Indian Textile Industry in the Next Era-2004

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Manifestations-2004

ECONOMICS AND SOCIAL SCIENCE

Indian Textile industry in thenext era

Authors:

Abhishek Thakur Basanta P. [email protected]

[email protected](0)-9891254622 (0)-9868364718

School of International Business ManagementIndian Institute of Foreign Trade

Qutab instititional areaNew Delhi-110016
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Table of Content

1. Executive summary (3)

2. Introduction (4)

3. The Indian textile and apparel industry (5)

4. The global scenario: post ATC (5)

5. SWOT analysis of the India textile industry (7)

6. Trade factors without quotas: a framework (9)

7. Chinese textile industry: opportunities and threats (11)

8. Recommendations (12)

9. References (15)

10. URLs (15)

11. Appendix (16)

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1. Executive summary

The textile industry is enormously important for India not only for its historical importance

but also due to the potential it has in the post liberalised era. With the abolishment of Multi

Fibre Agreement and the lifting of quotas as a trade barrier, opportunities are abound in the

world market.

This work is an attempt to understand Indias preparedness for the global competition as well

as the parameters that need to be taken into account for the quota free world of textile and

apparel industry. Our approach is more strategy based than econometric. We analyse China

in particular as a threat and try to chalk out a general action plan that India needs to adopt as

well as the scheme of things that may eventually turn in Indias favour despite the current

appearance of a seemingly uphill task.

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2. Introduction

The global textile industry is going to undergo a substantial change. On the 1st of January,

2005, the Agreement on Textile and Clothing (ATC) will no longer be in enforcement and

consequently, the trade barriers and quota system which used to dominate the textile trade

scene will also disappear.

As a result, the textile industry in India is going to face greatly increasing competition after

2005. Much of this competition will come from China, whose high capacity to produce

textiles is held back today only by the ATC quota system. As in many other countries, Indias

textile sector is one of its oldest industries and tends to be more traditional in terms of

organization and business practices. The traditional nature of the textile sector is likely going

to be a significant barrier to India for stepping up its performance after the elimination of the

quota system.

Recently, India has been very successful at supplying the global service economy, which has

not required the robust build-up in physical activity that industrial sectors require. Clothing

and textiles, unfortunately, falls within the industrial category and even without the

expiration of the ATC, its domestic producers undoubtedly face tough times ahead. The

increased competition from countries like China is only going to expose the relative underpreparedness of the sector even more.

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3. The Indian Textile and Apparel Industry

The structure of the Indian textile industry is both complex and unique. It represents a sharp

contrast to the textile industry in other countries and can be characterized by several aspects.

Employment of co-automated technology.

Dualistic manufacturing structure dominated by a fast expanding decentralized or

unorganized small-scale manufacturing segment and a declining, vertically-

integrated, large-scale composite mill segment.

The industry is dominated by cotton as a primary raw material.

Existence of a large public sector, which is composed mainly of nationalized and

sick mills that have been taken over by the government.

Predominance of the small-scale sector. This might be seen as a major advantage,

for example, in comparison to China. While the Indian textile companies are

capable of producing very small amounts of cloths for its clients, China is only

able to produce large quantities.

During the last decade, the industry displayed rapid growth in output and exports. But

existing structural weaknesses and the current regulatory environment will increasinglyhamper the industry's ability to sustain this performance.

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4. The global scenario: post ATC

The Multi-Fiber Agreement (MFA) in place since 1980s, provided a framework under

which developed countries including the United States, the European Union and Canada

imposed quotas on exports of yarn textiles and apparel from developing countries. The

Agreement on Textiles and Clothing (ATC) concluded during the Uruguay Round of

multilateral trade negotiations provides for the phase-out of import quotas established under

MFA for a period ending in December 2004. During the ten year transition period, the ATC

agreement calls for a progressive phase out of these quotas and the integration of traded

textile and apparel products within the GATT system which disallow quantitative restrictions

such as import quotas.

During the 1990s a significant portion of bilateral textile trade from MFA-constrained

suppliers (India, Pakistan, Hong Kong, Korea, Taiwan and China) has shifted to preferential

sources (Mexico, CBI countries). Nevertheless, MFA-constrained suppliers continue to hold

substantial shares of total trade and the removal of MFA quotas is expected to have a

significant impact on global trade in these products as well as to induce a reversal of these

trends in favor of MFA-restricted suppliers.

