Indian Textile Industry: Prospects and Challenges


By

Prof. R.K. Gupta
Director
S.A. Jain Institute of Management & Techology
Jain College Road, Ambala City-134 003
E-mail:
cityju@rediffmail.com / rkgupta_india@rediffmail.com
 


"It is difficult to find such a large-scale industry in the country that is so disorganized as the Indian textile industry"
                                                                     Arvind Singhal, Chairman, KSA Technopak, in 2004

"We have acted, but very late. The industry is back loaded with the technological obsolescence and sub-scale of operations"
                                                                       
S P Oswal, Chairman, Vardhman Group, in 2005

FOR long, no one paid much attention to the Indian textile industry. Most companies were in the doldrums, mired in debt and struggling with over-capacity. Textile scrips were largely inactive and the removal of quotas seemed a distant possibility. But as the deadline for the phasing out of the Multi-Fiber Agreement drew nearer, the industry appears to have got a new lease of life with modernization, expansion and value chain concept brought into practice. It is major industry of India from exports, revenue and employment potential point of view, and for that matter, for most of countries.

Overview of Indian textile Industry and export performance:

India is replete with natural resources like cotton, jute and silk. Indian products were known for fine designing, embellishment and craft. Besides this the ancient Indian fabric designers and weavers were one of the best in the world (Reference: The Dhaka Muslin-one of finest and light weight weaving that could pass through a finger ring)

Indian textile Industry is also largest employer (after agriculture) of workers directly and indirectly. Due to ethnic diversity and cultural multiplicity besides racial traces in India's hinterland, several designs and variety of costumes and apparels are used that enrich Indian textile garments design possibilities.

Industry plays significant role by contribution of 4% of GDP and 20% to the Indian exports kitty. Indian textile Industry is completely self reliant in the entire value-chain from cotton crop to Hi-fashion garment making.

India has around 40 Million Spindles (23% of world) and 0.5 million rotors (6% of world capacity). India has 1.8 Million Shuttle looms (45% of world capacity), 0.02 Million shuttle less looms (3% of world capacity) and 3.90 Million handlooms (85 % of world capacity). The Industry is highly fragmented except for spinning sub-sector and thus manually intensive. This is obvious from data of weaving sector mentioned above. Organized sector contributes to almost 100% of spinning but hardly 5 % of weaving of fabric. Cotton products are stronghold of India. As of March 2004 India had 1787 cotton/man made fiber textile mills including 1564 spinning mills (stand alone) and 223 Composite verticals. Many organized sector giants are actually conglomerates of medium sized mills, for example, Vardhman Group in Punjab.

The Indian textile Industry had been plagued by obsolescence, labor problems, raw material vagaries and lack of modernization including that of spindles. The post fabric stage processing technology has also been lagging but is now coming up fast with infusion of textile processing technology. SSI firms perform the majority of weaving and processing operations. The level of weaving technology is of lower order and knitting units don't possess capacity to perform dyeing, processing and finishing to international standards.

The apparel sector has over 25000 domestic manufacturers, 48,000 fabricators and around 4000 manufacturers/exporters. Over 80% of these are small operations (less than 20 machines) and are proprietorship or partnership firms. In 2001, GOI de-notified RMG products from SSI reservation list for obvious reasons. As stated before, cotton apparels constitute major part of India's apparel exports, although cotton appears to be out-thing in current global markets with share declining from 50% in 1982 to 38% in 2003. The export product mix of India is quite interesting with low and mid priced products and also high fashion items.

India processed 1900 million kgs of jute fiber at 1st rank, 15 million kgs of raw silk at 2 nd rank, 2700 Million Kgs of cotton fiber at 3rd rank, over 2000 million Kgs of man made fiber at 5th rank, and finally 51 million kgs of wool at 8th Rank in Global markets. 

After de-throttling of industry under new Textile policy of 1985 man made fiber industry has seen investments and scale economies coming up. India imports silk, fine quality wool and rags to feed its organized sector as well as shoddy yarn units. Most of woolen capacity is concentrated in North India.

