Published on January 6, 2009
Indian Economy Overview 1. The economy of India is the fourth largest in the world, with a GDP of $3.63 trillion at PPP, and is the tenth largest in the world with a $691.9 billion at 2004 USD exchange rates and has a real GDP growth rate of 6.2% at PPP. 2. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in the 23year growth record. 3. Indian economy has posted an excellent average GDP growth of 6.8% since 1994 India, the fastest growing freemarket democracy in the world, registered a growth rate of 8.2 percent in FY 2004. 4. India has emerged the global leader in software and business process outsourcing services, raking in revenues of US$12.5 billion in the year that ended March 2004. 5. Agriculture has fall to a drop because of a bad monsoon in 2005. There is a paramount need to bring more area under irrigation. 6. Export revenues from the sector are expected to grow from $8 billion in 2003 to $48 billion in 2009. 7. India’s foreign exchange reserves are over US$ 102 billion and exceed the forex reserves of USA, France, Russia and Germany. This has strengthened the Rupee and boosted investor confidence greatly. 8. A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves crossed the US $100 billion mark on Dec 19, 2003 and was $142.13 billion on March 18, 2005. 9. Reserve money growth had doubled to 18.3% in 200304 from 9.2 in 200203, driven entirely by the increase in the net foreign exchange assets of the RBI. 10. Reserve money growth declined to 6.4% in the year 2005. 11. During the financial year 200405, broad money stock increased by 7.4 per cent 12. Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. 1
Exports The competitive advantage that India enjoys across a range of sectors has led to rapid increase in India's exports. Back on the robust 23.88 per cent growth in exports during 200607, cumulative value of exports during 200708 grew by 23.02 per cent to total US$ 155.51 billion as against US$ 126.41 billion in the corresponding period last year. Spice exports grew by 20 per cent in export volumes in AprilMay, totalling up to • 98,570 tonnes as against 82,210 tonnes a year back. Jewellery exports rose 22.27 per cent during 200708 compared to the • corresponding period last fiscal, to reach US$ 20.88 billion. Automobile Exports grew by 22.30 per cent during 200708 over 200607, with • Two Wheelers growing by 32.31 per cent and Commercial Vehicles by 19.10 per cent. Software and services exports grew by 26.33 per cent to register revenues of • US$ 27.49 billion during AprilDecember 2007 as against US$ 21.76 billion during same period last year. It is estimated that annual exports are likely to grow to US$ 43.89 billion during 200708. Foreign tourist earnings have increased by 30.1 per cent during 2007 to touch • US$ 11.62 billion compared to US$ 8.93 billion in 2006. During JanuaryApril 2008, foreign tourists earnings further rose by 28.9 per cent to US$ 4.84 billion. The new fiscal (2008–09) has continued the robust performance of the economy on the trade front. Exports have risen by a healthy 31.5 per cent to US$ 14.4 billion during April 2008, as against US$ 10.95 billion during the corresponding period last year. With such continued buoyancy on the trade front, the Government has set a target of US$ 200 billion in export earnings for the current fiscal year. WHAT IS ECONOMIC SELF-RELIANCE? Economic selfreliance (ESR) represents a different way of thinking about the processes and outcomes of economic development. ESR is an individual's ability to garner and hold economic resources in excess of their basic needs. The concept of ESR recognizes that there are individuals who are unable (due to physical or mental disability) to garner any surplus resources, individuals with 2
surpluses large and secure enough to meet any conceivable need, and individuals at every point in between. ESR affects the entire spectrum. ESR is also context specific; what constitutes basic needs for someone in a developed country will differ drastically from someone in a developing country. But the core principles of economic development are the same throughout the world. WHY IS ESR IMPORTANT? Individuals who are economically selfreliant have greater resilience in the face of negative economic shocks. Those with greater resilience will suffer lower intensity (less severe) or shorter duration (quicker recovery). ESR represents a type of insurance against the disruptions caused by adverse economic events. More important than its insurance value, ESR provides a solid platform from which people can develop and reach their full human potential. Once people possess a sustainable surplus, they can turn their attention to the pursuit that psychologist Abraham Maslow termed selfactualization: developing and expressing talents, skills, emotions, and values to the fullest extent.2 It's hard to reach our full potential when we are worried about our next meal. 3
