Indian Textile Industry

The textile industry is the largest industry of modern India. It accounts for over 20 percent of industrial production and is closely linked with the agricultural and rural economy. It is the single largest employer in the industrial sector employing about 38 million people. If employment in allied sectors like ginning, agriculture, pressing, cotton trade, jute, etc. are added then the total employment is estimated at 93 million. The net foreign exchange earnings in this sector are one of the highest and, together with carpet and handicrafts, account for over ! percent of total export earnings at over "# $ %0 billion. Textiles, % alone, account for about 2& percent of India's total forex earnings. India's textile industry since its beginning continues to be predominantly cotton based with about (& percent of fabric consumption in the country being accounted for by cotton. The industry is highly localised in )hmedabad and *ombay in the western part of the country though other centres exist including +anpur, ,alcutta, Indore, ,oimbatore, and #holapur. The structure of the textile industry is extremely complex with the modern, sophisticated and highly mechanised mill sector on the one hand and the handspinning and handweaving -handloom. sector on the other. *etween the two falls the small/scale powerloom sector. The latter two are together known as the decentralised sector. 0ver the years, the government has granted a whole range of concessions to the non/mill sector as a result of which the share of the decentralised sector has increased considerably in the total production. 0f the two sub/sectors of the decentralised sector, the powerloom sector has shown the faster rate of growth. In the production of fabrics the decentralised sector accounts for roughly 12 percent while the mill sector has a share of only ( percent. *eing an agro/based industry the production of raw material varies from year to year depending on weather and rainfall conditions. )ccordingly the price fluctuates too.

Yarn, cloth, fabrics, and other products not made into garments.

India3s trade in textiles and its share in world trade can be categori4ed as follows5

Indias Trade in Textiles

-%116.

Type
Yarn Fabrics Apparel Made-ups Over-all

India's Share in World Trade

22% 3.2% 2% 9% 2.8%

Compound Annual Growth Rate (CAGR) of different segments

Type CAGR (1993 98!

Yarn Fabric Made-ups Gar#en$

31.79% 9. !% 1".18% %.79"%

Global Scenario The textile and clothing trade is governed by the 7ulti/8ibre )greement -78). which came into force on 9anuary %, %1!2 replacing short/term and long/term arrangements of the %1(0's which protected "# textile producers from booming 9apanese textiles exports. :ater, it was extended to other developing countries like India, +orea, ;ong +ong, etc. which had ac<uired a comparative advantage in textiles. ,urrently, India has bilateral arrangements under 78) with "#), ,anada, )ustralia, countries of the =uropean ,ommission, etc. "nder 78), foreign trade is subject to relatively high tariffs and export <uotas restricting India's penetration into these markets. India was interested in the early phasing out of these <uotas in the "ruguay >ound of ?egotiations but this did not happen due to the reluctance of the developed countries like the "# and =, to open up their textile markets to Third @orld imports because of high labour costs. @ith the removal of <uotas, exports of textiles have now to cope with new challenges in the form of growing non/tariff A non/trade barriers such as growing regionalisation of trade between blocks of nations, child labour, anti/dumping duties, etc. ?evertheless, it must be realised that the picture is not all rosy. It is now being admitted universally and even officially that the year 200& )B is likely to present more of a challenge than opportunity. If the industry does not pay attention to the very vital needs of modernisation, <uality control, technology upgradation, etc. it is likely to be left behind. )lready, its comparative advantage of cheap labour is being nullified by the use of outmoded machinery. @ith the dismantling of the 78), it becomes imperative for the textile industry to take on competitors like ,hina, Cakistan, etc., which enjoy lower labour costs. In fact the seriousness of the situation becomes even more apparent when it is