Export Scenario:

Textiles contributed 20% of India's exports to about US $ 12.5 Billion. The Quota Countries mainly USA, EU (15) and Canada constituted 70 % of total garment exports and 40% of India's textiles exports.

In non-quota countries UAE is the largest market with 7% of textile exports and 10% of garment exports from India.

Table 1
India's Exports: in US $ Billions   Year 2003-04

Countries/Region

Export of Textiles

Export of garments

World

6.47

6.10

Quota Countries

2.86

4.19

EU

1.64

2.35

USA

1.12

1.60

Canada

.098

.239

Source: DGCIS-Calcutta


In exports Cotton yarns, fabric, made ups etc made largest chunk with US$ 3.33 Billion or 26.5% in textiles category, and Ready Made garments (RMG)-cotton including accessories made largest chunk with 4.67 Billion US $ or 37.1 % of total exports. Whereas, manmade yarn and fabrics in textiles group and RMG–Man made fibers constituted second position in the two categories, respectively. Carpets and woolen garments are other items exported from India.

In Global scenario

Developed countries' exports declined from 52.2% share in 1990 to 37.8 % in 2002
And that of developing countries increased from 47.8% to 62.2 % in the same period

In 2003 the exports figures in percentage of the world trade in Textiles Group (for select countries) were:

EU (15)       34.8%
USA              6.4%
Japan            3.8%
China          15.9%
Republic of
Korea            6.0%
Taipei, Ch.    5.5%
India             3.8%
Pakistan        3.4%
Turkey          3.1%
Mexico         1.2%

In Clothing Sector the figures were as below in 2003 in percentage of total experts globally:

EU               26.5%
USA              2.5%
China         23.0%
Turkey         4.4%
Mexico        3.2%
India            2.9%
Bangladesh  1.9%

In this sector the exports have declined for EU (15) from 42% to 26.5% in period 1980-2003 whereas of China increased from 4% to 23% and of India from 1.7% to 2.9% only. We can see that developing countries' share in textiles had declined and in clothing it has increased sharply

According to Dr Abdul Kalam the President of India, in a recent speech, the global competitiveness factors are cost, quality and timely deliveries. Indian textile Industry certainly does not measure up to these criteria.
To enhance competitiveness both categories of factors-
Internal-like productivity and technology adoption by individual units, and External –like fiscal policy measures, labor policies and infrastructure are important factors to improve in.

Though India stands second to China in cotton yarn and fabrics, the productivity pf cotton as measured by yield/Hectare is lowest compared to Brazil, Turkey, China, Pakistan and USA with Turkey ranking highest followed by China and Brazil.

Global trade in Textiles and clothing has moved from MFA (since 1974) to ATC (Agreement on Textile and Clothing) which has now been dismantled from 1st Jan 2005 thus gradually throwing open the Textile trade under new WTO regime, which will result in adverse effect on some countries and will benefit other countries like China and India, hopefully, as some of quota areas for USA imports like Caribbean Basin Initiative (CBI), North American Free Trade Area (NAFTA), African growth and Opportunity Act (AGOA) and ANDEAN countries will cease to get favorable treatment under earlier restrained quota regime. The US imports in restrained category has declined from 86.89% in 1990 to 69.38% in 2003 from these preferential countries while overall imports increased from 13.11 % to 30.19% from these countries.

Pattern in EU Market:

India's share in EU imports in textiles was 3.6% in 2003 and of clothing 3.0% in same year. Whereas major chunk of EU imports in both categories came from EU (15) themselves and C/E Europe, the leading exporter is clearly China with share of 5.3% in textiles and 12.2 % in clothing. Turkey and Romania are other stronger contenders to India in EU cake. Pakistan and Bangladesh are following, but Bangladesh, Sri Lanka and some African countries may loose out post ATC liquidation. Here lies opportunity for India. India has been leading supplier of cotton yarn to EU with 17.6% share in 2003 up from 8.4% figure in 1990. In fabrics woven from synthetic yarns China has moved up fast in EU markets from 0.5% in 1990 to 35% share in 2003.