The implications of post-MFA on U.S. textile and fiber sector will be quite different for

apparel, textile and cotton sectors. Without MFA quotas, U.S. firms currently sourcing

apparel imports from preferential suppliers such as Mexico, CBI, Andean, or AGOA

countries may have economic incentives to shift to Asian suppliers. This has direct

implications on U.S. textile industry since a large share of apparel imports from preferential

sources is made in large part from U.S. fabrics whereas MFA sourced apparels use little U.S.

fabric. This is critical given that the United States is relatively more competitive in capital-

intensive textiles compared to labour intensive apparels. The MFA-induced shift in apparel

imports from preferential to MFA sources will also impact the U.S. textile patterns. In fibermarkets, the United States is a major cotton producer and exporter. It is expected that MFA-

induced changes in textile and apparel global trade will also affect domestic and foreign

demand for fiber inputs. Increases in demand for textiles will have opposing effects on cotton

demand both from adjustments in domestic textile industry as well as from new and

expanding export opportunities in global markets, which could be even larger if further tariff

liberalization takes place.

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5. SWOT analysis of the Indian textiles industry:

We now do a SWOT analysis of the Indian textile industry keeping in mind the global

changes that have taken place in the post quota regime.

STRENGTHS-

1. Abundant raw material

2. Low cost skilled labour

3. presence across the value chain

4. growing domestic market

5. Strong backward integration

6. Third largest cotton producer as well a the largest area under cultivation

7. Increasing presence across entire value chain

8. Cheap and skilled manpower

9. Sharp reduction in borrowing costs

10. Recent government efforts to promote the industry.

11. Truly vertically integrated from raw material to finished products.

12. Steadily diversified its raw material base to include man-made fibres such as

polyester, viscose, acrylic, polypropylene etc. as well as other natural fibres

(including silk, wool, linen etc.).

13. Flexible in terms of production quantity and lead time.

WEAKNESS:

1. Fragmented industry

2. Effect of historical govt policies

3. Lower productivity and cost competitiveness

4. Tech obsolescence. Quality is not consistent

5. Caters mainly to the low-end class.

6. Low level of training.

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7. The export-import policy of India changes too frequently due to which it becomes

very difficult for importers to import goods.

8. Delay in delivering the goods at the right time.

9. Lack of economies of scale and advance processing capabilities.

OPPORTUNITIES:

1. Huge demand for value added goods in all major countries.

2. Relocation from high cost economies.

3. Large and relatively untapped domestic market

4. Large Indian Expatriate community. Hence there is large demand for Indian

garments.

5. Rate of import duties is minimal.

6. Bilateral Agreements on Avoidance of Double Taxation and Prevention of Fiscal

Evasion with respect to taxes on income and capital have further opened the

opportunity for higher export for the garment sector.

7. Extensive commercial interactions have greatly helped in laying the foundation for

the development of a multi-dimensional relationship between India and the US.

8. India appears to be a competitive and sustainable hub of production globally, and

therefore manufacture-suppliers are investing in India as a growing market

9. India is also an emerging market for used and refurbished machinery.

THREATS:

1. Competition in domestic market

2. Economic and social awareness

3. Regional awareness

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4. Developed countries are bound to increase the non-tariff barriers like safeguard

measures and anti-dumping duties to protect their domestic industries.

5. Creation of trade blocks on the lines of EU and NAFTA, which runs against the free

and fair trade.

6. Tariff on most of the industrial items have been decreased by 38 percent as against 22

percent deduction in case of readymade garments. The tariff imposed by most of the

developed nations is very high in case of textiles.

7. Not enough quotas to utilize its fullest potential.

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6. Trade factors without quotas: a framework

We now give a basic framework within which the potential of each country can be

ascertained-

1. Business Climate and Infrastructure : Here three factors can be termed as critical-

1. Respect of basic human ethics such as minimum wages;

2. Absence of child or forced labor;

3. Good working conditions

2. Proximity to Markets : This is again an important consideration. In the post-2005

world, buyers are going to choose suppliers in terms of reliable delivery and lead

times. Particularly the U.S. buyers are increasingly demanding quick response

services; so distant factories will find it harder to satisfy customer requirements. E.g.

shipping time from Sri Lanka, Bangladesh, and India to the United States averages 28

days, compared to 2 days from Mexico or Canada.

3. Domestic demand: In countries like India and China, the wealth increase and the

general growth rates are higher than the developed countries. This translates into

higher scope of growth for textiles and apparels also and equips the manufacturer

with opportunities and skills that were previously unavailable.

