IMPACT OF MACROECONOMIC VARIABLES ON THE

INDIAN GARMENTS INDUSTRY IN THE 21ST CENTURY

ASSIGNMENT II
BY: SAMMARTH TULI
ROLL NO: NIFT MFM/16/41

SUBMITTED TO: DR. SANJEEV MALAGE

Associate Professor and Center Coordinator
Department of Fashion Management Studies

Department Of Fashion Management

NATIONAL INSTITUTE OF FASHION TECHNOLOGY
BANGALORE
 DECLARATION

This is to certify that that the project entitled: IMPACT OF MACROECONOMIC

VARIABLES ON THE INDIAN GARMENTS INDUSTRY IN THE 21ST CENTURY: AND
EMPERICAL ANALYSIS is the project work carried out by Sammarth Tuli at National
Institute of Fashion Technology, Bangalore. This report has not been submitted to any other
college/Institute for the award of any degree/Diploma

Name & Signature of Student Name & Signature Of Supervisor

Signature Of Coordinator
Stamp Of College

1
 ACKNOWLEDGEMENT

I would like to thank my professor Dr. Sanjeev Malage , who helped me throughout the
conduction of this project. Without his guidance and mentorship, the completion of this
project would not be possible. I would also like to thank my college for the opportunity to
conduct this project.

2
 TABLE OF CONTENTS

Sr No. Chapter Page

1. Executive Summary 5
2. Research Methodology 6
3. Overview: Garment Industry 7
4. Literature Review 8
5. The Industry: At a Glance 10
6. Qualitative Graphical 11
Analysis
7. Multivariate Analysis 18
8. Qualitative Analysis 20
9. Suggestions 22
10. Biblography 25

3
 LIST OF TABLES & GRAPHS

Sr No. Chapter Page

1. Garments Exports V/S Interest Rate 11

2. Garments Exports V/S Inflation 12

3. Garments Exports V/S Exchange Rate 13
4. Garments Exports V/S GDP 14
5. Garments Exports V/S Exchange Rate 15
6. Garments Rate V/S Unemployment Rate 16
7. Multivariate Analysis 18

4
 EXECUTIVE SUMMARY

This paper studies the relationship between the growth rate of garments industry and the
macroeconomic variables with respect to the Indian subcontinent. 3 types of analysis have
been conducted.

- Quantitative analysis;
- Qualitative analysis,
- Multivariable Regression Analysis

Qualitative analysis has covered graphical presentations of the variables amongst themselves
while a quantitative analysis has been done in the form of a Multivariable Regression
Analysis. The graphical presentation provides a basic overview of the relationship of the
variables with each other, while in case of regression analysis, one dependent variable has
been used that is the growth rate of garment industry, and five independent variables have
ben used with the inclusions of growth rate of real GDP, the unemployment rate, inflation
rate, interest rate and exchange rate.

Post running the test, the p-value, _squared and the actual R-squared statistic has been
studied and has been used to establish a relationship, I have to an extent provided a solution
to those problems. A multiple regression analysis has been made to know the extent to which
these variables affect the garment export growth rate. An analysis on the table values have
henceforth been conducted. Qualitative analysis has encompassed economic and political
issues. After this, for knowing the individual effect of the variables, At the end of the analysis
it can be said that, individual effect of the macroeconomic variables on the growth rate of
garments export is not much but when combined, can greatly influence the garments export
growth rate. As they are also closely related to one another, a change in one macroeconomic
variable may change all the other variables. Therefore, a combined effect always remains. So,
therefore we can say that macroeconomic variables influence the garment industry of our
country but not to a great extent.

5
 RESEARCH METHADOLOGY

The methodology followed for the research work constitutes both secondary and primary
research. The details of the research work have been provided below:

Secondary Research The secondary research has been carried out to obtain the information
on: -
- Macro-economic scenario of Indian economy which has been taken from various
reports conducted as well as data from the Reserve Bank of India Website.
- Sector specific government policies and regulations including taxes and custom duties
which again have been taken from the social Justice website as well Law textbooks
published by Sultan & Sons.
- Present status, growth trends, and the future outlook for the sector which has been
taken from the World Bank website.
- Export Data which has been found on the basis of growth rate of exports and
Compound annual growth rate of Garments exports from the years 2000-2015 .
production global market. The main data source from which this data has been
gathered is International Trade Centre. Data for exports is taken in values in US dollar
from International Trade Centre.

