The textile industry is one of the oldest industries in India. As a provider of jobs, it is second only to the railways. Known globally for its skill and craftsmanship, the Indian textile industry accounts for one-third of the country's foreign exchange earnings and 20% of its industrial production. Though primarily cotton based, it has a growing polyester sector and is active in processing linen, wool and silk. India has the largest number of looms in the world. India's share in the world textile trade went up from 2.4% in 1993 to 3.1% in 1997.

India's textile sector has a healthy and concentrated spinning sector, consisting mainly of medium and large-scale units. These form part of the mill sector. This sector also includes vertically organised "composite" production facilities that undertake spinning, weaving and processing.

Most of the weaving and fabric processing activity is, however, undertaken by an extensive but diffuse industry, consisting of small scale weaving and fabric processing establishments operating in the handloom and powerloom sectors.

The handloom sector consists of small, traditional weaving units with two to six manually operated looms. Production, at 5 metres a day, is extremely low. Handloom weavers buy yarn and sell grey fabric to local buyers. Usually the weaver's entire family is involved in the business.

The powerloom sector also comprises fragmented weaving units. However, this sector uses powered shuttle looms. Some powerloom weavers have also invested in shuttleless looms. Powerloom sector units typically have 10-45 looms. Powerloom sector weavers also buy yarn from the local market and sell grey fabric. Unlike the mill sector, powerloom units do not need to conform to labour regulations established by the government for factories. This gives them more flexibility as compared to the mills. Also most powerloom weavers are located in industrial areas, and therefore have the advantage of lower power tariffs and other benefits.

The decentralised sectors comprise the major producers of fabric in India. In 1998, the handloom sector accounted for 23% of total production in terms of volume and the powerloom sector accounted for 71%. The mill sector accounted for only 6% of total production.

Until the nineties, the focus of Indian producers was on the vast domestic market, where sellers ruled. Only in the early 1990s did manufacturers realise the benefits of exports. A lack of demand in the domestic market and an appreciation of the advantages of India’s lower production costs caused a boom in exports.

Being a high employment provider, the textile sector has been highly regulated for many years. Cotton, the main raw material, is grown locally. Even the cotton industry is highly dependent on the textile industry for its livelihood.Many people in rural areas are small scale producers in the handloom sector, or are employed in hand processing (dyeing and finishing). Thus they depend on the textile industry for their livelihood.

World trade in processed fabric is double that of grey fabric in terms of value. But in Indian textile exports, the share of grey fabrics is high. This is because -- India’s fabric processing sector lacks state of the art technology -- explains Prodipto Ray of KSA Technopak.

India exports only half as much processed fabric as grey fabric in terms of value. Even the processed fabrics that India does export achieve lower than average prices. This can be attributed to the fact that the garment sector has not been stringent as far as quality is concerned. Since there is little perceived need for high quality fabrics, there has been little demand for them. Also Indian garment makers mainly use low value fabrics produced by the powerloom sector, or mill stocks left over after the best lots have been exported. It is this lack of demand for high quality fabrics that has led to low investment in the fabric processing sector.

Also, the taxation policy favours low technology hand processing and standalone process houses, which have a zero or negligible excise incidence. This is a major deterrent to investment in the fabric processing sector.

This differential taxation policy also encourages duty evasion. For example, some process houses under-invoice their products so as to benefit from lower excise rates. Some process houses declare power processed fabrics as hand processed because the latter enjoy more favourable tax treatment. Industry sources say it is difficult to spot this evasion. After a fabric has been processed, it is difficult to ascertain whether it has been printed using hand processing machines or power machines.