4. Labo ur and Management: It is seen that comparative advantage keeps shifting as

a variable. While Japan lost its advantage as a key supplier in the 70s, Taiwan and

Hong Kong etc emerged as suppliers. Nowadays South Asians countries and China

are taking over that mettle of low cost producers.

5. Raw material Input: The availability of local or regional raw material greatly

improves a countrys ability to respond to orders with shorter lead times. As

purchasers consolidate and rationalize their sources, the degree of vertical integration

in countries or firms becomes an important competitiveness factor.

6. Level of Service Provided and Reliability of Supplier : Todays sourcing decisions are

increasingly based on which factories can best meet customers ever-increasing

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requirements. Level of service required by buyers is evolving and that a full

package from design to delivery of the finished product, inclusive of fabric and trim

sourcing, right down to the delivery of store-ready items to individual shops is

nowadays being demanded.

7. Market access : In general, suppliers that are not constrained by quotas and/or benefit

from preferential trade agreements have an advantage over quota-constrained as well

as other non-constrained suppliers. Although preferential access to European and U.S.

markets will not be completely removed (since preferential tariffs will remain), it

would be somewhat diluted with the 2005 elimination of MFA quotas and the

extension of such privileges to a larger group of countries.

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7. Chinese Textile Industry: Opportunities and Threat

China is undoubtedly Indias biggest competitor and threat, particularly in the post quota

regime. We thus analyse the Chinese textile industry vis--vis the positively and negatively

related factors that it faces. Here, the challenges and struggles with the US textile industry

are also given a thought.

Positively related factors:

a) For a long term, the advantages of China's textile products in the international market have

not been brought into a full play due to the quota limitation. China's exportation of textile and

clothing products is likely to experience a stage of rapid growth in the post quota era,

especially in the European and American markets that formerly set limitation.

b) After the abolishment of quotas, the Chinese textile industry will attract overseas elements

like funds, advanced technologies, and advanced management, strengthen its cooperation

with various countries in the textile domain, and drive the upgrading of the textile industry.

c) China's advantage on the labour cost is gradually weakening but China still has certain

comparative advantages on certain textile technologies. With the cancellation of quotas, The

Chinese Textile industry may have the opportunities to make investment, set up factories,

and explore diversified markets in North America, Central & South America, Africa, Mid-

East, Europe and neighbouring countries and areas.

Negatively related factors:

a) There exists a global overproduction of textiles and clothing and the profit margin in the

industry is very narrow. The market for China's textile and clothing products is under the

pressures from both advanced countries and developing countries.

b) China's exportation of textile and clothing products is still restricted by textile-specific

safeguards measure. China's exportation of textile and clothing products will continue to be

restricted greatly after 2005 due to it.

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c) Due to the excessively quick growth of China's exportation of textile products and

clothing, not only developed importers like the US and the EU countries but also some of

China's rivals in the international market and developing countries air the argument of

"China's threat" wantonly, which puts China into a disadvantageous position in multi-lateral

international situations.

d) International trade barriers in the textile and clothing industry still exist. After the

cancellation of the quotas, trade barriers, especially non-tariff barriers like quality,

technological barriers, green barriers, anti-dumping, and anti-subsidy etc will become a

major trade-protecting tool for developed countries.

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8. Recommendations

After studying the Indian and Chinese Textile industry structures in the international

market environment of post quota regime, we can suggest the following steps that should

be useful for the Indian textile industry-

The major textile import and export countries have established

monitoring/surveillance groups to continuously oversee the day-to-day changes

which constantly feed such governments for fruitful policy measures. India also

should have such a task group which should feed the interest groups about the

changes that are taking place.

Similarly the various Industry Associations should support its members through

market studies, competition tips and market data bases for future references. In the

days to come where Anti-Dumping measures are going to increase, if the

associations do not document the activities, in spite of best efforts of the

government, the cases can never be won.

Interest and power costs in India are among the highest across countries, rendering

units here less competitive. The Textile Up gradation Fund Scheme, set up five

years ago, provides for an interest rate subsidy of 5 per cent. However, the

advantage of this scheme is not fully realised.

Most banks are still wary of giving loans to the textile sector, which has earlier

been a non-performer. This needs to be tackled.

The government should try to improve the infrastructure in general, in particular

the management and operations of the ports can be improved.

Another smart move would be to try to change the routes of the major sea carriers,

so as to make them go through India.