In addition miscellaneous data which were essential for the analysis for example. State
specified Government Export data was obtained from India related to economy and trade
like Ministry of Finance, Department of Commerce, Department of Central Excise and
Customs etc.

6
 OVERVIEW: GARMENTS INDUSTRY

The Indian sub continent is the second largest manufacturer of garments after China being the
global leader in garment production. India is known for its high quality garments for men and
most of the garment manufacturers are in the Small and Medium scale industry. Indian men's
clothing industry has been growing steadily over the past few years, and this has been
possible owing to the Indian male becoming more fashion conscious, and hence there is more
consumption which has increased global demand of men's garments by the rest of the world.

India Garment Industry has an advantage as it produces and exports stylish garments for men
at economical prices due to cheap labour rates. Today the by the way of Technological
advancement and use of sophisticated machinery it has enabled the manufacturers to achieve
better quality and well designed garments. India's Garment Industry has been rapidly growing
in last few years. Exports have been rising as there is an increase in orders from global buyers
accompanied by a rise of investments in the garment sector of the country. The Garment
Industry is of major importance to the Indian economy as it contributes substantially to
India's export earning, it is estimated and analysed that one out of every six households in the
country depends on this sector either indirectly or directly for its livelihood. From all over the
world the Retailers also increasingly come to India attracted by low production costs, with
notable examples being Wal-Mart, Tesco, and M&S.

7
 LITERATURE REVIEW

The study attempts to review some available empirical studies regarding growth and
productivity of Indian industrial sector with special reference to textile industry. It also
reviews studies examining export performance, composition, direction of Indias exports,
indicators of Indias export competitiveness and the factors affecting it.

In a monthly report of Unnayan Onneshon, it has been found that the GDP is very closely
related with the amount of exports and there has been an incremental increase over the past
decade, however the degree to which the industry has been affected still needs to be
investigated and has been done through the graphical analysis. Besides GDP other
macroeconomic variables too have been analyzed and whether those factors have affected the
Garment Export Rate, is one which is up for debate.

In a report by CPD, the growth of garment industry has been marked by the unemployment
rate of Bangladesh. In another research, Stanely Fischer has found that, broad
macroeconomic stabilization is required for sustainable development in any sector of any
country (Fischer, 2001). Therefore, it can be said indirectly that macroeconomic variables do
affect every growth aspect of any country and the garment industry is also included in the list
of these aspect.

The intertemporal capital asset pricing model (ICAPM) of Merton (1973) suggests that state
variables that predict time variation in future investment opportunity sets should be included
as factors in asset pricing models. Among the most important candidates for state variables in
multi-factor asset pricing models are innovations in macroeconomic variables such as GDP
or consumption growth, employment rate and short-term interest rates (Cenesizoglu, 2010).

This sort of analysis has been done on the Indonesian economy. In one of the study, the
results suggested that, domestic textile production was affected by world cotton price and
wage rate, while the domestic garment production was affected by wage rate in the garment

8
sector. Indonesias textile export to world market was influenced by domestic textile price,
and Indonesias export garment was influenced by exchange rate (Rup/US$). Indonesian
textile demand was affected by wage rate while domestic garment demand was affected by

income per capita of Indonesia (Iwan Hermawan, 2011).

On the other hand, In Malawi, an underdeveloped African country, transport costs are one of
the biggest barriers to investment in and trade (Haan, Koen, & Mthembu, 2002). From this
perspective they find a negative relationship of the growth of garment industry with the
transport costs.

