India's textiles: Potential meets reality

Since the dismantling of the Multi-Fiber Agreement (MFA) on January 1, 2005, which drastically liberalized the global textile trade, there has been much excitement in India about the role that the sector could play, mainly with respect to exports, and how textiles might impact the economy as a whole.

While the potential is undoubtedly there, how much of it can be translated into reality remains an open question.The global textile and clothing industry is worth more than US$4.395 trillion, with clothing accounting for 60% of the market and textiles the remaining 40%. Global trade in textiles and clothing is currently at $356 billion and is expected to grow to $600 billion by 2010. The bulk of the increase is expected to be in clothing, which is projected to grow from $199 billion to about $400 billion.The United States and the European Union together dominate consumption, accounting for 64% of clothing and 39% of textiles consumption in 2004.

The US market alone accounts for $15 billion and is growing at 5% a year. Among other countries, Japan, Australia and New Zealand are significant consumers of textiles.The Indian textile industry is one of the largest and most important sectors in the economy in terms of output, foreign-exchange earnings and employment. As of 2005, it contributed about 20% of industrial production, 9% of excise collections, 18% of employment in the industrial sector, nearly 20% to the country's total export earnings and 4% of overall gross domestic product. The sector employs nearly 35 million people and is the second-highest employer in the country.

The textile sector also has a direct link with the rural economy and the consumption of major fiber crops and crafts such as cotton, wool, silk, handicrafts and handlooms, which employ millions of farmers and craftspersons in rural and semi-urban areas. It has been estimated that one out of every six households in the country depends directly or indirectly on this sector.India has several comparative advantages in the textile sector, including an abundant availability of raw material and labor. It is the second-largest player in the world cotton trade. It has the largest cotton acreage, at about 9 million hectares, and is the third-largest producer of cotton fiber in the world. It ranks fourth in terms of staple fiber production and fourth in polyester yarn production.Small-scale fabricators dominate garment manufacturing.

Most garment-manufacturing units use reasonably up-to-date technology. The bulk of apparel is produced by about 77,000 small-scale units classified as domestic manufacturers, manufacturer-exporters, and fabricators (subcontractors).One of the worst-hit sectors when interest rates skyrocketed during the late 1990s and early 2000s, the debt-laden Indian textile industry has spun many turnaround stories since then. Aided by lower interest rates, restructuring packages from financial institutions and the recent dismantling of quotas, the sector is today well poised to capture growth opportunities.

Exports of textiles and clothing from India have also been growing strongly over the past 10-15 years. Since 1992, Indian textile and clothing exports have grown 7.7% annually, reaching $13.4 billion in 2002 and accounting for 4% of the global trade in this sector. In 2002, India was the fifth-largest exporter and the second-largest net exporter of textiles and clothing. Cotton-based products dominate the bulk of exports.The dominant markets for India's textile and apparel exports are the US and EU, which together accounted for nearly 83% of exports in 2003.

Exports to the US have increased since the MFA expired - analysis of trade figures from the US Census Bureau shows that post-MFA exports from India to the United States in 2005 rose 27% year-on-year from 2004. According to the statistics made available by the Indian government's Directorate General of Commercial Intelligence and Statistics, India's textile exports during the period April-December 2005 increased by about 20%.

Problems facing the industry
In spite of the many favorable factors and strong recent growth, numerous obstacles remain that could prevent the Indian textile sector from reaching its full potential.

Unfavorable labor laws
Restrictive labor laws in India have been unfavorable to more rapid expansion the industry. In the absence of concrete labor policies, the industry has often been paralyzed by strikes, thereby compromising efficient operations. Archaic, inflexible labor laws have not allowed the sector to expand and modernize, resulting in many undersized operations.

Logistical woes
India also has logistic disadvantages due to its geographical location; the country is further from major markets than competitors such as Mexico, Turkey and China, which are closer to major markets such as the US, Europe and Japan, respectively. This increases shipping costs. Also, internally, relatively poor road connectivity and the inadequacy of ports and other export infrastructure have adversely affected the Indian textile sector's competitiveness.According to an Indian entrepreneur based in Dubai, a consignment of fabric can take up to 25 days to reach the manufacturer in India, particularly in Mumbai or Delhi, compared with 15 days in Sri Lanka. Customs clearance can be tricky. It might be three days in Chennai but upwards of 10 days in Mumbai, depending on whether one has a full container or not. And then comes the long march; negotiating interstate barriers, octroi (local entry tax), checkpoints and bad roads.A similar set of problems applies to exports, though in that case the time spent at customs is less. Overall, Indian garment exporters are generally at a 15-to-21-day logistics disadvantage. Not surprisingly, this has discouraged foreign direct investment in the sector.

Archaic regulations
Although quota restrictions have been dismantled, Indian textile players continue to grapple with archaic government regulations such as the "Handloom Reservation Order" and the "Hank Yarn Obligation Order".