There are reports of large scale shifting of machinery by EU producers to china to

relocate production. India must also try to get into this game.

For small scale manufactures there is technology up gradation fund with the

ministry of commerce. That may fall into disuse if producers are unable to learn

the intricacies of applying for government funds.

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Small players should develop supply linkages with big producers. This would

prevent them from getting eliminated in the export markets.

An unusual suggestion is to look at China as an opportunity rather than a threat.

With more than $60 billion of exports and one of the most cost-effective

destinations for textile products, China can be considered as an important

destination for partnerships and outsourcing.

Moving up the value chain by offering a strong brand of finished as well designed

goods. Currently India is considered strong only in medium to low value clothes.

There are also some points in the Chinese industry that may be taken advantage by

the Indian firms-

US threatens to impose safeguards measures on China

Chinese currency is unnaturally devalued, creating a false export

competitiveness

Post WTO, labour norms will have to be adhered to, diminishing

Chinas abysmally low labour costs.

Remove manufacturing of knit garment and fabric from SSI reservation list. This

will help creating the necessary economies of scale.

Develop apparel parks which would aim to develop deep backward and forward

linkages, up to and including yarn at one end and marketing at another.

An interesting way would be to develop linkages and coordination with the textile

industries in the SAARC region. For instance, raw fibre is exported from India to

Sri Lanka where it is re exported after processing. Such linkages can help in

providing the economy of scale.

Most importantly, a lot is expected from the government in this area. This includes

rationalising the labour laws, duty structure, promoting fair competition as well as

removing policy biases against certain kinds of fibres and yarns.

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9. References

1. Pant, Manoj (10th September, 2004) The warp in the Indian fabric, The Economic Times,

New Delhi.

2. Bhattacharyya, B. (1999),Non-Tariff Measures on Indias Exports, An Assessment,

Occasional Paper No. 16, Indian Institute of Foreign Trade, New Delhi.

3. Chandra, P. (1999), Competing Through Capabilities, Economic and Political

Weekly, 27 February

4. Prasad, A.C.H. (1997),Indias Competitiveness in Export of Garments in the MFA

Phase-out and Post-MFA Phase-out Periods, Occasional Paper No. 10, Indian

Institute of Foreign Trade, New Delhi.

5. Porter, M.E. (1998), The Competitive Advantage of Nations, The Free Press, NewYork.6. Verma, S. (2001), Impact of WTO Agreement on Indian Textile and Clothing

Industry in Chadha, G. K. ed., WTO and the Indian Economy, Deep & Deep

Publications, New Delhi

7. Gokhle, C., Vijaya Katti (1995), Globalising Indian Textiles- Threats and

Opportunities, Tecoya Publication.

8. Salvatore, Dominick (2003),International Economics, John Wiley and Sons.

10. URLs

1. www.wto.org

2. www.atmi.org

3. www.ncto.org

4. www.blonnet.com

5. www.economictimes.indiatimes.com

6. www.equitymaster.com

7. www.sharekhan.com

8. www.businessworldindia.com

9. www.ieport.com

10. www.washingtonpost.com

11. www.icrier.res.in

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http://www.wto.org/http://www.atmi.org/http://www.ncto.org/http://www.blonnet.com/http://www.economictimes.com/http://www.economictimes.com/http://www.equitymaster.com/http://www.sharekhan.com/http://www.businessworldindia.com/http://www.ieport.com/http://www.washingtonpost.com/http://www.icrier.com/http://www.icrier.com/http://www.wto.org/http://www.atmi.org/http://www.ncto.org/http://www.blonnet.com/http://www.economictimes.com/http://www.equitymaster.com/http://www.sharekhan.com/http://www.businessworldindia.com/http://www.ieport.com/http://www.washingtonpost.com/http://www.icrier.com/


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11. Appendix

Source: www.wto.org

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http://www.wto.org/http://www.wto.org/


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Source: www.wto.org

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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:www.equitymaster.com

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http://www.equitymaster.com/http://www.equitymaster.com/http://www.equitymaster.com/


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Source: www.depts.washington.edu

Source: International Trade Statistics, 2001-WTO

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Source: Prof K. Rangarajan,, Classroom presentation, Challenges and Prospects for Indian Textile Industry,

IIFT, New Delhi.

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Source: Prof K. Rangarajan,, Classroom presentation, Challenges and Prospects for Indian Textile Industry,

IIFT, New Delhi.

Indian Textile Industry in the Next Era-2004

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