a very small percentage of textile and clothing products had come out of the purview of quotas in first three phases. The reasons for this have been two-fold:

• Firstly, all the items of textile and clothing–whether previously quota related or not were included in the list of items on which quotas were to be removed

• Secondly, the basis of percentage of items (according to value) to be removed from quotas was on the 1990 data. Since significant growth in trade has happened over the years, as a result, developed countries could adhere to the deadlines even by removing a few of the items from the quotas. Thus, significant level of quota deregulation is happening only in the last phase of ATC, i.e., post January 1, 2005.

The accession of textile trade to the WTO presents both an opportunity and a challenge to the developing world. While there would be the new opportunities of free market, competition among the developing countries is also expected to increase, with the result that the share of the poor performers would be taken away by the good ones.

Indian textiles and clothing is competitive in the international market, as labour is relatively cheap in the country and most of the raw materials of the industry are indigenously available. However, the high power and interest costs impair these advantages to a significant extent (more so for fabric than apparel). Although the investments for modernisation are large, fiscal incentives announced by the Government in last five budgets along with soft interest regime in the TUFS scheme has provided the fillip to the Indian industry in improving its ability to compete more effectively in the emerging quota-free global environment.

During January-April 2005, i.e. after accession of international textile trade to WTO framework, India's exports to US have increased however, at a significantly smaller rate than shown by China. The developed countries' share has declined while the developing countries have increased their share.

The EU's textile and apparel import figures indicate that imports from India had a 11% growth in January-May 2005. Imports from China were up by over 36% and reached 7.4 billion Euros.

With China having joined WTO later in 2001, the developed countries can impose economic safeguards in order to limit Chinese growth. This is likely to help other developing countries including India. The US has already imposed restraints on China on the following products:

• cotton knit shirts & blouses (category 338/339),

• cotton trousers (347/348),

• cotton & man-made fibre underwear (352/652),

• combed cotton yarn (301),

• non-knitted men's and boys. cotton & manmade fibre shirts (340/640),

• manmade fibre knit shirts and blouses (638/639) and

• manmade fibre trousers (647/648).

EU has also imposed restraints on 10 categories of textiles imported from China.

INDUSTRY OUT LOOK

With China being highly competitive in textiles and clothing and large exporter of clothing (share of more than 20% already), it is likely to acquire a substantial share of the increase in market for developing countries. However, with China having joined WTO later in 2001, the developed countries can impose economic safeguards (till 2007) in order to limit Chinese growth. The ability of other developing countries (including India) in competing with China would be crucial for growth in exports from developing countries. The increased competition will not only affect India in the export markets but also threaten domestic producers with imports (especially in the high end premium fabrics and apparel).

India's textiles producers all face, primarily, the same challenge: to raise productivity through gains in efficiency that will still allow them to compete with imports; and continue to expand abroad in the face of higher cotton prices resulting from conformance with WTO rules and demand pressures. For strong growth of textiles and apparel exports post-WTO accession, the share of manmade fibre based textiles and clothing exports would have to be significantly increased in order to address larger portion of world textiles and clothing market.

Organised sector: Although the potential of the Indian textile industry is considerable, the performance of the organised sector has declined consistently. With the new textile policy in place it is expected that the new policy will give a boost to integrated players in the organised sector, who would then be able to modernise and improve the quality of the weaving sector. Further, these players also have an edge in exports and the favourable government policy coupled with changes in the international textile trade environment would result in sharp increase in performance of the efficient integrated players in the industry.

Cotton prices: In India, the prices and availability of cotton play an important role in determining the profitability of Indian textile industry. World cotton production increased significantly during 2004-05. Cotton production during 2005-06 is likely to reduce, albeit moderately and be lower than consumption by a small margin. However, high opening stocks are likely to result in moderately high availability scenario continuing over short to medium term. This is likely to result in minimal pressures on world cotton prices to rise over short to medium term. The indigenous cotton stocks are also high whereby the domestic prices of cotton are also not likely to rise over short term.