For India
Economic affairs committee
Phdcci
IMPLICATIONS OF
END OF MULTI-FIBRE AGREEMENT (MFA) FOR TEXTILES AND GARMENTS INDUSTRY IN INDIA
The MFA has governed
the world trade in textiles and garments since 1974. It has been the main
instrument for protecting the domestic textile industry of the US and the EU
from the increasing competition from developing Countries and was meant to be a
transitional measure to provide time to their industry to adjust.
The MFA resulted in
restricting the size of the textile industry in the exporting countries with
natural competitive advantage in the area, as no country could export more than
the quota allocated to it. At the same time, MFA was not applicable to trade
between the rich developed countries and to exports from the Least Developed
Countries. Textile industry therefore developed in these countries like
Bangladesh and Mexico to exploit the lack of quota restrictions. This, besides
restricting the size of the market and avenue of growth for the countries with
comparative advantage also perpetuated an inefficient production structure in
the world textiles and garment industry.
The Opportunities
for India
The completion of
phasing out of the MFA on 1st January 2005 would expand the size of
the market available to the countries that have been restricted by the quotas
till now. The size of the world textile and garment export market is projected
to grow to about $ 655 billion by 2010, which is worth $ 400 billion currently.
India will be one of
the principal beneficiaries of the large market available in the post MFA. It is estimated that India’s share in total
world textiles and garments exports can reach 8.0% by 2010 from the present
3.9%.
India’s market share
of textiles and garments is going to jump substantially in both the US and EU
which are its principal exports market. According to a study of the WTO,
India’s market share in textiles in the EU is estimated to increase to 11% from
the present 9% after the elimination of quotas. For the garments sector the
market share is expected to increase by 50% from 6% to 9%. In the case of USA,
India’s market share in garments is estimated to quadruple to 15% in post MFA
from the present 4%.
India’s
comparative advantage
India is placed in an
advantageous position to exploit the larger market available in the post MFA
regime. This is because India has a comparative advantage in textiles and
garments, which emanates from the low wage costs and access to domestically
produced fabrics and other inputs.
A study of revealed
comparative advantage of various countries in textile and garments done by WTO
shows that India’s comparative advantage is higher than China and South East
Asia in both textiles and clothing. In
textiles India’s advantage stands at 4.67 as compared to 3.18 of china. In
garments too it is marginally higher at 3.90 compared to 3.64 of China. The figures for comparative advantage in
textiles for Indonesia, South Korea, Malasiya, Philippines, Thailand and
Vietnam are 1,98, 2,49, 0.36, 0.41, 1.16, 1.12 respectively as compared to 4.67
of India’s.
The other strengths of the Indian textile
industry, which would provide it a strong base for accelerating the growth post
MFA are: (i) the easy availability of almost all raw materials from fiber to
yarn to fabrics and others domestically. (ii) There are big players who can do
everything under one roof. Thus,
exploiting the economies of scale available in post MFA. This is going to be one of the most
important factors in determining India’s competitiveness. (iii) India has a
well-developed fashion design industry, which can cater to the rapidly changing
fashion trends and demands. (iv) India has a large base of skilled workers.
Thus, India has all
the requisites for maximization of the gains from the emerging opportunity.
The present
constraints
However, despite our
inherent comparative advantage the study of the costs suggests that the Indian
garment and textile industry has a high cost structure, which would come in the
way of maximizing the gains from the opening of the market. For example, South
East Asian countries and China who are India’s main competitors have a lower
labour cost. Unskilled labour costs as percent of gross output of garment
industry for India is 21.1% as against only 9% in Vietnam, 15% in Korea and
18.2% in China. This is higher than even some developed countries. (USA-21.0%,
Italy-14.3%). The same is the case with
the textiles sector too. The skilled
labour costs too are higher than South East Asian countries. It is 2.8% for
India as against 1.6% for china, 1.6% for Vietnam and, 2.3% for South Korea.
Since a large portion
of our exports is from the lower priced segment where labour intensity is high,
it is important to improve the efficiency and productivity to increase the cost
competitiveness of these segments. It
is only then that India can compete in this segment where competitiveness is
driven by lower costs.
The industry is also
suffering because of very slow technological up gradation. This is one of the reasons for lower
efficiency and productivity in the Indian textile and clothing industry. Also the quality of Indian products suffers,
especially in the standardized mass production market.
