The Hindu Business Line : Textiles: Challenges of post-quota regime

The textile industry is truly at the crossroads. While the post-quota regime will open up new opportunities, there are also threats because of strong competition from China and a few other developing countries which have modernised their textile industries over the last three years and become more cost-competitive than India. says S. D. Naik.

THE system of import quotas that dominated the textile trade since the early 1960s will be completely phased out from January 1, 2005 and importing countries will no longer be able to discriminate between exporters. Since this will have a far-reaching impact on world trade in textiles and clothing, many developing countries accustomed to operate under a quota regime for decades, including India, are bound to face new challenges.

Of course, this is not a sudden development and the exporting countries were given sufficient time to prepare for the elimination of quotas. Since January 1, 1995, international textiles and clothing trade has been undergoing a gradual transformation under the 10-year transitional programme of the WTO's Agreement on Textiles and Clothing (ATC).

The Indian textile industry is truly at the crossroads today. While the post-quota regime will open up new opportunities, there are also threats because of strong competition from China and a few other developing countries such as Bangladesh, Vietnam and some African countries, which have modernised their textile industries over the last three years and become more cost-competitive than India.

Textile is the largest industry in India with its total size (domestic and exports) estimated at Rs 1,50,000 crore, or almost 7 per cent of the country's GDP. At about $13.5 billion, it accounts for over 25 per cent of India's total exports. Some analysts believe that there will be new opportunities for India to expand its textile and garment exports in the post-quota regime.

In fact, about a dozen global retailers have set up shop in India over the last two years to source their requirements, dispensing with the earlier practice of operating through local buying agents. This development coincided with the Indian Government's decision to throw open the garment sector to large players two years ago (it was earlier reserved for the SSI sector) and allow 100 per cent foreign direct investment (FDI).

Unfortunately, however, the wrong policies over the past decades and the Government's earlier misplaced ideological obsession have led to the fragmentation of this industry and the weakening of some of its vital segments. For instance, the growth of the mill sector has been stunted to such an extent that it now accounts for hardly five per cent of the total cloth produced in the country compared to about 60 per cent in the early 1950s. Consequently, it lost the competitive edge it once enjoyed to its South-East Asian counterparts.

Ironically, the plight of the powerloom sector, which has been responsible for the virtual ruin of the composite mills, is no better. While it now accounts for almost 70 per cent of the cloth produced in the country, it is plagued by technological obsolescence, overcapacity and pervading sickness. The reasons are not far to seek. For too long, it was allowed to thrive on cheap labour, power theft and massive excise duty evasion. As for the handloom sector, except for a few pockets of excellence, it is also beset with problems of outdated technology, paucity of institutional finance and the marketing muscle. Some recent studies have shown that this sector is capable of achieving exponential growth if only there is proper identification of its needs, a reasonable level of resource input and structural attention.

As a part of preparing for the new quota-free trading regime that will come into force from 2005, India had signed textile agreements with two of its major trading partners — the US and the European Union (EU) — at the beginning of 1995. Under these agreements, which coincided with the establishment of the WTO, India agreed to reduce tariffs and import controls on textiles in a `fair' and phased manner over a period of three to seven years. In return, the agreements provided for greater access to Indian textile items in the US and EU markets with immediate effect.

The opening of the Indian market for textile imports, though with a time lag, implied that the Indian textile industry would have to prepare itself for stiff competition in terms of price and quality during the 10-year transition period. Unfortunately, however, it has not done much over the past eight years to prepare for the new challenges. The pace of modernisation remains painfully slow and despite a few pockets of excellence, there is widespread sickness in almost every segment of the industry.

The Steering Group Report on Investment and Growth in Textile Industry, headed by Mr N. K. Singh, Member Planning Commission, has estimated the total funds required for modernisation of all the segments of the industry at Rs 98,550 crore. The three segments that would need huge investments are: Weaving (Rs 22,950 crore); woven processing (Rs 25,800 crore) and clothing (Rs 24,500 crore). Spinning and knit processing would need an investment of about Rs 19,200 crore.