In T shirts- Turkey was clear leader in EU with market share of 30% in 2003 followed by Bangladesh at 13.8%. In pullovers also these two countries were leading. In trousers worth noting countries in EU market were Turkey (16%) followed by Tunisia (11%), Romania (10%), Morocco and Bangladesh (9%) each.

Bangladesh has thus improved its market share in many items thanks to its low cost operations. For example, in trousers it was Euro 3.9 unit price as compared to Euro 11 per unit from Tunisia.

In women's blouses in EU market Turkey and India each had 14.5% share (India loosing out) while Romania increasing share to 13.2 %. Hong Kong and China next followed with 8% and 4% share respectively in 2003. India had better unit price of Euro 3.90 as compared to Euro 2.43 for Bangladesh.

In Men's shirts Bangladesh was leading with 14.5% share in 2003 followed by India, Romania, Turkey and Hong Kong. Bangladesh had cheapest unit Price at Euro 2.7.

Again China was leading supplier in Women's skirts with 23.3% share (increased). Next was Romania, and India stood at 5th place with 6.4% market share (actually contracted).

China was again leading in women's Suits with 41% market share in 2003.

The newly acceded EU (10) countries (called ACs) like Poland, Czech republic, Hungary and Slovakia hitherto enjoyed unrestricted access to EU (15) they will now face stiff competition from China and India. The EU (25) duties may increase in future and China and India may loose GSP status. In long run India may not face competition from these ACs but from other GSP suppliers.

Pattern in US Market:

In US Market India had share of 8.4% in textiles and only 3.2 % in Clothing in year 2003 as compared to 19.8% and 16.9 % respectively for China with EU, China, Canada and Mexico leading the scene in textiles imports in USA and Hong Kong and Vietnam joining the fray in clothing segment.

It is worth noting that India has increased its share in US market in Cotton pile towels from 3.5% in 1990 to 19% in 2003 but unit price is US $ 1.82 only as compared to $ 2.98 for China. It is seen that in both EU and US markets Indian unit prices are lower than China except for fabrics woven from synthetic filament yarn and the women's skirts. In cotton skirts and women's dresses Indian price realization is sharply lower than Chinese. This points to need for value addition. Another reason has been discrimination by EU and US with Indian exporters in past.

Import trends in Canada

Amongst the leading suppliers of textiles and clothing to Canada, USA had the highest share of over 31 percent (US $ 8.4 Bn), followed by China (21% - US $ 1.8 Bn) and EU (8% - US $ 0.6 Bn). India was ranked at fourth position and was ahead of other exporters like Mexico, Bangladesh and Turkey, with a market share of 5.2 percent (US $ 0.45 Bn).

Implementation of ATC

Developed countries treat textiles/clothing as sensitive items like agriculture and have been reluctant to bring down tariffs. In the pre Uruguay Round weighted average tariff for textile and clothing products was 15.5 % compared to 6.3% for all Industrial products taken together. While tariff on textiles and clothing is expected to be reduced by 22% by developed countries, the reduction for other industrial products is likely to be 46%.

Besides tariff barrier the Developed counties try to put non-tariff barriers like labor standards, safety etc in various forms. In the earlier stages of integration under ATC these countries removed restrictions on low value items sparing major products for stage 4- integration (90% of quota items of USA, 80% of EU and over 70% of quota items in Canada). This fourth stage has come into effect with 1st January 2005(Source-Textile Outlook International, March –April 2004)

The unilateral change in definition and classification of certain products by USA has been brought to the notice of Textile Monitoring Body (TMB) of WTO by India, on behalf of members of International Textiles and Clothing Bureau (ITCB) recently in July 2004.India pointed out that the move initiated by USA to include Made-up items with only 16% cotton content, in the category of cotton products, so as to extend stringent Rules of Origin established by USA for cotton imports, affected the prospects of exports of cotton made-ups by developing countries, like India.