Lack of quality manpower
A recent study by the Textiles Committee noted that a mere 6% of the workforce in the Indian apparel industry has received formal institutional training. At the supervisory level, only 2% of the workforce is trained. This certainly presents a very disappointing picture for a segment that is expected to drive the growth of the entire textile industry in the future.According to the Textile Policy, the Indian apparel sector is projected to grow to about $25 billion by 2010 from about $12 billion at present. This seems to be a tall order given the quality of manpower and infrastructure India now possesses.

The lack of training has taken an immense toll on overall productivity, even as India boasts of having one of the cheapest manpower pools globally.The study also revealed that India's education and training base is far from satisfactory. Moreover, there is a lack of interaction between the industry and educational institutes, which mostly fail to impart relevant education and training. Bridging this gap will require formulating a comprehensive strategy to revamp the entire system and make it more proactive.

The setting up of a competitive textile-production base will call for the sustained availability of efficient manpower.Over the years, India has enjoyed cost-effective labor. But changing technology now requires changes in the labor-force profile as well. Demand for technical and skilled manpower is showing a big jump, while requirements for unskilled workers may not go up commensurately in the future. This growing disparity requires immediate attention. The existing labor laws have impacted the overall manpower supply and blunted the edge that the domestic industry has always enjoyed. It is time that the government brings about some alternative mechanism to deal with this complicated issue.

An obvious solution is to upgrade the education and training system, but the government's recent move to carry out a major revamp under the Nodal Center for Upgradation of Textile Education program has not yet shown the desired results. The process has been moving slowly. The effort has to be given greater urgency so that the industry can meet growing demand. This issue has assumed huge significance, since over the past two decades or so, the industry's depressed condition has adversely impacted the supply of skilled labor for the industry.

Cost constraints
Apart from low-cost labor, other factors that affect competitiveness are relative interest cost, power tariffs, structural anomalies and productivity levels (affected by technological obsolescence). A study by the International Textile Manufacturers Federation revealed high power costs in India as compared with other countries such as Brazil, China, Italy, South Korea, Turkey and the US. Power's share of the total cost of production for the spinning, weaving and knitting of ring and open-end yarn for India ranged from 10-17%, which is also higher than that of such countries as Brazil, South Korea and China. Capital costs as a percentage of total production cost in India were also higher, ranging from 20-29% as compared with 12-26% in China.

Technological constraints
The rush of garment exports in the quota-free regime has not yet materialized in the Indian textile sector. Lack of state-of-the-art technology poses the most serious challenge to India's attempt to increase its exports. The total number of shuttleless looms as a percentage of total looms in India in 2003 was 9.5% as against 94.8% in the US and 95.2% in Austria, according to the Indian Ministry of Textiles. India's number of shuttleless looms as a percentage of total looms is the second-lowest, next only to Pakistan with 7.6%.

Though the government introduced the Technology Upgradation Fund Scheme for the textile industry in 1999, the approach of the authorities implementing the scheme remained rigid, as can be seen from the fact that disbursals of funds during the first five years amounted to only about Rs70 billion ($1.53 billion), against the target of Rs250 billion. Also, the concept of technological upgradation was diluted by permitting imports of second-hand equipment that had been sold by overseas entrepreneurs installing more modern equipment.

Fragmentation keeps industry below-scale
Given the fragmented nature of the industry, the Indian players are unable to reap the benefits of economies of scale, in sharp contrast to the Chinese. This is a major reason, thus far at least, that Chinese textile manufacturers have reaped most of the benefits of the post-quota regime. This is the legacy of India's policy of reserving the textile sector for small-scale players, which limited its growth. Even big textile houses have preferred to set up several smaller companies rather than have one or two monoliths, solely to save on taxes, at the cost of global competitiveness. In India, very few exporters have gone in for integrated production facilities.It is noteworthy that those countries that have emerged as globally competitive - for instance, South Korea, China, Turkey, Pakistan and Mexico - have significantly consolidated supply chains.

In contrast, apart from spinning, such activities as weaving, processing and garmenting are fragmented in India.Besides being fragmented, the supply chain in the Indian textile industry is beset with bottlenecks that could very well slow down the growth of the sector. As a result, the average delivery lead times (from procurement to fabrication and shipment of garments) still take about 45-60 days. With international lead delivery times coming down to 30-35 days, India needs to cut down its production-cycle time substantially to stay in the market.

Low productivity
Though India is one of the major producers of cotton yarn and fabric, the productivity of cotton production, as measured by yield per unit of land, has been found to be lower than in many countries. The level of productivity in China, Turkey and Brazil is more than 1 tonne per hectare, while in India it is only about 300 kilograms per hectare.In the man-made-fiber sector, India ranks fifth in terms of capacity. However, the capacity and technology of this sector need to be further enhanced in view of the changing fiber consumption in the world. The share of cotton in world fiber demand declined from about 50% (13.34 million tonnes) in 1982 to about 38% (18.25 million tonnes) in 2003, while the share of man-made fiber has increased from 44% (11.88 million tonnes) to about 60% (28.81 million tonnes) over the same period. Besides, the level of technology in the Indian weaving sector is low compared with other countries of the world.

While India does indeed have the potential to be a major player in the global textile trade in the coming decades, it needs to overcome the aforementioned problems to do so.