By Devashish Dhar & Ranveer Nagaich
India and its textiles industry have a long and storied history. However, in the recent past, the country has fallen behind some of its peers, especially when it comes to catering to the global export markets. Held back by lower competitiveness (owing to higher production costs) and higher import duties in the destination markets (compared to its peers), Indian garment exports have been steadily losing ground to countries such as Bangladesh and Vietnam. Consider the following: In the year 2000, both Bangladesh and Vietnam had a smaller share of the global garment export market, at about 1% and 2%, respectively. India’s share stood at about 3%, whilst China had already garnered a share of 18% by that time.
Fast forward to 2017, and we find that India’s share has increased marginally to 4% in about two decades. On the other hand, the share of Bangladesh and Vietnam has surged to 6.5% and 5.9%, respectively. China’s share in 2017 stood at 34.9%, down from 36.7% in 2010.
In addition, with the ongoing trade tensions of China with the US, and the rising costs of labour, the manufacturing activity is poised to exit China, in the process vacating more space for countries such as India, Bangladesh and Vietnam. However, the evidence presented above seems to point towards Bangladesh and Vietnam capturing the lion’s share, as suitable changes in India’s policy framework in the textiles sector have not been made.
Increasing India’s share in the global textiles market
First, we must examine what is holding India back from competing in the international markets. Globally, the demand is moving towards man-made fibres, rather than cotton. In India, cotton still dominates, indicating that the country is not moving in conformity with the global demand, and this is hampering the country’s export potential. Whilst India is the largest producer and exporter of cotton yarn and the second largest producer of man-made fibres, the current inverted duty structure on man-made fibres is hampering its adoption.
In addition, technology adoption is another constraint. For example, according to the data made available to the NITI Aayog, India currently has 23.7 lakh shuttle looms, as compared to 6.5 lakh in China. However, in China, there are 6.3 lakh shuttle-less looms, compared to 1.4 lakh in India (shuttle-less looms are up to six times more productive than shuttle looms). This indicates the huge productivity gap India must bridge to become competitive in the global markets.
The final constraint is that of scale. According to some estimates, approximately 95% of the fabric produced in India is produced in small-scale industries. And combined with power cross-subsidisation and high real rates of interest, an inherent cost disadvantage has developed in the Indian garment products, making them more expensive.
So, what does India need to do?
Interventions in the weaving/knitting and processing stage of the value chain have the potential to offset India’s cost disadvantage in the international markets. Concomitantly, the man-made fibre industry can be made more competitive through removing the inverted duty structure (where inputs are taxed at a higher rate than the final product). This will free up substantial working capital and reduce the cost of raw materials.
Similarly, with the World Trade Organisation (WTO) norms on the horison, the Merchandise Export from India Scheme (MEIS) may need to be revamped so as to be WTO-compliant. In addition, a time-bound plan for a transition from shuttle looms to shuttle-less looms must be urgently drawn up to boost productivity in the country.
Enabling size and scale is perhaps the most important intervention that can be made. Both Vietnam and Bangladesh offer common facilities such as effluent treatment plants, water treatment plants, steady water supply, and low-cost power in their textile industrial parks. This is certainly not a novel idea in India, as the Brandix India Apparel City (BIAC) in Visakhapatnam, Andhra Pradesh, is doing exactly this. In the BIAC, an integrated ecosystem with plug-and-play facilities is provided to the manufacturers, who are also able to avail fiscal incentives under the Special Economic Zone (SEZ) Policy and incentives offered by the state government. This model should be studied for replication in states that have well-developed transport infrastructure, availability of water, and low-cost labour.
Recently, a committee chaired by Baba Kalyani on revitalising SEZs submitted its report to the government. Central to the findings of this report is that SEZs need to be reoriented into Employment and Economic Enclaves (3Es). Investments should be directed towards activities that boost economic activity and job creation, and not just exports. This would tie-in well with the impending WTO norms as well. The integrated textile parks should be regulated in line with the recommendations of this committee to help ensure that size and scale is achieved.
According to the ministry of textiles, nearly 45 million workers are employed directly in this sector. Considering the labour-intensive nature of this industry, accelerated growth is likely to lead to accelerated employment generation as well. An econometric exercise revealed that the employment elasticity of this sector is 0.37. This means that a 1% increase in value-added growth leads to a 0.37% increase in jobs.
Therefore, if we assume that as a result of all these interventions, the textiles sector is able to grow at 10% per annum, we should see job growth of 3.7% per annum. This is not unachievable by any means. For example, between 2000-01 and 2004-05, employment grew at an average rate of 5.7% as per the RBI KLEMS database. A 3.7% employment growth rate (10% value-added growth) would imply the creation of 8.9 million jobs over the next five years, at an average of 1.8 million jobs per year.
Concerted policy efforts are needed to realise the job-creation potential of the textiles sector. Healthy job creation in this sector also provides an avenue for pulling labour out of the agricultural sector, thereby raising the incomes of both who remain in agriculture and those who exit. The central government should work with state governments with identified comparative advantage to develop plug-and-play facilities. These facilities should provide common resources, ease of doing business in its true sense, along with a well-developed link infrastructure. Only then will India be able to reap the benefits of this industry.
(Dhar is public policy specialist, Nagaich is young professional, NITI Aayog. Views are personal)