In Srilanka, the garment industry is seriously being hampered by the low wage rate of the
garment workers (B. Gowthaman & Prasanna, 2007). They found out that the unemployment
rate somewhat is negatively related with the apparel industry growth. When the
unemployment rate has decreased the wage rate has also decreased and this in turn has
hampered the garments industry. In a sub-Saharan country, Zambia, a relationship between
the trade liberalization and the growth of garment industry can be found (Koyi, 2006). In a
research paper, the author tried to say that, for a long time, Zambia has casualties in having
growth in the garment industry. Since 1991, this country was so swift in changing the
macroeconomic policies. That change has made many supporting industry of garments shut
down. As a result, the growth of the garment industry remained slow in those years.
Therefore, here we find a direct relationship of the growth of the garment industry with trade
liberalization.

In Jordan, a significant relationship has been found between the evolvement of the garment
industry and the stock of the human capital and persistent the unemployment rate. According
to the opinion of the authors, the apparel industry has emerged in those countries because of
those two macroeconomic variables (Domat, Glass, & Brown, 2012). So it is easily
determinable that there is a relationship between the garment industry and the GDP.

9
 THE INDUSTRY AT A GLANCE

Being one of the fastest growing economies of the world, The Indian garment industry is
expected to grow to a size of US$ 223 billion by 2021, according to a report by Technopak
Advisors. Moreover, This industry accounts for almost 24% of the world's spindle capacity
and 8% of global rotor capacity.

Abundant availability of raw materials and skilled workforce have made the country a
sourcing hub for the world garment industry. The Indian garment sector contributes about 14
per cent to industrial production, 4 per cent to the gross domestic product (GDP), and 27 per
cent to the country's foreign exchange inflows.

It provides direct employment to over 45 million people, and is set for strong growth,
supported by strong domestic consumption as well as export demand. MMF (man-made
Fibre) production increased by about 4 per cent during FY2014. Cloth production by mill
sector registered a growth of 6 per cent during FY2014, while the total cloth production grew
by 3 per cent during the same period.

Textiles exports registered a growth of 14.58%, with exports from India expected to touch
US$ 60 billion over the next three years according to industry experts. The Indian Garment
Industry attracted foreign direct investment (FDI) worth Rs 6,710.94crore (US$ 1.11 billion)
in FY2014. Factors improving the above outcome would be Improved demand from the US
market, as well as rising labour cost in China that would be a huge boost to the Indian textile
exports.

The total value of textile products exported from India touched US $35.4 bn in FY14, which
was 12% higher compared to FY13, with the united states being the primary market for
Indian garment exporters.

10
DATA ANALYSIS:

With the graphical data analysis shown below, the main problems and opportunities that the
garments manufacturers or exporters have faced have been detected. Trends have been
identified along with the economic explanations associated with them with relation to the
Demand and Supply. Each independent variable has been analyzed with the dependent
variable, i.e the value of the Garments Exports. By carefully reviewing some of the internal
and external environmental factors, the garments associates of India will be able to formulate
effective and successful strategies, some of which have been outlined towards the end of this
analysis.

For having a primary idea about these variables in terms of garments export, the graphical

presentation of the above data is given below:

Garments Exports and Interest Rate: -

Garment Exports V/S Interest Rate

30000 9

8
25000
Garment Exports (Million $)

20000 6

5
15000
4
Garment Export
10000 3
Interest Rate
2
5000
1

0 0

Years

Figure 1: Garments Exports V/S Interest Rate

11
For any business, Interest Rate cost is the main input in business. In an economy, Ithe interest
rate directly impacts inflation, exchange rate & cost of other inputs for garment exports. An
Increase/decrease in IR affects not only investments but exports in a very dramatic manner.
As shown from the graph above, India has experienced a varied base interest rate throughout
the time period specified, with notable dips being in the year 2002-2004 as well as a sharp
dip during the 2008-2009 period. The export performance has been constantly improving
despite the IR declines. An increase however should be noted between the years of 2003 and
2005, wherein the result of an expansionary fiscal policy allowed suppliers to borrow more at
a lower interest rate, and in the long run allowed them to increase their exporting prowess.
Furthermore, a sharp decline in the interest rate in the year 2009 is due to the recession, this
was done to kick start the economy in order to improve the aggregate supply of production
and positively impact the GDP.