realised that the non/<uota exports have not really risen dramatically over the past few years. The continued dominance of yarn in exports of cotton, synthetics, and blends, is another cause for worry while exports of fabrics is not growing. The lack of value added products in textile exports do not augur well for India in a non/78) world. Textile exports alone earn almost 2& percent of foreign exchange for India yet its share in global trade is dismal, having declined from %0.1 percent in %1&& to .2 percent in %11(. 7ore significantly, the share of ,hina in world trade in textiles, in %112, was % .22 percent, up from 2. ( percent in %160. ;ong +ong, too, improved its share from !.0( percent to %2.(& percent over the same period. Drowth rate, in "#$ terms, of exports of textiles, including apparel, was over %! percent between %11 /12 to %11&/1(. It declined to %0.& percent in %11(/1! and to & percent in %11!/16. )nother disconcerting aspect that reflects the declining international competitiveness of Indian textile industry is the surge in imports in the last two years. Imports grew by %2 percent in dollar terms in %11!/16, against an average of &.6 percent for all imports into India. Imports from ,hina went up by &0 percent while those from ;ong +ong jumped by 2 percent. Glo"al #a$tors in#luen$in% textile industry The history of the textile and clothing industry has been replete with the use of various bilateral <uotas, protectionist policies, discriminatory tariffs, etc. by the developed world against the developing countries. The result was a highly distorted structure, which imposed hidden costs on the export sectors of the Third @orld. Bespite the fact that D)TT was established way back in %12!, the textile industry, till %112, remained largely out of its liberalisation agreements. In fact, trade in this sector, until the "ruguay >ound, evolved in the opposite direction. ,onse<uently, since %1!2 global trade in the textiles and clothing sector had been governed by the 7ulti/fibre agreement, which was the se<uel to an increasingly pervasive <uota regime that began with the #hort/term arrangement on cotton products in %1(2 and followed by the :ong/Term arrangement. )fter the successful conclusion of the "ruguay >ound in %112, the 78) was replaced by the )greement on Textiles and ,lothing -)T,., which had the same 78) framework in the context of an agreed, ten year phasing out of all <uotas by the year 200&. The section that follows takes a brief look at the history of these protectionist regimes as also a more detailed look at the 78) and the )T,.

&ulti'(i"re A%reement (&(A! 0n 9anuary %st, %1!2, the )rrangement >egarding the International Trade in Textiles, otherwise known as the 78) came into force. It superseded all existing arrangements that had been governing trade in cotton textiles since %1(%. The 78) sought to achieve the expansion of trade, the reduction of barriers to trade and the progressive liberalisation of world trade in textile products, while at the same time ensuring the orderly and e<uitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production in both importing and exporting countries. Though it was supposed to be a short/term arrangement to enable the adjustment of the industry to a free trade regime, the 78) was extended in %1!2, %162, %16(, %11%, and %112. *ecause of the <uotas allotted, the 78) resulted in a regular shift of production from <uota restricted countries to less restricted ones as soon as the <uotas began to cause problems for the traders in importing countries. The first three extensions of the 78), instead of liberalising the trade in textiles and clothing, further intensified restrictions on imports, specifically affecting the developing country exporters of the textile and clothing products. Increased usage of several 78) measures tended to further erode the trust which developing countries had originally placed in the 78). The 78) set the terms and conditions for governing <uantitative restrictions on textile and clothing exports of developing countries either through negotiations or bilateral agreements or on a unilateral basis. The bilateral agreements negotiated between importing and exporting country's contained provisions relating to the products traded but they differed in the details. The restraints under the 78) were often negotiated, or unilaterally imposed at relatively short intervals, practically annually. The <uotas could be either by function or fibre "nder the 78), product coverage was extended to include textiles and clothing made of wool and man/made fibres -778., as well as cotton and blends thereof. @ith regard to applications of safeguard measures, import restrictions could be imposed unilaterally in a situation of actual market disruption in the absence of a mutually agreed situation. ;owever, in situations involving a real risk of market disruption only bilateral restraint agreements were possible. The Textile #urveillance *ody -T#*. was set up to monitor disputes regarding actions taken in response to market disruptions.

