On the first anniversary of the end of MFA

The end of the Multi Fibre Arrangement (MFA) and associated quotas is a year past and it is time to take stock. The WTO secretariat, the IMF and several other august agencies had predicted that China and India would win the post-quota sweepstakes and the least developed nations were likely to suffer badly. The argument was simple: the quota regime, by freezing market shares, permitted the less efficient?both in industrialised nations and in some of the least developed ones extended quota-free access?to sell. Hence, the prevalent price was higher than what it might have been under free competition. The end of MFA would signal the removal of this rent, increase the gains from trade and allow the more efficient to expand market shares.

What has been the outcome? Chinese exports of textiles rose by 22.6% in the period Jan-Oct 2005 over the corresponding period of last year. Her exports to the US rose by 48% in this period and her market share rose from an already formidable 20% to 28%. Late in 2004, some vulnerable quota-exempt developing countries, anticipating economic hardship from a severe decline in their textile exports, had argued for the extension of MFA quotas, and China had offered voluntary export restraint. While it is doubtful if the latter came to happen, the facts suggest the pessimism of the LDCs was overdone. In Jan-Oct 2005, imports of textiles into USA from Cambodia rose by 18% and from Bangla-desh by over 17%. Amongst other developing country gainers in the US market were Peru (up 20%), Jordan (up 18%), Indonesia (up 17%), Pakistan (up 11%) and Sri Lanka (up 8%). Textile exports from Vietnam and Thailand to the US failed to expand, and some Central American and Caribbean nations experienced some declines. However, the principal losers, as expected, were industrialised economies, namely Hong Kong, Taiwan and South Korea.

How did we fare? US imports of Indian textiles increased by 23% in Jan-Oct 2005 and our market share rose creditably from 4.6% to 5.3%. Except that it is dwarfed both by the level and the increase out of China. The DGCI&S data for the period April-Sept 2005 shows India?s exports of textile items have actually fallen by 0.6%. A far cry from China?s global textile export growth of 22.6%. Painfully compounded by the fact that textile exports from China are 10 times as large as ours. Two criticisms could be levelled at this conclusion. First, that there has been price pressure emanating from China and, as a result, the value of exports does not necessarily mirror the volume of exports. Second, that the DGCI&S data is under-reporting textile exports.

The difference between value and volume does not matter in this context, since the comparison made across markets and suppliers are all in value (nominal) terms. On quality of DGCI&S data, there does not yet exist an alternative data set and in its absence, any other conclusion isn?t possible. Even if it turns out that textile exports were higher than reported, it is most unlikely that the situation as delineated here will need to be revised significantly.

Further, the DGCI&S data, which indicates that India?s textile exports fell by 0.6%, actually tells us very much more. We examined what export growth there was in formerly quota-restricted markets (USA, Western Europe and Canada) and what it was elsewhere, in respect of two key items? cotton yarn, fabrics & made-ups and cotton apparel ?that comprise over 60% of India?s textile exports. Exports of these two items to the former quota-restricted markets actually increased by 13.5% during the period April-Sept 2005.

But that to the formerly non-quota region fell sharply. Our exports of these two items to markets in West, South, SE and East Asia (excluding Japan) fell by as much as 22%. For the record, Asia has been amongst our fastest growing markets and accounted for 23% of our cotton textile exports last year. Exports to African markets were down 16% and that to Russia and Eastern Europe were lower by 40%. In industrialised countries that were not quota restricted, large declines have also occurred, as in Switzerland and Australia. The only formerly non-quota market to register an increase was Latin America (up by 11%). Overall, our exports to non-quota markets were lower by 20%.

Non-quota markets had absorbed the spill-over from the quota restricted market. Not surprisingly, the going was tougher and the margins thinner. With the removal of quotas, exporters would naturally have been inclined to focus on opportunities opening up in North America and Europe. It is conceivable that a switching of products from less profitable to more profitable markets could result in the end of quotas. However, this behaviour would only be expressed where the exporting industry was constrained by capacity. In the presence of excess capacity, exporters would have sought to protect their hard-won market share in the formerly non-quota markets, while seeking to expand business in Europe and North America.

However, the fact that switching seems to have occurred is clear indication that our domestic capacity is stretched. And in consequence, not only have we not been able to fully harvest the opportunities that the removal of quotas had offered, we also seem to have yielded space in other important markets?and it does not need a genius to figure out who to.

Once again, this experience highlights our inability to seize on opportunity, stemming from the inadequacies in our capacity to execute?decisions, projects, whatever. What afflicts the Indian producer is not a shortage of sops, but of infrastructure and employment conditions conducive to modernise and to expand.

The writer is economic advisor to Icra