Garments Exports and Inflation Rate :-

Garments Exports V/S Inflation

30000 16

14
25000
Garment Exports (Million $)

12
20000
10

15000 8
Garment Export
6
10000 Inflation rate
4
5000
2

0 0

Years

Figure 2: Garments Exports V/S Inflation

From the above graph, we see the inflation has increased with an increase in the production
of garment exports. In recent times, there has been a decrement in the inflation rate, which

12
has negatively impacted the production of the exports as the exports causing a slow decline.
The reasons behind this could be a rise in the fuel prices. For example, in the price of oil, if
the oil price increases by 20% then this will have a significant impact on most goods in the
economy and this will lead to cost push inflation. E.g. in early 2008, there was a spike in the
price of oil to over $150 causing a spike in inflation as seen from the graph. Along with an
increment in corporate taxes, such as VAT and Excise duty, the demand for exports in other
countries will decrease because the garments will be costed at a higher price. However, these
tax rises are likely to be one-off increases. The factors mentioned have a direct impact on the
the producers as sudden shocks will urge firms to decrease costs in the form of reducing the
factors of production such as labour, thereby automatically reducing the supply of exports.
Other factors may include incidents such as, stock market crash and the fall of some
Multilevel Marketing companies that has contributed to inflation. Companies though, selling
goods in the local environment will experience more sales. This result follows the rule that
when inflation rate rises the export will most benefit the exporters and this may be one of the
reasons why our garments industry has developed the most.

Garments Exports and Exchange Rate: -

Exchange Rate V/S Garment Exports

30000 80

70
Exchange Rate (US$
25000
60
Garment Exports ( Million $)

20000
50

15000 40

30
10000
20
5000
10

0 0

Garment
Year Export

Figure 3: Garments Exports V/S Exchange Rate

13
India has been using a floating rate system since 1975 wherein the currency market
determines the value of a currency. There is a positive correlation between the relationship of
Exchange Rate and Garment Exports. An upward trend of devaluation is apparent which has
caused amount of exports to increase, this is explained as follows: More local currency is
needed to purchase imports and exporters get more local currency when they convert the
export proceeds (the foreign exchange that they get for their exports). In other words: imports
become more expensive and exporters earn more money. This is supposed to discourage
imports and to encourage exports and in turn, reduce trade deficit, thereby improving the
GDP of the country. Indian textiles therefore are artificially cheaper as compared to the
products being locally produced in the country where the goods are exported to. The
appreciation of exchange rate a has negative impact on the exports as it erodes the
profitability of the exporter. Not only the appreciation but also the fluctuating exchange has
impact on the export business decisions. During the year 2008, the exchange rate fluctuated
widely against US dollar which has negatively affected the trade performance of India The
appreciating rupee against the US dollar in 2007- 08 played the spoil sport for the textiles and
clothing exports industry in India.

Garments Exports and GDP: -

Garment Exports V/S GDP

30000 12

25000 10
Garment Export (Million $)

20000 8

15000 6
Garment Export
10000 4 GDP

5000 2

0 0

Years

Figure 4: Garments Exports V/S GDP

14
The textiles industry has made a major contribution to the national economy in terms of
direct and indirect employment generation and net foreign exchange earnings. The sector
contributes about 13% to industrial production, 5% to the gross domestic product (GDP), and
28% to the country's foreign exchange inflows. It provides direct employment to over 40
million people, and the sector is the second largest provider of employment after agriculture.
Thus, the growth and all round development of this industry has a direct bearing on the
improvement of India's economy. Prior to the recession in 2008-2009, there was a positive
correlation between the exports and the GDP of the country, post it, although the GDP did
decrease, garments exports production had not declined but only managed to slow down, this
is primarily due to the inelastic demand of textiles around the world, and with a trend towards
more and more start-ups in the textile industry.