The 78) permitted certain flexibility in <uota restrictions for the exporters so that they could adjust to changing market conditions, export demands and their own capabilities. The 78) also provided for higher <uotas and liberal growth for developing countries whose exports were already restrained. The 78) asked the participants to refrain from restraining the trade of small suppliers under normal circumstances. In general, developed countries, under 78), chose not to impose restrictions on imports from other developed countries The T#* ensured compliance by all parties to the obligations of bilateral agreements or unilateral agreements. It called for notification of all restrictive measures. ) Textiles ,ommittee E established as a management body consisting of all member countries E was the final arbiter under the 78) and worked as a court of appeal for disputes that could not be resolved under T#*. "nsatisfactory experience with several extension protocols of the 78), retention clauses, such as Fgood willG, Fexceptional casesG, and Fanti/surgeG and other trade related factors led the developing countries to press for the inclusion of the textile issue in the agenda of the D)TT 7inisterial meeting. The eventual outcome of prolonged negotiations was the )greement on Textiles and ,lothing. A%reement on Textiles and Clothin% (ATC! The )T, calls for a progressive phasing out of all the 78) restrictions and other discriminatory measures in a period of %0 years. In contrast to the 78), the )T, is applicable to all members of the @T0.

(our Steps o)er 1* +ears

S$eps

&ercen$a'e o( produc$s $o be brou')$ under GA** +includin' re#oval o( ,uo$as-

.o/ (as$ re#ainin' ,uo$a s)ould open up0 i( 199! ra$e /as %%

Step 1 %st 9an %11& E %st Bec %11! Step %st 9an %116 E %st Bec 2002 Step 3 %st 9an 2002 E %st Bec 2002 Step / %st 9an 200& 8ull integration into D)TT and final elimination of <uotas , )T, terminates

1, per$ent -minimum (.1( percent annually taking %110 imports as base. 1. per$ent 6.!0 percent annually

18 per$ent

%%.0&

percent annually

/9 per$ent -maximum.

?o <uotas left

Top 10 Exporters (Textile)

1oun$r2 3illion 4S5
;ong +ong ,hina #outh +orea Dermany Italy Taiwan "#) 8rance *elgium/ :uxembourg 9apan Total (Top 1*! World !.11 !.%0 (.02 %2.00 1.60 (.% &.0 !.2% (.&2 &.66 ./03, 1*/0**

199 % s)are
!.(6 (.62 &.6% % .2( 1.2 &.10 2.6 2.(& (.21 &.(& .101 1**0**

1997 3illion 4S5 % s)are

%2.( % .6 % . & % .0& %2.1 %2.! 1.%1 &.6( !.0% (.!& 11*0,1110** 1.22 6.12 6.(% 6.22 6. 2 6.2% &.1
&.(2

2.&2 2. & .103. 1**0**

Top 10 Exporters (Apparel)

1oun$r2
,hina ;ong +ong Italy "#) Dermany Turkey 1.2% %&. ! %2.0! 2.&! !.62 .22

199 3illion 4S5 % s)are

1.%2 %2.12 %%.!2 2.21 !.&1 . 2 %.6 2 .%% %2.6& 6.(6 !.21 (.!