Safeguard measures are easier to implement than anti-dumping measures and China and India projected as major gainers post-MFA may be adversely affected by such moves.

Cost of Production:

Cost of production of textiles yarns and fabrics is much higher in India despite low labor rates. We should not forget that India will also loose this advantage over time in as much as ACs (EU-10) are likely to loose the same over a period of time in EU market access.

Production cost of textured yarn is estimated to be US $ 2.06/kg in India, which is higher than that of China (US$ 1.40/kg) and Brazil ($ 1.90 /kg)

Similarly woven and knitted textured yarn production cost in India is higher than that of China, Brazil and South Korea. These costs include power cost that is higher in India besides low productivity, obsolescence and structural abnormalities.

Hourly wage cost in textiles in select countries (US $):

Switzerland   22.15
USA              14.24
Argentina        5.90
Brazil              3.20
Turkey            2.69
Mexico           2.20
Mauritius        1.47
China             0.69
India               0.58
Pakistan          0.37

The message is clear-the labor productivity; power and other costs are higher in India.

Percentage share of capital costs too was higher in India than china in both Ring and OE yarn and fabric production (India 20%-29% of total cost of production) as compared to China (12% to 26%)

Level of Integration

Very few exporters have gone in for integrated production facility. It has been noted that countries that are globally competitive are the ones with significant integration facility and consolidated supply-chain. A visit to Ludhiana, Gujarat and Coimbatore will display poor condition of Indian textile industry both in cotton and woolen sectors. This decentralized sector has been suffering from low productivity, old technology, and lack of scale of economies.

That is why GOI de-reserved the garment industry and our RMG units will have to set up integrated manufacturing facilities. India should also embark on textile processing facilities (Post fabric and garment production) of world-class level.

Supply Chain Management

Indian textile and clothing industry has one of most complex, fragmented and long supply chain in the world right from raw material procurement to shipping port handling facilities. The average manufacturing and delivery lead time from fabric buying to shipment of apparels comes to 45-60 days and in most cases can extend to 80 days. The mean delay in procurement of raw materials for garments and then exporting finished garments form India is estimated to be 15.5 days. Since shelf life of fashion driven products is hardly 45 days, such delays are untenable. In contrast Turkey has flat 30 days cycle from approval of design to delivery in warehouse. Turkey is also strategically located for EU markets and has a favorable liberal political climate.

It won't be out of place for some Indian exporters to locate facilities in Mexico, Turkey, Maldives and Mauritius. Sri Lanka and Bangladesh are likely to be losers in post ATC scenario, in longer time horizon.

According to AEPC member database of garment units in India, there are only few companies with high turnover, whereas over 1000 firms are with a turnover of less than Rs 100 Million and, similar is the situation in fabrics.

To conclude India has low competitive position with regards to availability and price of cotton (good quality), low level of technology, poor automation, and lack of scale economies in weaving and processing sector, and low brand image in textile garment sector

Strategies for Indian Exports

Quota free market means competition amongst firms and not nations. Quotas have frozen the growth in market share. They encouraged the high cost domestic industry in many textile-importing countries by freezing the market share. Even the high cost exporting countries (Hong Kong, South Korea, Taiwan) continued to have high market share taking advantage of quotas. Quotas also assured fixed market opportunities in early years to Indian garment industry and textile industry despite low productivity, poor time delivery and quality. Number of incentives was provided in India including Duty drawback and cash compensatory support. Garment quotas are distributed by AEPC based on Government policy from time to time regarding past performance, etc and quotas were traded in gray market for long time.

This is in sharp contrast to world-class manufacturing and supply chain tried by some units in Europe and USA in online transmission of high sale garment designs in departmental stores and replenishing the sold stocks quickly through a very low delivery cycle.