Garments Exports and Stock Market Capitalization: -

Garment Exports V/S Stock Market Capitalization

30000 $2,000,000,000,000
$1,800,000,000,000
Garment Exports (Million $)

25000
$1,600,000,000,000
$1,400,000,000,000
20000
$1,200,000,000,000
15000 $1,000,000,000,000
$800,000,000,000 Garment Export
10000
$600,000,000,000
Stock Market Capitalization
$400,000,000,000
5000
$200,000,000,000
0 $0
2002-03
1999-00
2000-01
2001-02

2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2011-11
2011-12
2012-13
2013-14
2014-15

Years

Figure 5: Garments Exports V/S Exchange Rate

There is a positive correlation between the export market the stock market capitalization, i.e
the total value of the stock market. As the economy improved initially so did the value of the
stock market. This maybe due to many firms going public in order to raise the capital, due to
an increase in the demand for their goods. While growth till 2007 was increasing at an
average rate of 9%. A sudden decline was observed in the 2008-2009, due to the stock market

15
crashing and entering into a slump. An expansionary fiscal policy was then applied in order
to pump more money into the economy, which was successful as it did not allow the export
industry to decline, however it did witness a slight decline last year. This is probably due the
GDP declining as well.

Garments Exports and Unemployment Rate: -

Garment Exports V/S Unemployment Rate

30000 6
Garment Exports (Million $)

25000 5

20000 4

15000 3
Garment Export
10000 2
Unemployment Rate
5000 1

0 0

Years

Figure 6: Garments Rate V/S Unemployment Rate

There is strong evidence that states that a lower unemployment rate will lead to more goods
being produced across the economy because more labour will be employed to take care of the
increase in the demand for those exports. Similarly, as seen from the graph, as the
unemployment rate has declined, the number of garments exports has increased, this is
apparent from the years 2000-2008, after which the recession has resulted in the volume of
garments exports to move at a declining pace, furthermore, post the recession which caused a
small increased in the rate has resulted in the increases in either export prices or the capital
stock in the tradable goods industries due to the economy weakening. However, in recent
times the situation has worsened with the job market worsening in 2015. This maybe due to
the number of long-term unemployment being increased, and these inviduals being detached
from the labour market. Another issue in India, that has only recently come up is due to the
governments inabililty to measure the unemployment rate accurately.

16
SUMMARY OF ANALYSIS:

The above analysis aimed at reviewing researches conducted on the factors influencing the
export performance of Garments. The analysis was based on figures obtained from China,
India, Sri Lank, Bangladesh and Pakistan and how the macroeconomic factors have impacted
their countries as well . These economies are the dominant textile exporters in the
international trade. The review highlights that most of the studies have been carried out on
establishing the relationship between GDP, exchange rate, labor, capital (FDI), inflation,
exchange rate, stock market, interest rate and final the technological factors with the export
performance of textile industry. Most of the researchers found a positive relationship between
the above said variables and textile exports. Based on the review, it is suggested that future
researches can be done analysing impact of these factors on less export oriented industries so
that possibly such results may be compared and new theories could be established.

17
Multivariate Analysis

Although the graphical analysis gives us an overview of the impact of the variables of value
of the exports, it is unable to provide us the extent to which the exports have been affected by
the macroeconomic variables, therefore a quantitative analysis in the form of a multivariate
analysis has been conducted using the software Eviews.

Multiple Regression Analysis: - Before the analysis was conducted the data was converted to
stationary using unit test to the 1st degree. To obtain a more concrete measure, an analysis has
been conducted on the data gathered from the years 2000-2016 (inserted in the CD attached)
to give an expanded insight. The conducted analysis is shown in the image below:

Figure 6: Multivariate Analysis

18
From the above given analysis. The following observations can be made:

- The R-squared term which states as to what all terms can be defined by the variables
is at 65.56%, which states that the garments exports can be measured by the
independent variables, we will however use adjusted R-squared which is 36.26% as
this gives us the percentage of variation explained by only those independent
variables that in reality affect the independent variable

- As observed from the Prob (P-Value_ statistic, only GDP and Unemployment Rate
have a strong correlation with the dependant variable, however the other variables
have too low a P-value to be considered for a strong correlation.