1997 3illion 4S5 % s)are

2%.0( %&. 0 1.6 &.!& 2.6 2.22

8rance "+ #outh +orea Thailand Total (top 1*! World

2.(& .06 6.%% 2.6( ,9038 1*30**

2.&% 2.11 !.6! 2.!6 ,.03, 1**0**

&. 2 &.26 2.%1 .!! 1110*1 1110**

.&2 .&0 2.!! 2.&0 .3011**0**

23 Top Ten Suppliers o# &(A Clothin%4 Ran5 6ri$e (AGR 199/ 9,!

1991 Ran5s and A)era%e 6ri$e

199, Ran5s and A)era%e 6ri$e

Ran5 6ri$e CAGR 199/ 9,

,ountry

>ank in Halue

>ank in Holume

)vg. Crice, =cuA+g

Rank in Value

>ank in Holume

)vg. Crice, =cuA+g

,hina Turkey ;ong +ong Tunisia 7orocco Coland India *angladesh >omania Indonesia

2 %

% 2

1 2 (

% 2

% 2

6 ( & ! 1 2 2 % 9 %0 2 ! 2 6 1* & % (

2 & ( . 6 1 %0

! ( 6 1 2 %0 1 & 2 . %0 2 6

2 & ( . 6 1 %0

( ! 6 1 2 %0 1

6ost &(A 7 ATC S$enario It is generally believed that <uota phase/out can only be "ene#i$ial for the industry. In %11 , a study of seven countries found that the price of cotton yarn per kilo, was cheapest in India at "#$ 2.!1, compared to "#$ . 0 in *ra4il, "#$ 2.%1 in 9apan, and "#$ .%0 in Thailand. This was because overall labour and raw material costs are cheaper in India. ;owever, it should be realised that the opposite can also happen. >emoval of <uotas may open new frontiers but will also close captive markets. The =" and the "# will no longer be restrained in buying as much as they want from the cheapest possible sources. #ome argue that the ending of <uotas will result in cut/throat competition between developing countries. ,oupled with this is erosion in the growth of markets in industrial countries. )pparent consumption of textile products, in real terms, remained stagnant during the decade %16&/1&. Curchases become discretionary and fashion/driven. )s a result, fashion cycles got shorter and order/cycles compressed. >etailers order re<uirements on short/ order cycle term and demand rapid responses to in/season ordering. ;ence, they are compelled to secure their supplies of top/up orders from those in close vicinity. There is, therefore, a propensity towards sour$in% #rom lo8 $ost $ountries in the neighbourhood as also a growth of offshore processing by manufacturers in developed countries. >egional integration reinforces this. 8urther exporters in India fear that freer imports could lead to dumpin% o# lo8 $ost #a"ri$s from ,hina and other #outheast )sian countries. Thus, the industry needs restructuring on all fronts. )lthough the policy framework can be blamed partially for its ills, internal factors are e<ually important. >ecent studies indicate that India is beginning to lose out to its rivals. In one survey of "# textile and apparel imports, ,hina and ;ong +ong had higher market shares than India. In certain categories, other )sian low cost producers like Cakistan and Indonesia had higher market shares and had emerged as close competitors to India. *ecause many of these countries depend on imports, however, India can take advantage of home produ$tion. 8urther, formation of ?)8T) means dire$t $ompetition from the :atin )merican countries. The "nited #tates has farmed/out offshore processing work to enterprises in 7exico and the ,aribbean *ase Initiative countries. #imilar relocation has taken place in =urope with manufacturers shifting base to =astern =urope, which provides similar advantages of cheap labour and proximity. According to projections by TECS, EU imports of ready-made fabrics will double between 199 and !"" , as a result of t#e elimination of $uotas% US imports are e&pected to treble o'er t#e same period%

According to anot#er prediction, apparel output could more t#an double (i%e% e&pand by ! 1)* between 199+ and !""+, compared to an increase of only 11 ), wit#out t#e agreement on te&tiles and clot#ing% *y increasing market access, the )T, will generate multiplier e##e$ts in the Indian economy, eventually feeding back into the textile industry itself. The rise in demand for exports could increase output and employment in the textile industry. This in turn will stimulate the agricultural sector to meet the rising demand for cotton. )s profits rise, so will wages, which will act as further stimulus. The export boom in the textile and clothing industry will also generate considerable foreign exchange. Diven India's high <uota growth rates during the phase/out period, its competitive product niches and established links with retailers and importers in developed countries, it should experience vigorous growth in the future. The @orld *ank predicts a growth rate of %(I per annum in the coming decade. Ultimately, t#e e&tent t#at ,ndia will benefit from trade liberalisation depends on its current cost competiti'eness, its ability to increase producti'ity and upgrade $uality% 6#plica$ions on 6ndian 78por$s +Op$i#is$ic Scenario-arn J Darment exports of *angladesh increase leading to increase in consumption of Indian fabric and yarn J =xports of 8ar/=ast K )#=)? increase further J >ationali4ation in duties of 778 leading to increase in processing of fibres in India

