The global manufacturing industry has seen a shift across geographies since the industrial revolution, the origin of which is traced to the later decades of the eighteenth century. By the historical pattern of this shift, manufacturing of textiles, one of the earlier industries to flourish, has almost fully moved to the east. In this inevitable process, the former lot of countries kept constantly shifting to new industries, in keeping with the incessant progress of technology, rising labour costs and aspirational living.
Going by convention, therefore, this would have been the time India seized the lion?s share of the world market for textiles (yarns, fabrics and made-ups) and clothing (apparel). Labour-intensive industries (the Indian textile industry employs 35 million) are best suited for India at this stage, given its large population, most of which don?t yet fall into the category of skilled manpower. Far from it, just over 4% of the roughly $650 billion world (inter-country) trade in textiles and clothing (T&C) in 2011 was attributed to India. The removal of quantitative restrictions on exports to the US, the EU and Canada in 2005 did seem to come to the aid of Indian T&C exporters for a while, but they could not sustain the momentum when faced with the onslaught of competition.
Even as it is increasingly clear now that China has begun the process of ceding its dominance in the world T&C market due to the continuous rise in labour and other costs, the eventuality of currency appreciation and the shift in focus to technology-intensive industries, India is apparently not the obvious one that seems to benefit. As India failed to live up to its potential, it fell to the likes of Bangladesh, Indonesia, Vietnam, Thailand, Cambodia and even Pakistan to cater to the world demand for clothing, if not textiles. These countries worked their way up in the highly competitive T&C markets battling some disadvantages. Unlike India, most of these countries cannot even boast of a robust indigenous base of natural (cotton, wool and silk) and man-made (polyester, viscose and acrylic) fibres, leave alone integrated production chains. Yet, Bangladesh?s share in the US apparel imports is 6% compared with India?s 4.4%.
While synthetic/artificial fibres account for 60% of the textiles and apparel items sold in the global markets, more than 80% of India?s T&C exports continues to be cotton-based. This is a factor that seriously undermines India?s competitive strength. The irony is that India is a net exporter of man-made fibres (MMFs). For example, the country?s polyester filament yarn (PFY) exports in 2010-11 stood at $800 million compared with imports of $289 million, leaving a surplus of $511 million. Similarly, there were net exports of $175 million of polyester staple fibre (PSF), $105 billion each of viscose filament yarn (VFY) and staple fibre (VSF). It can?t be that India can be competitive in the global man-made fibre market, but not in textiles and garments made out of them.
Reliance Industries, the largest producer of PSF, PFY and partially oriented yarn (POY) in India, also makes PTA, the input for these products, which it is in no need of importing. In exporting PSF and PFY, the company, however, gets the benefit of duty remission schemes (meant to nullify the import tax content in export products). AV Birla Group?s flagship Grasim Industries makes VSF and VFY and enjoys tax relief for wood pulp imports when it exports VSF or VFY. In Grasim?s case, the imports are real, but imports of PTA or MEG (another input for fibres) by RIL are notional. So we have a situation where the domestic synthetic/artificial fibre producers don?t face sufficient competition, but enjoy some privileges. What they do is to keep their domestic prices for fibres just below the possible import price (which is inflated by tariffs and freight). As if these privileges weren?t enough, these two companies are also beneficiaries of anti-dumping duties on these fibres. There are dumping duties on POY imports from China, Thailand, Indonesia, Malaysia and Taiwan and on PFY imports from all these countries and South Korea; similarly, VFY imports form China and VSF imports from China and Indonesia attract dumping duties.
By RIL?s own admission, it has 4% of the global polyester capacity, but accounts for 6% of the global production. That means the company?s capacity utilisation is better than the global average. The question therefore, is does it need the level of protection it now enjoys, at the cost of the downstream T&C industry? The fact that the factory-gate price of PSF in China is about 20% cheaper than that in India speaks volumes. The tables here of profitability of different segments of the industry are also revealing.
Patently, skewed policies have long been the bane of the Indian T&C industry. The industry used to be a victim of patronage politics, purblind economic theories and usurpation of sops meant for the small-scale sector (power looms, small garment units) by powerful lobbies. Until a few years ago, garment-making used to be an exclusive preserve of the small-units industry (then called SSIs), preventing large and more automated units from coming up. Fabrics produced in India lacked consistent texture and quality of dyeing in the absence of modern shuttle-less looms and large, sophisticated processing capacities. A small community of clever investors, euphemistically called ?master weavers?, enjoys the sops designed for poor power loom weavers; in the process, thwarting the modernisation of the weaving industry.
True, the SSI reservation in garment sector has gone and the distortions in the tax policies have also been somewhat addressed in recent years. Also, thanks to the technology upgradation fund scheme (which consists of an interest incentive), the industry has seen investments to the tune of R2,10,000 crore since 1999 in modern spindles and loomage. But for the industry to grow and enhance its presence in the global markets, supply of raw materials at competitive prices is vital. Bringing more competition to the MMF industry is key to the unshackling of the T&C sector, which accounts for about 9% of the index of industrial production (IIP) but had risen at rates lower than the overall index in recent months (see table). Impulsive policy decisions like the ban on cotton yarn exports for a few months last year (which had caused spinning mills to pile up inventories and cut production) are eminently avoidable. Rather than MSP operations (which are inefficient and often inopportune), productivity increases will come to the rescue of cotton farmers. Very high cotton prices in the initial months of 2011 were partly due to wrong export policies.
India?s exports of T&C products are likely to be around $30 billion this fiscal. That might look impressive in isolation but very dismal when compared with the China?s export performance or even with that of other emerging economies that are mush smaller in size and potential than ours. Despite a demand slump in the West and the policy-induced shift to technology-intensive industries, about 42% of the combined T&C imports of over $200 billion by both the US and the EU will be from China this fiscal.
India?s T&C industry is in the doldrums at present. There has been negative annual growth in production for all months since April 2011 and the worst hit have been the power looms and hosiery units. Only 99 companies made profits in the first half of this fiscal, as against 180 in the year-ago period, while the number of loss-making units has increased to 127 from 46. Demand from key exports markets of the US and the EU has of late seen a month-on-month decline and the forecast for 2012 isn?t very rosy either. Industry is asking for yet another restructuring of loans to stay afloat.
It is high time the wrong policies were amended with respect to the MMF sector and the cotton economy was handled with far-sightedness and policy certainty.
kg.narendranath@expressindia.com