19
QUALITATIVE ANALYSIS:

Moving onto the qualitative analysis of this research paper. Each paper researched pertains to
a different macroeconomic variable with relation to the textile industry, for example
According to European and American researchers, economical and political consistency is a
major factor when deciding the demand for the exports. Interview excerpts from senior
officials from major garments companies such as GAP, Zaara and Abercrombie & Fitch state
that they would decrease the value of their sourcing in Bangladesh if political steadiness were
to decline. Indias government has had conflict, and corruption is one factor to blame for this.
Black money is prevalent. Major exporters hire illegal immigrants from the countries such as
Bangladesh and Srilanka in their factories, these allow them to artificially escape the
minimum wage rate laws. Therefore, producing goods that would mostly go unnoticed in the
governments books, allowing them to escape taxes as well. Moreover, preparation of
security, political turbulence and forays, sleaze, and ease of doing business are the issues
revealed most often. Indias government is branded by two hefty opposing parties and a year
long election process The undercurrents of the countrys government have partly contributed
to disruptions in short-term preparation and implementation of long- term projects.

Mass strikes amongst workers too have have less repeatedly directly affected the exporting
industry in recent times, but political turbulence and raids in the supply chain can be a clue to
momentous postponements. In McKinseys investigation, Indias exports providers
mentioned political turbulence (50 percent of respondents) and strikes (21 percent of
respondents) as the highest risks in sourcing from India, right after infrastructure (McKinsey,
2011).The constant strikes which are mainly caused by the Trade Unions abusing their
power as the local media call it, is not only a hindrance for the local customers, but can also
carry a significant risk for foreign exports who often order in bulk and have stringent delaines
for product cycles. A delay in which can cause significant loses for them.

Corruption again is realized as the main problem, as around Some 57 percent of interviewees
are cognizant of dishonesty being present but state that in todays times, this is unavoidable
but is manageable with experience, whereas a high percent has also perceived boundaries in
their business relations because of it. Indias situation in the Transparency Corruption Index

20
has upgraded over the last few years, but procedures against dishonesty need to become more
operative. In the view of experts and providers as well as international NGOs, the
implementation of law and order is ineffective or as the media states Laws exist, but the
government does not enforce application. The Modi led government though successful in its
first year of ruling had encouraged FDI and had also been successful in starting the Make In
India initiative, however their main focus has been on how how they can remain in position;
and have done little to gauge into the problem, i.e. how to combat the main problems such as
increasing unemployment and the vast disparity that exists between the rich and the poor.

Some comments issued by CEOs of garments manufacturers in South East Asia have stated:
(Manager, Sunman Group). Of course, the macroeconomic variables affect our normal
business operation. The fluctuation in the exchange rate of dollars seriously influences the
garment export. (Manager, Opex Group) We try to help the government in every possible
way we can but when the time comes for some help from the government, we hardly find
them on our side. The trade union strikes are not only harming the regular activities of us
but also ruining the reputation of our country among the foreign officials which will affect
the garment industry in the long run.[President, TradeIndia}

As highlighted from the above comments, the industry is need of help, the government must
introduce new policies in line with the exporters in order to improve the situation.
Bangladesh, for example has introduced norms such as tax rebates in certain parts of the
country in order for companies to set up factories, where unemployment is severely being
affected. If India implements a policy in similar lines, the GDP will not only improve. But
will also help drive down inflation.

21
SUGGESTIONS:

According to the analysis, more or less every independent variable did have an impact on
Garments Export through the year. The variables used in the analysis: Garments Export,
Interest rate, Inflation rate, Exchange rate, GDP, Stock market capitalization and the
unemployment rate, have been inserted into the regression analysis to find the extent of the
influence. And based on the results some recommendations have been provided below in
order to improve the current predicament.

- A relaxation in the FDI policies in the sector should allow modern retailers from
abroad to set up shop in the country, producing their goods in India will allow them a
comparative advantage when compared to opening up stores abroad, mostly owing to
the Modi government. An issue may come up wherein large companies may decide to
simply outsource their clothing requirement, however this will only increase the
aggregate production which will eventually result in the unemployment rate
decreasing and a larger tax income for the government. Presence of large retailers
would create domestic demand for ready-to-wear garments, and also push for higher
productivity in garment manufacturing through bulk orders. This would also help
promote large-scale manufacturing facilities for garmenting, and help Indian exports
diversify into standardised, mass-clothing items.