This fact comes out
clearly in the study of capital costs. The proportion of capital costs to gross
output is 6.7% in India textile industry and 7.8% in garment industry. This is lower than that of its main competitor
China, where capital costs form 12.2% of gross output for clothing and 12.0%
for textiles. The lower capital costs are reflecting the low capital
utilization in the textiles and clothing industry. Therefore, this lower capital costs do not provide any competitive
advantage to India.
The focus
segment
The garments segment
is where maximum growth of exports is projected. This segment provides the
highest per unit realisation and has
high value added content. The garments segment broadly comprises the high-fashion
garments, low quality mass-produced / standardized products and low to medium
priced segment.
A dominant role is
played by big retail companies these days like WAL-MART or companies like NIKE
and ADDIDAS, most of whom do not have their own manufacturing units but
outsource from mainly the developing countries. Retailers accounted for more
than 1/2 of total garment imports in the EU. The retail market today has become
concentrated and has considerable buying power thus should be the focus area for
the Indian garment exporters.
Challenges
before the textile and garment industry
The study of the
supply chain of the garment industry indicates that it is a demand-pull-driven
market. The information flow starts from the customer and forms the basis of
what is to be produced and when. With rapid advance in use of information
technology in supply and stock management most firms want supplies only at the
time when needed. They do not keep stocks. IT has also allowed firms to know
latest fashion trends very quickly. This enables them to reduce supply time in
meeting new demands. Thus, the Indian exporters have now to meet very rigid
delivery schedules. This is going to be the real challenge before the
Indian textiles and clothing industry in the post MFA regime.
Some
other suggestions for the textiles and garment industry are given as under:
q Infrastructure
is a major bottleneck for exporters in meeting delivery schedules. The maximum
waiting time at Indian ports is still 8 to 12 days. Roads, ports and power
infrastructure needs to be up graded on a war footing.
q Improving India’s competitiveness requires modernization
of the Industry, especially the decentralised power loom sector, which accounts
for 60% of the fabric production. One
estimate puts the amount required for the modernization of the Indian textile
and garment industry at Rs.150000 Cr. The high interest rate structure in the
past have created huge non-performing portfolios making it difficult for
manufacturers to secure fresh credit for technological up gradation. One
solution could be a credible debt restructuring exercise to reschedule
past debt of the industry at a revised lower rate of 7-8 percent to improve
company balance sheets and enable access to fresh credit.
Irritants in the TUF for textiles
should also be suitably removed so that the fund could be used for effecting
modernization of this industry.
q There is a need to simplify the language of the laws
to make them easily comprehendible to industrialists and reduce chances of
discretionary interpretations.
q At present government issues 50 to 60 notifications on
an average throughout the year, which directly or indirectly has an impact on
the textile industry. This unnecessarily complicates matters creating
procedural hassles and leading to delays. The government must restrain from
issuing notifications throughout the year and keep them to the minimum
required.
q Similarly, unexpected changes in policy should be
avoided, like the recent reduction in rates in the DEPB scheme, as it creates an
environment of uncertainty for exporters at the time of negotiating contracts.
q While improving quality and efficiency, a proactive
marketing of the “made in India” brand as a quality product is a must
for cornering a bigger share of the world market.
q There is a possibility that the developed nations may
resort to innovative non-tariff barriers as environmental conditions, social
clauses, safety standards etc, to protect their industry. Therefore, it is
important that the Indian industry should go in for quality certifications
and adopt best practices. More importantly, the government and the industry
should regularly interact to track such cases and undertake remedial measures.
q The competitive ability in high-quality fashion
garments would be determined by the ability to produce designs that captures
the tastes and preferences, better still influence such tastes and preferences.
At the same time one has to be cost effective. India is quite favourably placed
in terms of designs in high fashion segment but quality will be the determining
factor. Therefore, this segment requires investment in quality control, R&D
in design and product development and, improvement in dyeing and packaging
technology to reduce the rejection rate, which is around 5%. An effective government-industry-institution
partnership should be evolved to address this issue.
q Competitiveness of the Indian industry, especially the
garment sector, is going to depend on their efficiency of supply chain
management. This requires investment in and maximum use of IT and
systems like ERP, MIS etc.
With the industry
tightening its belt and government providing an export friendly facilitative
environment, India can very well exceed the target of achieving US $50 billion
exports by 2010.