Post MFA: Position of India in rapidly changing global textile tradePresented by: Sushant NagSubmitted to: Mr. Tapas BhattacharyaFMS – 1, Roll – 03 NIFT, Kolkata

Introduction• The Indian textile industry has an overwhelming presence in the economic life of

the country. The Indian Textile Industry is growing at 20% and accounts for 4% of India’s GDP. It contributes about 14 % to industrial production, 4 percent to the GDP and 16.33 percent to the country’s export earnings. The textile sector is the 2nd largest provider of direct employment after agriculture with 35 million people. Thus, the growth and all round development of this industry has a direct bearing on the economy of the nation.

• It accounts for 21% of India Gross Export Earning. Foreign Direct Investments inflows worth €681.59 million have been received by the industry between Aug 91 and May 06, accounting for 1.29% of total FDI inflows in the country.

• The Indian textile industry has not looked back after the quota restrictions on exports were lifted. The Multi Fibre Agreement that has governed the extent of textile trade between nations since1974 ,expired on 31st December 2004. It is expected that post-MFA most tariff distortions would gradually disappear and firms with robust capabilities will gain in the global textile trade. While the abolishment of quota has presented the buyers with an option to source from the most efficient and cost effective vendors and countries . For the suppliers this has resulted into stiff global competition driven by low costs and new legislations.

• An important question Indian companies are facing is whether their capabilities and their diverse supply chain are aligned to benefit from the opening up of the global textile trade.

The Multi Fibre Agreement• Exports of textiles and clothing from developing countries have long faced restrictive blocks to

their exports called quotas. Brought in force as a temporary relief measure in favour of the domestic textile manufacturers in the developed countries, it has been in force for 40 years now. In 1962, a Long Term Agreement (LTA) regarding international trade in cotton textiles was signed. It replaced the one-year Short Term Agreement that existed at the time. LTA underwent several renewals and was subsequently replaced by the Multi Fibre Agreement (MFA) in 1974, which was expanded to cover exports of synthetic fibres and woollen products, besides cotton.

• MFA came into force to allocate export quotas to the low cost developing countries, limiting the amount of imports to countries whose domestic industries were facing serious challenge from rapidly increasing imports. It sought to expand trade, reduce barriers to trade and progressively liberalise world trade.

• The MFA regime existed for 25 years, until 1994 when the Uruguay Round of Multilateral Trade Negotiations resulted in the Agreement on Textiles and Clothing (ATC). The ATC sought to phase out all quota restrictions in four phases spread over a period of 10 years. The first three partial phase-outs were in January 1995, January 1998 and January 2002. The final one is due on January 01, 2005.

Source: WTO

Background

• MFA textile and apparel quotas are country/product specific▫United States has agreements with 46

countries; European Union with 21• Agreement on Textile and Clothing of WTO:

▫4 stages of phase out; back-loading of quota removal

• Several preferential agreements with the U.S.:▫NAFTA, CBI, AGOA, Andean

• New players in global textile trade (China, India)

MFA Quota removal: Sources and expecteddirection of change for the U.S. sectors

Global and bilateral trade impact• Global Trade:– MFA has greater impact for apparel (11.2%; $B 30.9)

than textiles (1.1%; $2.5B)

• Bilateral Trade:– MFA trade shift from preferential to restricted

countries of Asia plus Turkey– US show rise in apparel imports and domestic

consumption– US textile exports are negatively affected by lower

domestic demand and imports from preferential producers

– MFA exporters also raise textiles imports to meet apparel production boost

Implications for fibre market Welfare

• Impact on Fibre/cotton market:– Global cotton trade rise by 6% ($ 443 M)– US: Larger boost in exports under full MFA impact (+9.7%) compared to quota removal only (6.7%)

• Global and regional welfare:– Global welfare under MFA quota removal rise by $10.1 B– U.S. shows the largest welfare gain (not surprisingly)– MFA exporters do not necessarily translate higher trade with welfare gains (terms of trade larger than efficiency gains)– MFA exporters only show welfare gain under combined quota removal and further tariff reductions

India’s Textile Exports & Imports

Item 1999-2000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07(P)

Exports (Including Jute, Coir& Handicraft)Million US $

10521.28

12014.44

10801.00

12444.94

13532.04

14055.36

17553.00

18713.00

ImportsMillion US $

1128.59

1172.40

1537.10 1645.47 2021.96 2239.40 2678.94 2757.00

Source: Compendium of Textile Statistics' 2006-07 & www.txcindia.com

India’s major export destinations

Country 2003-04 2004-05 2005-06 % increase in 2005-06 over previous year

EU (27) 4378 4802 6272 30.61%

US 2932 3464 4747 37.04%

UAE 1121 1126 1002 -11.01%

Canada 351 370 410 10.81%

Saudi Arabia

321 226 361 59.73%

Rest of World

4411 4358 5091 16.82%All Textiles (value in Million $)

Source: Apparel Talk June 2008

India’s position in the world textile economy• India is a major player in the home textile

segment (61% of world loom capacity)

• 2nd largest producer of raw cotton• 2nd largest producer of cotton yarn• 2nd largest producer of cellulosic fibre/yarn• 2nd largest producer of silk• 4th largest producer of synthetic fibre/yarn• World’s Largest producer country of raw jute• World’s largest producer of Polyester is

Reliance

India’s position in the world textile economy• 12% to the world production of textile fibres and yarns

is from India and is the largest producer of Jute, second largest producer of silk and cellulose fibre / yarn, third largest producer of cotton and fifth largest producer of synthetic fibres / yarns.