Export-Import Bank of India ExportImport Bank of India is the premier export finance institution of the country, set up in 1982 under the Export Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the country’s foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of products and services offered at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, preshipment and postshipment and overseas investment. THE INITIATIVES Exim Bank of India has been the prime mover in encouraging project exports • from India. The Bank provides Indian project exporters with a comprehensive range of services to enhance the prospect of their securing export contracts, particularly those funded by Multilateral Funding Agencies like the World Bank, Asian Development Bank, African Development Bank and European Bank for Reconstruction and Development. The Bank extends lines of credit to overseas financial institutions, foreign • governments and their agencies, enabling them to finance imports of goods and services from India on deferred credit terms. Exim Bank’s lines of Credit obviate credit risks for Indian exporters and are of particular relevance to SME exporters. 4
The Bank’s Overseas Investment Finance programme offers a variety of • facilities for Indian investments and acquisitions overseas. The facilities include loan to Indian companies for equity participation in overseas ventures, direct equity participation by Exim Bank in the overseas venture and nonfunded facilities such as letters of credit and guarantees to facilitate local borrowings by the overseas venture. The Bank provides financial assistance by way of term loans in Indian • rupees/foreign currencies for setting up new production facility expansion/modernization/upgradation of existing facilities and for acquisition of production equipment/technology. Such facilities particularly help export oriented Small and Medium Enterprises for creation of export capabilities and enhancement of international competitiveness. Under its Export Marketing Finance programme, Exim Bank supports Small and • Medium Enterprises in their export marketing efforts including financing the soft expenditure relating to implementation of strategic and systematic export market development plans. The Bank has launched the Rural Initiatives Programme with the objective of • linking Indian rural industry to the global market. The programme is intended to benefit rural poor through creation of export capability in rural enterprises. In order to assist the Small and Medium Enterprises, the Bank has put in place • the Export Marketing Services (EMS) Programme. Through EMS, the Bank seeks to establish, on best efforts basis, SME sector products in overseas markets, starting from identification of prospective business partners to facilitating placement of final orders. The service is provided on success fee basis. Exim Bank supplements its financing programmes with a wide range of value • added information, advisory and support services, which enable exporters to evaluate international risks, exploit export opportunities and improve competitiveness, thereby helping them in their globalisation efforts. 5
Indian Textile Industry 6
Indian Textile Industry The term ‘Textile' is a Latin word which cones from the word ‘texere' which means ‘to weave'. Textile originally referred to a woven fabric but latter on the term textile as well as the plural textiles refers to fibers, filaments and yarns. Textile industry occupies a significant position in India. The primary contribution of textile industry : Export earning for the country, textile industry occupies 16% of the country's • export earning. Generating employment, second largest employment generator after • agricultural sector Industrial output sums up to 14% of total industrial production and • approximately contributes to 30 % of total export products. The primary sectors which comprise of the textile industry • Manmade fiber mill textile mill industry • Filament yarn industry • Deconcentrated power loom sector • Woolen textile industry • Silk industry • Jute industry • Handicraft industry Textile industry is constituted of the following segments • Readymade Garments • Cotton Textiles including Handlooms (Millmade / Powerloom/ Handloom) • Manmade Textiles • Silk Textiles • Woollen Textiles • Handicrafts including Carpets 8
