Come January 2005, the Multi-Fibre Agreement that has regulated global trade in textiles will be laid to rest. The protection currently available to textile and apparel importers and exporters would give way to forces of competition. Countries that can supply quality products at the lowest cost would win. Others would become marginal players.
There is unanimity among industry analysts that China, which commands over 15 per cent of the nearly $400 billion global market in textiles, would be the biggest gainer. Indeed, there is evidence that China?s market share could cross 25 per cent. In three categories of both man-made fibre and cotton made-ups and apparel in which quotas in the US market were abolished in January 2002, China?s exports surged by 300 to 500 per cent in just one year.
A recent US assessment says that India could be a gainer, although it would lag behind China by a substantial margin. An India-China comparison clearly shows how India has crippled the competitive advantage it once enjoyed in textiles by myopic policies and confusion about goals. While China has the capacity to make rapid advances in the global market the moment opportunity arises, the size of India?s industry is diminutive in comparison. Even if it were to make rapid advances in competitiveness, its ability to ramp up production and meet large orders remains rather limited.
Simply put, China has created large capacities and capitalised on economies of scale to dominate the world market. In sharp contrast, India?s policy framework has fragmented industry by discouraging large-scale production and encouraging proliferation of small units. Large garment exporting units in India employ less than 1,500 workers, whereas in China that number goes up to 25,000. It?s not surprising that the $6 billion garment exports from India are spread across over 10,000 units. Even Sri Lanka?s garment exports of $3.5 billion come from only 300 units.
This has happened because small-scale reservation for garment export and the attendant fiscal concessions discouraged large units from entering the business. Similarly, in textiles, the profitability of large mills was severely eroded by fiscal concessions extended to powerlooms and the imposition of obligation to sell hank yarn at fixed prices to the handloom sector. The result was complete stagnation of the mill sector which had little money left for modernisation and technology upgradation. For instance, in the year 2000, China had six times more shuttleless looms than India. Even Pakistan had twice the number.
The growing obsolescence in the mill sector and fragmentation of garment manufacture into small units has resulted in India selling low value-added goods. The evidence is shocking: while India?s quantitative share of the global textile trade is around 8 per cent, its share of value added in the global trade is only 3 per cent. We have missed the huge opportunity in processing, made-ups and ready-made garments.
Mercifully, over the last two years the government has dereserved garment manufacture, rationalised excise duties and introduced Cenvat across the textile value chain, and reduced import duties on textile machinery. But the change agenda remains incomplete. First, labour laws need to be more flexible to enable companies to capitalise on low labour cost. This would not harm labour, as along with other measures to make the industry globally competitive, this could double the number of jobs in less than a decade. Indeed, the textile industry offers the best scope for absorbing rural workers displaced from farming.
Second, government?s latest initiative on debt restructuring of existing units must ensure that credit is made available at interest rates that are globally competitive. Availability of funds at competitive costs is also critical for rapid creation of new capacity. Third, we must encourage the growth of man-made fibre industry through a fiscal structure that encourages value addition as over two-thirds of the global trade in textiles is in products based on synthetic fibre. Fourth, measures to reduce costs of infrastructure to global levels would be needed to aid growth.
India?s textile industry has the potential to contribute more to our GDP growth, job creation and poverty reduction than any other sector. The support we give it now would yield a whopping dividend in the years to come.
The author is an advisor to Ficci. Views expressed herein are personal