• India’s key assets include a large and low-cost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities. On the basis of these strengths, India will become a major outsourcing hub for foreign manufacturers and retailers, with composite mills and large integrated firms being their preferred partners. It will thus be essential for SMEs to align with these firms, that can ensure a market for their products and new orders.

India’s Textile Exports

•Cotton yarn and fabrics,

•Man-made yarn and fabrics,

•Wool and silk fabrics,

•Made-ups and a variety of garments, knitwear

•Woven and silk besides handmade

India’s Textile Exports

• Major export destinations for India’s textile and apparel products are the US and EU, which together account for over 75% of demand. Exports to the US have further increased since 2005, post the termination of the MFA (Multi Fibre Agreement). Analysis of trade figures by the US Census Bureau shows that post-MFA, imports from India into the US have been nearly 27% higher than in the corresponding period in 2004-05.

• Within one year after the abolition of MFA , Indian textiles and apparel exports grew by 19% to reach US$17 billion in2005-06.

• In 2007-08 textile exports are $20 billion. Against the target of $25 billion. Registering a growth of9.45 against exports in 2006-07.

• The textile exports are expected to reach $50 billion by 2012.

• In spite of the impressive growth , India has not been able to compete with the performance of countries like china, Bangladesh, Turkey, Indonesia, Philippines and Vietnam.

• Some of the rules of origin and preferential treatment provided by destination countries of US and EU have also affected the Indian textiles exports adversely.

India’s Textile Exports

• The post MFA global market has not only opened a vista of opportunities but has also brought in a host of challenges to the Indian textiles exports. The opportunity provides unlimited market access, a competing position of India vis-à-vis other competitive nations for its strength on a strong resource base and production of small and variated research product. The Indian exports have also received opportunity to expand in terms of product and market diversification. However, the Indian textile exports have not been able to corner the benefit as was expected on account of a plethora of challenges being faced by the sector, both in domestic and export markets.

Government Policy A total of €15.9 billion has been disbursed for technology upgradation. There are

around 26 Apparel Parks. Investments in the textiles sector can be assessed on the basis of three factors:

• Plan schemes such as the Technology Upgradation Funds Scheme (TUFS). Under the TUFS scheme, t states in India, with a total estimated investment of €2.3 billion

• Technology Mission on Cotton

• Apparel Parks, etc.

A competitive industry, Apparel has the potential of achieving export earnings of €25.46 billion by 2010

Specialized textile parks, apparel parks, EOUs and EPZs have been set up with improved infrastructure. The apparel parks operate as Special Purpose Vehicle and is run independently by entrepreneurs

Government support has ensured that key policy changes in the fiscal regime have been made in the past two years, which would ensure rapid increase of clothing consumption as well as the fibre consumption. A single rate will now be prevalent throughout the country

Opportunities in the Textile Sector

• Global Textile and apparel trade is estimated to be $480 billion

• Global Textile and apparel trade is expected to grow to $700 billion by 2011

• Indian textile industry estimated at $47 billion with domestic market of $30 billion and export market of $17 billion

• Indian textile export is expected to cross $40 billion by 2011Source: Tex Summit, 2007 background

paperSource: ASSOCHAM study paper

India in post quota scenario

•US and EU are the biggest export destination for India followed by UAE and Saudi Arabia. During the post quota period. Though countries like Bangladesh, Turkey, Bulgaria, Indonesia, Vietnam, Cambodia ,Mexico, also consolidate their position in the US and EU , India also remained a reckoning force .

Conclusion

The global elimination of quotas at the end of 2004 has greatly enhanced the opportunities for sourcing from India. The overall growth in the post quota era in India's exports of textiles and apparel is quite encouraging. However, in order to sustain the growth, the Indian industry needs more investments in weaving, processing and apparel sectors. Our spinning industry is technologically well advanced, with investments flowing in regularly for modernization and capacity expansion. However, there is a considerable lag in the required investments in weaving and processing sectors. Necessary steps will have to be taken to accelerate the pace of modernization in these segments. This alone can engender higher production of value-added products such as home textiles and garments. Emergences of large-scale garment units, paving the way for economies of scale, are the need of the hour.

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