• Coir • Jute Advantages and Limitations of Textile Industry Indian textile industries enjoy certain favorable factors which contribute in retaining its leading position in national and international scenario. These factors can be fully utilized to ensure further growth and development. Large raw material base including cotton, wool, silk, jute and other manmade • fibers. Huge capacity of production • Easy accessibility to large scale skilled man power • Entrepreneurship • Flexible production process • But there are certain limitations as well which constrict the pace of growth in textile sector. The whole industry is split up • Cotton quality • Limitation and hazards in procedure of processing • Labor reform problems • Infrastructural limitations and bottlenecks • Major products of textile industries Awnings, textile • Blankets and Towels • Bags or sacks, textile • Blinds, textile • Canvas goods, textile • Fabrics, textile • Felts ( except floor coverings) • Glass fiber fabric • 9
Household linen, Lace • Narrow fabric • Netting, textile • Piece goods • Ropes (except wire ropes) • Sail cloth • Sewing thread / String • Tarpaulin • Trimmings, textile • Yarns • Main aspects of Textile industry Textile apparel which includes clothing and garment • Textile fabric • Fibers, yarns and threads • Textile chemical , Textile products , Textile machinery, Textile services • Textile Industry in India Textile Industry in India is the second largest employment generator after agriculture. It holds significant status in India as it provides one of the most fundamental necessities of the people. Textile industry was one of the earliest industries to come into existence in India and it accounts for more than 30% of the total exports. In fact Indian textile industry is the second largest in the world, second only to China. Textile Industry is unique in the terms that it is an independent industry, from the basic requirement of raw materials to the final products, with huge valueaddition at every stage of processing. Textile industry in India has vast potential for creation of employment opportunities in the agricultural, industrial, organised and decentralised sectors & rural and urban areas, particularly for women and the disadvantaged. Till the year 1985, development of textile sector in India took place in terms of general policies. In 1985, for the first time the importance of textile sector was recognized and a separate policy statement was announced with regard to development of textile sector. In the year 2000, National Textile Policy was announced. Its main objective was: to provide cloth of acceptable quality at reasonable prices for the vast majority of the population of the country, to increasingly contribute to the provision of sustainable employment and the economic growth of the nation; and to compete with confidence for an increasing share of the global market. The policy also aimed at achieving the target of textile and apparel exports of US $ 50 billion by 2010 of which the share of 10
garments will be US $ 25 billion. Strengths of Indian textile Industry India has rich resources of raw materials of textile industry. It is one of the • largest producers of cotton in the world and is also rich in resources of fibres like polyester, silk, viscose etc. India is rich in highly trained manpower. The country has a huge advantage due • to lower wage rates. Because of low labor rates the manufacturing cost in textile automatically comes down to very reasonable rates. India is highly competitive in spinning sector and has presence in almost all • processes of the value chain. Indian garment industry is very diverse in size, manufacturing facility, type of • apparel produced, quantity and quality of output, cost, requirement for fabric etc. It comprises suppliers of readymade garments for both, domestic or export markets. Weaknesses of Indian textile Industry Indian textile industry is highly fragmented in industry structure, and is led by • small scale companies. The reservation of production for very small companies that was imposed with the intention to help out small scale companies across the country, led substantial fragmentation that distorted the competitiveness of industry. Smaller companies do not have the fiscal resources to enhance technology or invest in the highend engineering of processes. Hence they lose in productivity. Indian labour laws are relatively unfavorable to the trades and there is an • urgent need for labour reforms in India. India seriously lacks in trade pact memberships, which leads to restricted • access to the other major markets. Outlook for Indian textile Industry The outlook for textile industry in India is very optimistic. It is expected that Indian textile industry would continue to grow at an impressive rate. Textile industry is being 11