Where as Indian domestic market shall hot up by entry of both retailing chains in India (FDI has been now permitted up to 51% in single brand stores) and Outsourcing centers for International chains like Wal-Mart, the Indian exporters will get on one hand newer opportunities to enter restrained markets, while on other hand they will face stiff competition from countries like Turkey, Brazil, Mexico, Korea, China, Tunisia, Romania, Bangladesh and Pakistan.

Quotas by restricting market supply have also kept the export prices artificially high. There is bound to be a price war in post quota regime. Already it has started happening with Indian exporters (at least for price elastic goods). Developed countries have relocated facilities offshore or have shifted to high value products. Developing countries that were free from MFA restraints will loose out due to fall in prices.

The Indian textile and clothing Industry except for cotton yarn sector should test waters within domestic markets to establish their global competitiveness and consumer acceptance.

Developed countries and many other countries are trying to extend quotas up to end of 2007 as evident from Istanbul declaration in March 2004.USA is developing a DNA marker system to trace the fabric origin. The technology can identify the US produced cotton yarn and check illegal textile imports.

Instead of criticizing, countries lie India should hold high vision as regards standards of health, safety and child labor to conform to international standards and to avoid non-tariff barriers. Technology Up gradation Fund (TUF) has to be better utilized and textile technology training infrastructure has to be improved in country. The textile sector should take lead in this.

Global trade is expected to be in range of US $ 800 Billions in 2014 up from US $ 350 Billion in 2002 with share of textiles at 40% and clothing at 60%

According to some studies China and India will be major gainers. India could increase their share from present 8 % in US textile market to 13.5% and from 3% to 8% in US Garment market. For EU the projections are from 3.6 to 8% and 3% to 8 % in textiles and garment sectors.

As on date China has distinct advantage in terms of supply chain management, low cost and better designs.

Whereas Morgan Stanley has projected India to be one of top three exporters of textile and garments, another study by Indian Cotton Mills Federation has estimated Indian textile exports to reach US $ 40 Billion by 2010.

GOI on other hand has projected exports to double from US $12 Billion to 25 Billion in next couple of years and eventually to US $ 50 Billion by 2010.

Whereas new buying season starting Jan 2005 already has seen demands for 10-15% price reduction by the importers.

China lacks capability in value addition and fashion design. India stands to gain in ladies blouses because of strength in hand-works, like embroidery, sequins, printing etc. On the other hand China has clear advantage in Nightwear due to large capacity and lower costs. Therefore, while China will focus on low value high volume capabilities, India should gain through fashion content. India will also be favorite destination as alternative source other than China for major retailers globally. India can emerge as good outsourcing center for EU and US giants.

Another important factor is under valuation of Chinese currency by at east 20% vis-à-vis Dollar. China may retain their operations in Sri Lanka, Cambodia and Vietnam due to low costs prevailing there, when china set up facilities there for taking quota advantage.

Chinese Imports subject to US Safeguard Measures

Item Code       products

222               Knitted fabrics
350               Dressing gowns and negligee –cotton
650               Above from man made fibers
349               Brassieres, corsets and girdles from cotton
649               Above from man made fibers
USA and EU can use similar safeguards in other cases too.

Internationally, trading in textile and garment sector is concentrated in the hands of large retail firms. Majority of them are looking for few vendors with bulk orders and hence opting for vertically integrated companies . Thus, there is need for integrating the operations in India also, from spinning to garment making, to gain their attention. This would also bring down the turn around time and improve quality. Indian players should also improve upon their soft skills, viz., design capabilities, textile technology, management and negotiating skills.

Garment manufacturing business is order driven. It would be difficult for the players to keep the workforce full time, even in lean season. This calls for changes in contract labor laws.

To offset competitive disadvantage Indian industry will have to expand vertically and set up scale of economies units while grappling with infrastructure bottlenecks and high cost limited power availability.