At present, the only scheme through which the Government can assist the industry is the Technology Upgradation Fund Scheme (TUFS), which offers a 5 per cent interest subsidy on loans/finance raised from designated financial institutions or the banks and State Financial Corporations co-opted by them. The Rs 25,000-crore TUFS was introduced with effect from April 1, 1999 for a five-year period up to end-March 2004. However, because of a number of reasons, the scheme failed to make much headway.

While the total amount sanctioned under the TUFS up to December 2002 was Rs 6,100 crore, the actual amount disbursed was just Rs 4,202 crore. Evidently, there is a need to liberalise and expand the scope of the scheme to ensure its success. Moreover, the problems of the textile industry are so formidable that they cannot be tackled by TUFS alone. There is an urgent need to formulate some alternative schemes, including provision for foreign exchange loans and seeking assistance from the multilateral institutions.

Even though time has been running out fast, Indian Government's policy response has been slow and inadequate. A classic example of dithering and inaction is the failure of the successive governments to resolve the vexed problem of sick mills under the National Textile Corporation (NTC). This has added to the woes of the mill sector already reeling under the impact of the prolonged demand recession.

The New Textile Policy, which was in the making since 1995, was finally out only in November 2000. However, it turned out to be just a patchwork, long on promises and short on concrete measures. The thrust of the policy statement is on making India a global player in textile and apparel, by raising the industry's exports from $11 billion in 2000 to $50 billion by 2010 The policy statement said that efforts would be made to restore the organised mill sector to its position of pre-eminence to meet the international demand for high-value, large-volume products. For this, the policy proposed to encourage setting up of large integrated textile complexes and entering into strategic alliances with international majors, with focus on new products and retailing strategies. The policy also recognised that processing (dyeing and printing) was the weakest link in the textile production chain and recommended policy support for setting up of large processing houses.

However, at the ground level, nothing much has happened since the announcement of the policy, beyond taking the garments off the SSI reservation and removal of 24 per cent cap on FDI. A major grouse of garment manufacturers relates to the non-availability of quality fabrics in adequate quantities. Recognising the critical importance of the weaving sector to the entire textile value chain, the 2001-02 Budget had announced a special programme for modernising weaving capacity by induction of 50,000 shuttle-less looms and 2.5 lakh semi-automatic/automatic looks in the decentralised powerloom sector with TUFS as the main credit instrument. However, the pace of modernisation of this sector also failed to improve.

Thus, by all accounts, India has missed the opportunity to claim a larger share of the global textile market. The weaving and processing segments of the industry have been languishing with little investments. Only the spinning segment has become world-class, thanks to the booming yarn exports and the investments made under the Export Promotion Capital Goods (EPCG) Scheme.

Meanwhile, China has taken a clear lead in the production of value-added fabrics and garments. China's garment exports have already crossed $50 billion against India's $6 billion. Some of the large garment companies there have a turnover of $ 800-1,200 million, nearly three times the size of India's biggest garment firm, Orient-craft. Since the industry was reserved for the SSI sector until recently, Indian garment companies have remained small and fragmented in over 20,000 units. Naturally, they are not in a position to invest on a large scale to capture the new demand. The Finance Minister, Mr Jaswant Singh has offered a package of fiscal incentives for the textile industry in his Budget for 2003-04, which includes a reduction in excise duty on polyester filament yarn, all spun and other filament yarns and woven and knitted fabrics. Similarly, Customs duty on apparel grade raw wool has been reduced from 15 per cent to 5 per cent. To encourage modernisation, Customs duty on a large number of textile machinery and their parts has been reduced from 25 per cent to 5 per cent. He also indicated that the Government was considering a mechanism for restructuring the debt portfolios of viable and potentially viable textile units.

Now it is for the industry to seize the opportunity and reap the benefits of the new trading environment once the quota system goes. Fortunately, the Indian textile industry appears to be heading for better times with signs of demand revival after a prolonged recession. Textile shares, which were in the dumps for a long time, are in the limelight once again with prices showing an upward movement. Some leading players have also drawn up plans for new investments. Thus, there is room for optimism despite a number of pitfalls on the road to resurgence.

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