modernized by an exclusive scheme, which has set aside $5bn for investment in improvisation of machinery. India can also grab opportunities in the export market. The textile industry is anticipated to generate 12mn new jobs in various sectors. The textile industry is the largest industry of modern India. It accounts for over 20 percent of industrial production and is closely linked with the agricultural and rural economy. It is the single largest employer in the industrial sector employing about 38 million people. If employment in allied sectors like ginning, agriculture, pressing, cotton trade, jute, etc. are added then the total employment is estimated at 93 million. The net foreign exchange earnings in this sector are one of the highest and, together with carpet and handicrafts, account for over 37 percent of total export earnings at over US $ 10 billion. Textiles, alone, account for about 25 percent of India’s total forex earnings. India’s textile industry since its beginning continues to be predominantly cotton based with about 65 percent of fabric consumption in the country being accounted for by cotton. The industry is highly localised in Ahmedabad and Bombay in the western part of the country though other centres exist including Kanpur, Calcutta, Indore, Coimbatore, and Sholapur. The structure of the textile industry is extremely complex with the modern, sophisticated and highly mechanised mill sector on the one hand and the handspinning and handweaving (handloom) sector on the other. Between the two falls the smallscale powerloom sector. The latter two are together known as the decentralised sector. Over the years, the government has granted a whole range of concessions to the nonmill sector as a result of which the share of the decentralised sector has increased considerably in the total production. Of the two subsectors of the decentralised sector, the powerloom sector has shown the faster rate of growth. In the production of fabrics the decentralised sector accounts for roughly 94 percent while the mill sector has a share of only 6 percent. Being an agrobased industry the production of raw material varies from year to year depending on weather and rainfall conditions. Accordingly the price fluctuates too. India's trade in textiles and its share in world trade can be categorized as follows: India’s Trade in Textiles Annual Growth Rate Compound (CAGR) of different segments (1998) Type India's Share in Type CAGR (1993-98) World Trade Yarn 31.79% 12 Fabric 9.04% Made-ups 15.18%
Yarn 22% Fabrics 3.2% Apparel 2% Made-ups 9% Over-all 2.8% 13
SECTOR- WISE ANALYSIS (i) Readymade Garments: Readymade Garments account for approximately 45% of the country’s total textiles exports. During the year 2004–2005, Readymade Garment exports were US$ 6 billion, recording an increase of 4.1% as compared to the corresponding period of 200304. During 20052006 the Readymade Garment exports have amounted to US$ 7.75 billion, recording an increase of 28.69 % over the exports during 20042005. During the first quarter of 20062007 the Readymade Garment exports have amounted to US$ 2.17 billion, recording an increase of 15.70% over the exports during the corresponding period of 20052006. (ii) Cotton Textiles including Handlooms: Cotton Textiles i.e. yarn, fabrics and madeups (Mill made / Powerloom/ Handloom) constitute more than 2/3rd of our exports of all fibres/yarns/madeups. During 2004–2005, Cotton Textile exports including Handlooms were US$ 3.54 billion, recording a decline of 1.5% as compared to the corresponding period of 200304. During 20052006 the Cotton Textiles exports have amounted to US$ 4.49 billion, recording a healthy increase of 26.78% over the exports during the corresponding period of 20042005. During the first quarter of 2006 2007 the Cotton Textiles including Handlooms exports have amounted to US$ 1.25 billion, recording an increase of 25.70% over the exports during the corresponding period of 20052006. (iii) Man-made Textiles: During 2004 –2005, manmade Textiles exports were US$ 2.05 billion, recording a growth of 12.6% as compared to the corresponding period of 200304. During 20052006 the manmade Textile exports have amounted to US$ 2.00 billion, recording a decline of 2.47% over the exports during the corresponding period of 20042005. During the first quarter of 20062007 the Man made Textiles exports have amounted to US$ 0.52 billion, recording an increase of 13.15% over the exports during the corresponding period of 20052006. (iv) Silk Textiles: During 2004–2005, Silk Textiles exports were US$ 0.59 billion, recording a growth of 9.0% as compared to the corresponding period of 200304. During 20052006 the silk exports have amounted to US$ 0.69 billion, recording an increase of 16.37% over the exports during the corresponding period of 20042005. During the first quarter of 20062007 the Silk Textiles exports have amounted to US$ 0.165 billion, recording an increase of 4.23% over the exports during the corresponding period of 20052006. 14