The main factors identified in a study by Ramaswamy and Gereffi as having contributed to the globalization of world apparel industry includes:

    • Labor intensive nature of apparel industry
    • Loss of comparative cost advantage of developed countries
    • Dramatic decline in transport and communication costs
    • Search for production sites with lower labor costs
    • Shift in apparel manufacturing from more restricted to less restricted developing countries due to the discriminatory nature of restrictions imposed by erstwhile MFA (Multi Fiber Agreement 1974)

Another strategy Indian exporters and garment manufacturers can adopt is coming together privately or through State sponsored agencies to do joint Brand marketing. If not done early, then MNC retailing organizations will hijack the Indian garment Industry initiative and India may simply get reduced to outsourcing center for major textiles and Garment exports, although there is nothing serious about it, but India may well loose status of being independent India Brand garment exporter with higher value realization to the national exchequer.

It is estimated that industry would require Rs 1000 billion investment as new capital over the next five years.

Conclusion:

While Indian exports to the US has risen 22 per cent in the first quarter of 2005, profits are sliding as prices have dropped 8-20 per cent and the industry is on the verge of a shakeout. With importers preferring suppliers that have 'vertical' production systems rather than dispersed production facilities, Indian exporters need to shore up their mass production techniques. Of the 1,500 Indian exporters only 15 have turnovers of $50 million-plus. Infrastructure development is the need of the hour. Power and water contribute to nearly 37 per cent of total production costs. In contrast, in China, this cost comprises just 24 per cent. India also has to deal with inefficient port handling facilities. The Chinese figures have less credibility including their artificially fixed high exchange rate.

The key advantages of the Indian industry are :

* India is the third largest producer of cotton with the largest area under cotton cultivation in the world. It has an edge in low cost cotton sourcing compared to other countries.

* Average wage rates in India are 50-60 per cent lower than that in developed countries, thus enabling India to benefit from global outsourcing trends in labor intensive businesses such as garments and home textiles.

* Design and fashion capabilities are key strengths that will enable Indian players to strengthen their relationships with global retailers and score over their Chinese competitors. This is also visible in auto sector and many other industries like IT and software and Pharma research.

* Production facilities are available across the textile value chain, from spinning to garments manufacturing. The industry is investing in technology and increasing its capacities, which should prove a major asset in the years to come.

* India has gathered experience in terms of working with global brands and this should benefit Indian vendors.

Companies with integrated capacities, such as Arvind Mills and Vardhman Spinning, capable of delivering large volumes are likely to gain.

Alternatively, market leaders in niche segments, such as Alok Industries, Abhishek Industries and Welspun India (both in cotton pile towels), may also emerge as gainers.

Some of the largest garment exporters, such as Orient Craft and Gokuldas Exports, which supply to international retailers, could gain considerably.

Acknowledgements:

1. EXIM Bank working paper No 9 February 2005
2. WTO International Trade statistics 2003
3. Bharattextiles.com
4. Compendium of International Textile Statistics, 2004
5. International textiles and Clothing Bureau, Geneva
6. Indian Council For Research On International Economic Relations,Samar Verma Nov 2002:working paper No 94 on Export Competitiveness
7. Speech Delivered by Shri Kashiram Rana, Honb'le Union Minister of Textiles at the TEXPROCIL'S Export Award Function held at MUMBAI on 30th September 2002 
8. Textiles: Unfolding opportunities by Shanthi Venkataraman: Business Line; Sunday Jan 13, 2004
9. Textiles and apparel in Global economy: 3rd Ed. By Kitty G Dickerson
10. www.apparel.indiamart.com
11. http://icmr.icfai.org/casestudies/catalogue/Business%20Strategy/BSTR163.htm
 


Prof. R.K. Gupta
Director
S.A. Jain Institute of Management & Techology
Jain College Road, Ambala City-134 003
E-mail:
cityju@rediffmail.com / rkgupta_india@rediffmail.com
 

Source: E-mail January 26, 2006

   

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