Indian Textile : Losing Momentum?

- N Janardhan Rao and Ravi Babu Adusumilli

Dismantling of quota regime which promise to unleash Indian textiles on the world map is, however, yet to deliver. For the first time, after disman- tling quota restrictions in textile exports, the Indian textile industry is facing fierce competition from Asian countries.

Though, in 2005, China and India recorded an impressive growth in textile exports, the growth momentum slowed down considerably in 2006. Other Asian countries such as Indonesia, Pakistan, Bangladesh and Vietnam recorded high growth rates posting a dramatic surge in their exports to the US markets. The import curb on certain categories by the US in January 2006 under a special WTO dispensation was the major reason behind the slackening textile exports from China; whereas, in India's case, it is the lack of competitiveness in the synthetics segment. Growth rate of Indian textile exports to the US apparel market has declined during January-September 2006 to 10.75%, compared to a growth of 30.56% in April-October 2005. Moreover, there has been a substantial dip in unit value realization too.

Currently, India has a share of 5% in both the US and EU textile and garment markets3-4% in synthetics and over 10% in cotton textiles. Despite indirect tax structure in the textile industry for the past three years, a host of other factors are hampering India's international competitiveness. High cost of synthetic raw materials attributable to an effective 15% import tariff, and power and inflexibility in labor management are the principal reasons for India losing out on the competition in western markets. The US and EU markets have been dominated by the synthetics segment, which accounts for 60% of the apparel market in these countries. Due to high raw material prices, Indian exporters have become weak in synthetic and blended textiles and clothing. Besides, the high import duties have been hampering the usage of syntactic and man-made fiber in India. With the high cost of synthetic inputsthey are much cheaper in China and IndonesiaIndia's growth in the US and EU markets gets virtually restricted to the cotton textiles market where it has already got a reasonable market share. According to a status paper prepared by the textiles ministry, exports are estimated to touch Rs. 81,616 cr in 2006-07, up from Rs. 75,621 cr in 2005-06 and Rs. 63,024 cr in 2004-05. Together, the US and the EU account for 62% of India's textile exports.

New horizons

Indian textile companies, across product categories (apparels, denim, home textiles) are today in the process of expansion and deepen their footprint and access global markets. In the process, several Indian companies own textiles units in the US, Europe and central Asia either through Greenfield investments or by acquiring the existing facilities. North India- based Vardhman Group, Ginni Filaments, Abhishek Industries and Spentex Industries are looking to acquire spinning mills in Central Asian countries. Being closer to huge markets is the prime objective behind all these acquisitions; as also, to benefit from better production economy from plants located in the Central Asian and Southeast Asian countries. Global retail giants like Wal-Mart, JC Penney, Gap and branded apparel marketers such as Calvin Klein, Lacoste and Sara Lee have been attracted to India for the resourcing.
In addition to acquisitions abroad, Indian companies are forming alliances and joint ventures with their global counterparts which have strong front end capabilities. The strategic rationale behind these alliances are aimed at accessing global markets, tap technological know-how, design skills and branding and retailing abilities. For instance, Welspun India has taken stake in Christy and Raymond's has partnered with overseas textile houses such as UCO NV, Belgium and Gruppo Zambaiti, Italy. In the retailing side too, Indian companies are increasing the number of outlets. Raymond's is reasonably successful with their brands such as color plus and companies like, Welspun and Himatsingka are taking steps towards branded apparel stores.

Import curbs on China by the US and EU in certain segments has opened up additional trade opportunities for India and is likely to gain market share in categories such as cotton knit shirts, where volumes have doubled. While China has a major edge in attaining economies of scale by virtue of competitive bulk production, India has advantages in terms of flexibility to adopt new designs faster and supply even smaller orders. China has already been supplying machinery to major Indian manufacturers. They have been supplying raw materials to Indian companies. India can offer its design capabilities and finishing skills to create synergies with Chinese manufacturers.

Dampening the growth

Textile sector is the key to both India and China from the overall economic development perspective. While China enjoys technology and pricing edge over India, the gap is expected to narrow as the Indian textile industry is expected to get technologically upgraded in the next couple of years. As most of the units are in the small-scale sector Indian players are unable to compete with China. In order to improve competitiveness of Indian textiles industry, the textile ministry has already approved 26 textile parks under the Scheme for Integrated Textile Parks (SITP). Many of the parks are in various stages of implementation. Besides, the government has recently approved another 24 parks at a cost of Rs. 1,000 cr. The textile ministry also wanted SEZ-like benefits for SITPs and a full SEZ status for four out of the 26 parks. Big companies having direct access to retail stores are trying to get into local tie-ups where non-critical jobs could be outsourced to small and medium entrants in the adjoining areas. This ensures that the big companies remain focused towards customers and their requirements.

Currently, the Indian textile industry has a size of $46 bn. To increase its size to $85 bn by 2010 needs investments of $31 bn and at least $8 bn of this should be FDI to avail themselves of the funding under Technology Upgradation Fund (TUF), which offers loans at 6% subsidy and due to expire in March 2007. Hence, most of the companies have timed their expansion plans after FY2004, which, has led to peaking in capex garments in the textiles sector in the last two years. These benefits will occur FY2008 onwards as the investments in the sector have already been made, or in last leg of completion. Investments are estimated to touch Rs. 33,000 cr in 2006-07, of which Rs. 25,000 cr will be made through the TUF Scheme. Indian companies should upgrade their textile infrastructure to compete globally and the government has to help the industry in rationalizing the tax structures for sourcing textile equipments. It needs to attract aggressive foreign investment in the entire textile value chain from not only the US and EU companies, but also from those of Korea, Taiwan and China.

The major concern for textile companies is slowdown of the home textiles market, for which India is the low-cost producer for the US and European markets. Indian companies have made substantial capital expenditure to increase the capacities, but have failed to realize the volumes in 2005. Competition from Pakistan and Turkey would hamper this segment's prospect. On the other hand, companies have been slow in ramping up the apparel capacities to garner orders from buyers who are diversifying from China. India's inflexible labor laws have been a barrier to investment, besides a drop in denim prices as a result of excess capacity built in 2005. Having a surplus production of cotton may not be sufficient to meet the global demand. Hence, for some time now, prices remain high impacting the operating margins.

Going forward, exports as well as domestic markets are expected to drive future growth in the industry. In the exports front, the large outsourcing orders by retail giants as part of the de-risking strategy and imposition of caps on certain import segments from China by the US and EU have opened up opportunities for India. On the other hand, a growing young population, rising household income levels and organized retail would help in expanding the domestic market.