(v) Woolen Textiles: During 2004–2005, woolen Textiles exports were US$ 0.42 billion, recording a growth of 23.4% as compared to the corresponding period of 2003 04. During the period of AprilMarch, 20052006 the woolen Textile exports have amounted to US$ 0.47 billion, recording an increase 13.63% over the exports during the corresponding period of 20042005. During the first quarter of 20062007 the Woolen Textiles exports have amounted to US$ 0.114 billion, recording an increase of 11.96% over the exports during the corresponding period of 20052006. (vi) Handicrafts including Carpets: During 2004 –2005, handicrafts including carpet exports were US$ 1.01 billion, showing a decline of 6.6% as compared to the corresponding period of 200304. During 20052006 the handicrafts exports have amounted to US$ 1.24 billion, recording an increase of 22.24% over the exports during 20042005. During the first quarter of 20062007 the Handicrafts including Carpets exports have amounted to US$ 0.301 billion, recording a marginal decline of 1.31% over the exports during the corresponding period of 20052006. (vii) Coir: During 2004 –2005, coir exports were US$ 0.106 billion, recording a growth of 35.7% as compared to the corresponding period of 200304. During 2005 2006 the coir exports have amounted to US$ 0.134 billion recording an increase of 27.19% over the exports during 20042005. During the first quarter of 20062007 the Coir exports have amounted to US$ 0.032 billion, recording an increase of 10.03% over the exports during the corresponding period of 20052006. (viii) Jute: During 2004 –2005, jute exports were US$ 0.276 billion, recording a growth of 14% as compared to the corresponding period of 200304. During 2005 2006 the Jute exports have amounted to US$ 0.295 billion, recording an increase of 6.64% over the exports during the corresponding period of 20042005. 15
Global Scenario The textile and clothing trade is governed by the MultiFibre Agreement (MFA) which came into force on January 1, 1974 replacing shortterm and longterm arrangements of the 1960’s which protected US textile producers from booming Japanese textiles exports. Later, it was extended to other developing countries like India, Korea, Hong Kong, etc. which had acquired a comparative advantage in textiles. Currently, India has bilateral arrangements under MFA with USA, Canada, Australia, countries of the European Commission, etc. Under MFA, foreign trade is subject to relatively high tariffs and export quotas restricting India’s penetration into these markets. India was interested in the early phasing out of these quotas in the Uruguay Round of Negotiations but this did not happen due to the reluctance of the developed countries like the US and EC to open up their textile markets to Third World imports because of high labour costs. With the removal of quotas, exports of textiles have now to cope with new challenges in the form of growing nontariff / nontrade barriers such as growing regionalisation of trade between blocks of nations, child labour, antidumping duties, etc. Nevertheless, it must be realised that the picture is not all rosy. It is now being admitted universally and even officially that the year 2005 AD is likely to present more of a challenge than opportunity. If the industry does not pay attention to the very vital needs of modernisation, quality control, technology upgradation, etc. it is likely to be left behind. Already, its comparative advantage of cheap labour is being nullified by the use of outmoded machinery. With the dismantling of the MFA, it becomes imperative for the textile industry to take on competitors like China, Pakistan, etc., which enjoy lower labour costs. In fact the seriousness of the situation becomes even more apparent when it is realised that the nonquota exports have not really risen dramatically over the past few years. The continued dominance of yarn in exports of cotton, synthetics, and blends, is another cause for worry while exports of fabrics is not growing. The lack of value added products in textile exports do not augur well for India in a nonMFA world. Textile exports alone earn almost 25 percent of foreign exchange for India yet its share in global trade is dismal, having declined from 10.9 percent in 1955 to 3.23 percent in 1996. More significantly, the share of China in world trade in textiles, in 16
1994, was 13.24 percent, up from 4.36 percent in 1980. Hong Kong, too, improved its share from 7.06 percent to 12.65 percent over the same period. Growth rate, in US$ terms, of exports of textiles, including apparel, was over 17 percent between 199394 to 199596. It declined to 10.5 percent in 199697 and to 5 percent in 199798. Another disconcerting aspect that reflects the declining international competitiveness of Indian textile industry is the surge in imports in the last two years. Imports grew by 12 percent in dollar terms in 199798, against an average of 5.8 percent for all imports into India. Imports from China went up by 50 percent while those from Hong Kong jumped by 23 percent. Global factors influencing textile industry