.abric/0ade-ups J Darmenting dereserved leading to entry of large textile players ensuring efficient sourcing and increase in the margins J Increase in investment for processing J Improvement in #)CT) trade 1arments J Darmenting and +nitting de/reserved to allow the units to grow bigger to be

able to service large orders and large clients J :abor laws in India become industry friendly J Darment parks come up in key regions giving a boost to exports J #uccessful Luota Chase/out without exports getting restricted by L>s
.ig in US 2 0n

Marn 7ade/ups 8abric Darments Total

N Crojections

199/ &10 6&% %2%2 !% 3435

1998 %!60 %216 %!%( 2621 95!4

-**2 2(20 2&%2 (&%0 1 "4+

-**19 2!0% 2&2! & 0 %0!12 !1++!

-*1*9 % % %%2(( !%00 2%!%% 4!"5

6#plica$ions on 6ndian 78por$s +&essi#is$ic Scenario-arn / ,hange works to the advantage for #. +oreaA)#=)?A8ar/=ast / Bemand for packages increases / ==, other garment supply countries invest in back/end processes 8abricA7ade/ups / =nvironmental ,lause impacts / Investment in processing does not happen / *lends and synthetic fabrics dominate reducing advantage of Indian cotton Darments / #ocial clause impact leading to ban on some categories, etc. / ##) is a reality impacting exports of garments from India to "#) and =" / 8T) becomes a reality / 0ther projectionist measures come up )s opposed to the optimistic scenario, the pessimistic scenario shows a shortfall of nearly "# $2000 mn of exports in year 200& and the exports are not likely to be much higher than the present figures. It would also lead to development of textile and clothing industry in the other nations and India would lose out as a significant player in the industry. This would also stifle the domestic textile industry which would be in a very weak position to compete with imports. -These are expected to become cheaper with import duty rationali4ation as per international treaties and cost competitiveness of overseas players.. #ome of

the subsidies currently extended by the Indian government to promote exports which are sector specific -T"8, 60 ;;,. or region specific -=CO#, =0"#. may also need to be withdrawn.
.ig in US 2 0n

Marn 7ade/ups 8abric Darments Total

N Crojections

199/ &10 6&% %2%2 !% 3435

1998 %!60 %216 %!%( 2621 95!4

-**200 20 6 %1 % &2 & 11 "5

-**19 2%2( 222! 20&0 &1 1 1!+ !

-*1*9 2022 016 2%&2 (66& 1 1+9

Con$lusions To effectively tackle the situation India needs to invest in research and development to develop new products, reduce transaction costs, reduce per unit costs, and finally, improve its raw material base. India needs to move from the lower/end markets to middle level value/for/money markets and export high value/added products of international standard. Thus the industry should diversify in design to ensure <uality output and technological advancement. The weakest links in the entire chain are the powerlooms and the processing houses. The latter especially are very important because they are responsible for the highest value addition in the manufacturing line. ) powerloom co/ operative structure could be evolved for pooling of common services and functions such as <uality testing, marketing, short/term financing, etc. 8urther, because of the geographical proximity enjoyed, a cluster approach can be adopted. The government also needs to make policy changes like dereserving the small/ scale sector so that it can achieve economies of scale and adopt a synergistic approach. ;andlooms by their very nature can adopt a strategy of PnicheG marketing. In this respect, export promotion, common credit and marketing facilities and more significantly publicity are important areas for co/operation. ;ere too, a co/ operative structure would be useful though government agencies should be involved because of their outreach. ?ewer and more innovative forms of involvement are re<uired where decentralisation should be a key element. India has made little attempt to forge partnerships E in e<uity, technology and distribution in overseas markets. The newer nuances of global apparel trade demand joint control of brand positioning, distributing and <uality assurance systems.

