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Indian textile sector: Post-quota regime and the road ahead
A K G Nair
The regime of quota system for textile exports and imports under the Multi-Fibre
Arrangement (MFA) will be over on January 1, 2005 as per the Agreement for Textiles
and Clothing (ATC) of World Trade Organisation (WTO). The countdown has begun.
A new era awaits the Indian textile sector, in general; and textile and garment
exporters in particular. The million dollar question is, whether India is prepared
for the post-quota regime? What has it done to prepare its textile industry
to face new challenges in the last ten years after ATC was signed in 1995?
On the positive side, experts opine that there are new opportunities for India
to expand its garment and textile exports in the post-MFA era. As per the agreements,
India agreed to reduce tariffs and import controls on textiles in a phased manner,
in return for greater access to Indian textile items in the US and the European
Union (EU) markets. It implies that post-quota regime offers great opportunities,
which India and its industry is looking forward to seize. Indian economy too
has a lot of expectations from the textile sector, one of the largest industries
in India estimated at Rs 150,000 crore. At over US$ 13 billion, textile sector
accounts for over 25 per cent of India’s total exports.
An optimistic outlook suggests that sky is the limit for Indian textile sector
post 2004 as there will be no quota restrictions. It will be a free trade scenario,
that means no protectionism and free and fair competition. But, here lies the
challenge. India has to face stiff competition from its neighboring country
China, so far as textile trade is concerned. That is not the end though; Bangladesh,
Sri Lanka and Vietnam too are the competitors. They have modernised their textile
industries over the last couple of years to emerge as more cost-competitive
manufacturing destinations than India.
According to the US International Trade Commission (USITC), which has published
a report on ‘Textiles and Apparel: Assessment of the Competitiveness of
Certain Foreign Suppliers to the US Market’, China is expected to become
the “supplier of choice” for most US importers due to its capacity
to make almost any type of textile and apparel products at competitive price
and with desired quality level.
The commission however adds that the over-dependence on one supplier is strategically
bad in international trade, so US importers are also likely to tap other low-cost
sources, mainly India, which also has a very large manufacturing base for textiles
and apparel and a large supply of relatively low-cost labour. The Chinese per
unit labour costs are very low due to low wages and high productivity, according
to the report. As far as inputs are concerned, the country itself produces fabrics,
packaging and most other components that are used to make apparel and made-up
textile articles. Further, Chinese products are regarded by the US industry
to be among the best in the world. Whereas, India, according to the commission,
is likely to remain a competitive supplier to the US in the post-quota period
and is considered by many US firms to be the primary alternative to China. The
advantages for the Indian industry are that it has a huge, relatively inexpensive
and skilled labour force; it has impressive design expertise; it is among the
world’s largest producers of yarns and fabrics; and it produces a wide
range of apparel articles and is considered a particularly competitive source
for home textiles (bedlinens, towels, etc). The negative factors recorded in
the report include, personal safety, security of shipments between factories
and ports, bureaucratic red-tape and infrastructural bottleneck. This is the
reason why many US firms are using agents in lieu of dealing directly with producers.
The report also pointed out at the labour productivity in India, Bangladesh
and Pakistan as 20-25 per cent lower than in China despite the fact that India
had a very large pool of skilled and unskilled workers and well-educated management
and technicians.
When we look at India’s vigilance for the post quota regime, the situation
is not encouraging. Since entering into the agreement, India remained quite
for about eight years. The pace of modernisation is still very slow despite
alarm bells ringing. Barring certain pockets of excellence, there is widespread
sickness in almost every segment of the industry. In the last couple of years,
the government announced policy measures and fiscal incentives to encourage
Indian textile industry to gear up for the new era. The modernisation efforts
of the government are limited to the Rs 25,000 crore Technology Upgradation
Fund Scheme (TUFS) introduced in 1999 for a five-year term, TUFS offers a five
per cent interest subsidy on loans raised from designated financial institutions.
The scheme could not make much headway due to various reasons including archaic
labour laws and inability of promoters to wind off sick units. The total amount
sanctioned under the TUFS up to December 2002 was Rs 6,100 crore, the actual
amount disbursed was just Rs 4,202 crore. It is quite clear that TUFS is not
able to solve problems of the textile industry. There is an urgent need to institute
alternative mechanisms, including provision for foreign exchange loans and seeking
assistance from the multilateral institutions.
The total funds required for modernisation of the entire industry is estimated
at over Rs 98,500 crore by the Steering Group Report on Investment and Growth
in Textile Industry, headed by Mr N K Singh, member, Planning Commission. The
three industrial segments weaving, woven processing and clothing alone need
investments to the tune of Rs 22,950 crore, Rs 25,800 crore and Rs 24,500 crore
respectively. There is also a need to change labour laws and allow sick mills
to close down. But due to certain political compulsions, reforms in the textile
sector are implemented half-heartedly. NTC mills are the classic case study
in this sense where the government has failed to resolve the problems of sick
mills. Though, wrong policies over the past decades have led to the fragmentation
of this industry and the weakening of some of its vital segments, since November
2000 the government is making a conscious effort to help the ailing textile
industry to regain its health to face global challenges from 2005.
The National Textile Policy, initiated in 1995, was laid down in the public
domain only in November 2000. The thrust of the policy statement is on making
India a global player in textile and apparel, by raising the industry’s
exports from US$ 11 billion in 2000 to US$ 50 billion by 2010. Some important
policy decisions are taken in the recent past that includes taking garments
off the SSI reservation and removal of 24 per cent cap on FDI. The budget for
2003-04 offered a reduction in excise duty on polyester filament yarn, all spun
and other filament yarns and woven and knitted fabrics. Similarly, customs duty
on apparel grade raw wool has been reduced from 15 per cent to 5 per cent. To
encourage modernisation, customs duty on a large number of textile machinery
and their parts has been reduced from 25 per cent to 5 per cent. The government
is considering a mechanism for restructuring the debt portfolios of viable and
potentially viable textile units.
But compared to China, we are not yet prepared for global competition. China
has taken a lead in the production of value-added fabrics and garments. China’s
garment exports have already crossed US$ 50 billion against India’s US$
6 billion. Some of the large garment companies there have a turnover of US$
800-1,200 million. Indian garment companies remain small and fragmented in over
20,000 units. The road ahead is tough and bumpy for Indian textiles industry
in the post-MFA regime. But the positive outlook of the Indian economy with
10.5 per cent GDP growth in the previous quarter is likely to boost the growth
of the textile sector too. Both government and industry are conscious of the
impending challenges. With right policies and with better production and marketing
strategies India may be able to emerge the second largest textile exporter in
the world after China.
(The author is executive director, Pearl Academy of Fashion)
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