The history of the textile and clothing industry has been replete with the use of various bilateral quotas, protectionist policies, discriminatory tariffs, etc. by the developed world against the developing countries. The result was a highly distorted structure, which imposed hidden costs on the export sectors of the Third World. Despite the fact that GATT was established way back in 1947, the textile industry, till 1994, remained largely out of its liberalisation agreements. In fact, trade in this sector, until the Uruguay Round, evolved in the opposite direction. Consequently, since 1974 global trade in the textiles and clothing sector had been governed by the Multifibre agreement, which was the sequel to an increasingly pervasive quota regime that began with the Shortterm arrangement on cotton products in 1962 and followed by the LongTerm arrangement. After the successful conclusion of the Uruguay Round in 1994, the MFA was replaced by the Agreement on Textiles and Clothing (ATC), which had the same MFA framework in the context of an agreed, ten year phasing out of all quotas by the year 2005. Current Scenario Textile exports are targeted to reach $50 billion by 2010, $25 billion of which will go to the US. Other markets include UAE, UK, Germany, France, Italy, Russia, Canada, Bangladesh and Japan. The name of these countries with their background can give thousands of insights to a thinking mind. The slant cut that will be producing a readymade garment will sell at a price of 600 Indian rupees, making the value addition to be profitable by 300 %. Currently, because of the lifting up of the import restrictions of the multifibre arrangement (MFA) since 1st January, 2005 under the World Trade Organization 17
(WTO) Agreement on Textiles and Clothing, the market has become competitive; on closer look however, it sounds an opportunity because better material will be possible with the traditional inputs so far available with the Indian market. At present, the textile industry is undergoing a substantial reorientation towards other then clothing segments of textile sector, which is commonly called as technical textiles. It is moving vertically with an average growing rate of nearly two times of textiles for clothing applications and now account for more than half of the total textile output. The processes in making technical textiles require costly machinery and skilled workers. The application that comes under technical textiles are filtration, bed sheets and abrasive materials, healthcare upholstery and furniture, bloodabsorbing materials and thermal protection, adhesive tape, seatbelts, and other specialized application and products. Strengths India enjoys benefit of having plentiful resources of raw materials. It is one of the largest producers of cotton yarn around the globe, and also there are good resources of fibres like polyester, silk, viscose etc. There is wide range of cotton fibre available, and has a rapidly developing synthetic fibre industry. India has great competitiveness in spinning sector and has presence in almost all processes of the value chain. Availability of highly trained manpower in both, management and technical. The country has a huge advantage due to lower wage rates. Because of low labor rates the manufacturing cost in textile automatically comes down to very reasonable rates. The installed capacity of spindles in India contributes for 24% share of the world, and it is one of the biggest exporters of yarns in the global market. Having modern functions and favorable fiscal policies, it accounts about 25% of the world trade in cotton yarn. The apparel industry is largest foreign exchange earning sector, contributing 12% of the country's total exports. The garment industry is very diverse in size, manufacturing facility, type of apparel produced, quantity and quality of output, cost, requirement for fabric etc. It comprises suppliers of readymade garments for both, domestic or export markets. 18
Weakness Massive Fragmentation: A major loophole in Indian textile industry is its huge fragmentation in industry structure, which is led by small scale companies. Despite the government policies, which made this deformation, have been gradually removed now, but their impact will be seen for some time more. Since most of the companies are small in size, the examples of industry leadership are very few, which can be inspirational model for the rest of the industry. The industry veterans portrays the present productivity of factories at half to as low as onethird of levels, which might be attained. In many cases, smaller companies do not have the fiscal resources to enhance technology or invest in the highend engineering of processes. The skilled labor is cheap in absolute terms; however, most of this benefit is lost by small companies. The uneven supply base