The Indian textile industry has recognised the need for a cradle/to/grave approach when tackling environmental issues i.e. eco prescription should be applied right from the stage of cultivation to spinning to weaving to chemical processing to packaging. ;ere especially there is great scope for private /public partnerships. ) great deal of work has been done by Indian trade and industry to comply with ecological and environmental regulations, and so Indian garments can adopt an appropriate label signifying a distinct <uality. =fficiency and output of handloom and powerloom sectors also needs to be increased. The clothing sector needs the support of high <uality and cost/ effective cloth processing facilities. 7odernisation of mills is a must. ;uman resource is another area of focus. The workforce must be trained and oriented towards high productivity. The business environment of the future will be intensely competitive. ,ountries will want their own interests to be safeguarded. )s tariffs tumble, non/tariff barriers will be adopted. ?ew consumer demands and expectations coupled with new techni<ues in the market will add a new dimension. =/commerce will unleash new possibilities. This will demand a new mindset to eliminate wastes, delays, and avoidable transaction costs. =ffective entrepreneur/friendly institutional support will need to be extended by the Dovernment, business and umbrella organisations.

Areas 8here German de)elopment $o operation $an help are enumerated "elo80
6npu$ Areas &olic2 (ra#e/or9 is co#ple8 /i$) inpu$s (ro# #an2 #inis$ries. *)e (ollo/in' c)ar$ is no$ #ean$ $o be e8)aus$ive bu$ onl2 $o indica$e areas /)ere Ger#an develop#en$ co-opera$ion can )ave an i#pac$.

:ATI;:A< 2C;:;&IC 6;<IC+ Industrial 6oli$y 7 Textile 6oli$y

&lannin' Financin' 6nves$#en$ 78por$ Manpo/er :;< 6n(ras$ruc$ure

,ompetitive positioning

,redits

Cromotion

*ilateral agreements

=ducation

Luality control

Corts

=valuating domestic and foreign needs

)id through multi/lateral agencies

Information technology

=xport promotion

Training

Croductivity

,ontainers

=xport strategy

#ector specific

Bevelopment of support industries

#kills and development

#tandardisatio n

)irports

=xport financing

7achinery spares

@elfare

I#0 1000

>oads

#ynthetic raw materials

:iteracy

Cackaging

>ail

:anguage

>KB

Telecom

=ntrepreneur development

=cology standards

Cower

@ater

Das

Possible Indo-German Co-operation in Textiles

Areas o# Co operation
6ro'ision of co-operati'e structures for $uality testing, mar7eting, brand-building Tec#nological upgradation (egs% Effluent treatment plants, energy sa'ing de'ices, and ot#er mac#inery related directly to t#e production process li7e spreading, cutting, finis#ing, etc%* Adoption of en'ironment-friendly tec#nology to pre-empt t#e ad'erse impact of non-tariff barriers% T#is includes en'ironmental monitoring / testing e$uipment and ser'ices, combating air pollution (pac7age scrubber, special air pollutant treatment for 8 !S, CS!*, solid waste remo'al, wastewater disposal 9e'elopment of te&tile-specific software for ,ndia, Computer-Aided Te&tile 9esigning, aiding ,T integration :or7ing out alternati'e tec#ni$ues / frame conditions suc# t#at sanitary and p#yto-sanitary measures are not a problem 0anagerial training to encourage adoption of tec#ni$ues li7e ;,T, <uic7 =esponse Systems Usage of E6S (Electronic 6oint of Sale* software 6romoting labels li7e =U10A=> (carpets* in te&tiles so t#at consumers are satisfied t#at c#ild labour #as not been employed, to counter negati'e publicity generated by t#e ?Clean Clot#es? mo'ement, etc%

6romoting #and-made articles by impro'ing $uality of raw materials and introducing mac#inery w#ere possible in t#e process so as to maintain standards of $uality and design 9e'elopment of new products Adoption and adaptation of state-of-t#e-art information tec#nology in enterprise resource planning so as to pre-empt non-tariff barriers w#ic# curtail mar7ets for t#e ,ndian te&tile industry 8elping firms build close relations#ips wit# customers Training centres S#ort-term credit ,mpro'ement of synt#etic fibre-base to reap economies of scale, use of genetic engineering, bio-tec#nology, and cellular biology in bot# natural and synt#etic fibre-base