- Secondly, a reduction the import duty on textile and apparel to infuse competition in
the domestic market, would be required to drive up demand for clothing in general.
India is known to have one of highest tax rates on imports in the world, and the
garments industry too has been affected by this phenomenon. Around 30-40% is the
range textile giants will be expected to pay if they want to setup shop in the Indian
subcontinent. The Indian import tariffs in this industry are among the highest in the
world, ranging between 25-40%. India can use this as an opportunity to minimise the
threat from proliferating regional trading arrangements. The government should
implement a programme wherein they may use the reduction in import tariffs as a
bargaining tool to get MFN tariff rates (especially peak rates) in US and EU

22
 negotiated downwards as a reciprocal measure. That would significantly reduce the
adverse tariff impact of PTAs on India vis--vis the PTA countries of US/EU.
Promote fair competition

- Thirdly, they must also remove biases against certain materials for example synthetic
cloth and cotton fibre. An increment in the duty on certain fabrics with a lower
demand and a decrement in tariffs on certain fabrics such as synthetic which has a
higher global consumption would greatly improve demand, while also increasing the
general GDP of the nation. This is also essential to grow into the vast area of technical
textiles that is emerging as a special-use textile in the world. India is just not present
in the huge and growing area of non-apparel textile applications. Most of standardised
items of clothing too require some form of blend. Moreover, that would enable Indian
exports to diversify into non quota markets where the demand for synthetic apparel is
much higher compared to quota-markets. And finally, that would take off some
pressure on cotton to clothe the domestic market (due to which cotton prices have
been subsidised in India). Cotton then, can concentrate on higher value addition.

- Fourthly, Remove manufacturing of knit garment and fabric from SSI reservation list.
One of the chief reasons for the current fragmented, decentralised garment sector in
India is that it is reserved for SSI81. De-reservation would attract large-scale firms
into manufacturing of mass-items of clothing, which reap scale economies. Large-
scale firms would not in any case enter the product lines, where order size is small,
and considerable manufacturing flexibility is required. So SSIs would not be wiped
out. De-reservation would allow India to enter into markets segments, which are
among the fastest growing and are factory-based. Besides, ceiling on scale has
prevented modernisation and investment in the sector. That would also eliminate the
peculiar dichotomy whereby the Indian garment units were protected from Indian
large-scale manufacturers, but had to compete with foreign large-scale units in the
domestic turf following removal of quantitative restrictions on imports. De-
reservation would allow processing of bulk orders from large retailers overseas as
well as at home (after FDI in retailing is allowed). This would make the sector
attractive for quality investment through technological up gradation. Very
importantly, this would also enable the sector to invest in products not on the basis of
SSI constraints, but on the basis of composition of demand. Finally, since building

23
 non-price competitive competencies are crucial for export growth, the sector would
begin to invest in brands, designs, IT driven superior customer services, unique style
and patterns etc. era of surpluses that characterises the Indian textile and clothing
sectors currently.

- And finally moving on to the infrastructure, this includes the port, inland
transportation, power, and communication i.e all facilities involved within the supply
chain process within the country. Now, because of the ardent corruption and the
population, it may not be possible to influence these factors in a major way. As a first
step, such infrastructure must be made available to units in Special Economic Zones,
and extended to rest of the country. Specific recommendation on each of these
economy-wide factors is beyond the scope of this study. Nevertheless, this must not
belittle the very high degree of adverse impact that the poor quality of Indian
infrastructure has had on Indian exports of textile and clothing. For instance, China
enjoys an overall 37% advantage (of which 13% is cost advantage) over India in
shipping garments due to delays and inefficiencies at the Indian ports. 25% of
production cycle time in Indian exports of apparel is owing to delays at customs.
Quick response and just-in-time delivery is virtually impossible.

24
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