also leads barriers in attaining integration between the links in supply chain. This issue creates uncontrollable, unreliable and inconsistent performance. Political and Government Diversity: The reservation of production for very small companies that was imposed with an intention to help out small scale companies across the country, led substantial fragmentation that distorted the competitiveness of industry. However, most of the sectors now have been dereserved, and major entrepreneurs and corporate are puttingin huge amount of money in establishing big facilities or in expansion of their existing plants. Secondly, the foreign investment was kept out of textile and apparel production. Now, the Government has gradually eliminated these restrictions, by bringing down import duties on capital equipment, offering foreign investors to set up manufacturing facilities in India. In recent years, India has provided a global manufacturing platform to other multinational companies that manufactures other than textile products; it can certainly provide a base for textiles and apparel companies. Despite some motivating step taken by the government, other problems still sustains like various taxes and excise imbalances due to diversification into 35 states and Union Territories. However, an outline of VAT is being implemented in place of all other tax diversifications, which will clear these imbalances once it is imposed fully. 19
Labour Laws: In India, labour laws are still found to be relatively unfavorable to the trades, with companies having not more than ideal model to follow a 'hire and fire' policy. Even the companies have often broken their business down into small units to avoid any trouble created by labour unionization. In past few years, there has been movement gradually towards reforming labour laws, and it is anticipated that this movement will uphold the environment more favorable. Distant Geographic Location: There are some highlevel disadvantages for India due to its geographic location. For the foreign companies, it has a global logistics disadvantage due the shipping cost is higher and also takes much more time comparing to some other manufacturing countries like Mexico, Turkey, China etc. The inbound freight traffic has been also low, which affects cost of shipping though, movement of containers are not at reasonable costs. Lack of trade memberships: India is serious lacking in trade pact memberships, which leads to restricted access to the other major markets. This issue made others to impose quota and duty, which put scissors on the sourcing quantities from India. Opportunities It is anticipated that India's textile industry is likely to do much better. Since the consumption of domestic fibre is low, the growth in domestic consumption in tandem is anticipated with GDP of 6 to 8 % and this would support the growth of the local textile market at about 6 to 7 % a year. India can also grab opportunities in the export market. The industry has the potential of attaining $34bn export earnings by the year 2010. The regulatory polices is helping out to enhance infrastructures of apparel parks, Specialized textile parks, EPZs and EOUs. The Government support has ensured fast consumption of clothing as well as of fibre. A single rate will now be prevalent throughout the country. The Indian manufacturers and suppliers are improving design skills, which include different fabrics according to different markets. Indian fashion industry and fashion 20
designers are marking their name at international platform. Indian silk industry that is known for its fine and exclusive brocades, is also adding massive strength to the textile industry. The industry is being modernized via an exclusive scheme, which has set aside $5bn for investment in improvisation of machinery. International brands, such as Levis, Wal Mart, JC Penny, Gap, Marks & Spencer and other industry giants are sourcing more and more fabrics and garments from India. Alone WalMart had purchased products worth $200mn last year and plans to increase buying up to $3bn in the coming year. The clothing giant from Europe, GAP is also sourcing from India. Anticipation As a result of various initiatives taken by the government, there has been new investment of Rs.50,000 crore in the textile industry in the last five years. Nine textile majors invested Rs.2,600 crore and plan to invest another Rs.6,400 crore. Further, India's cotton production increased by 57% over the last five years; and 3 million additional spindles and 30,000 shuttleless looms were installed. Forecast till 2010 for textiles by the government along with the industry and Export Promotion Councils is to attain double the GDP, and the export is likely attain $85bn. The industry is anticipated to generate 12mn new jobs in various sectors. 21
Multi –Fibre Agreement (MFA) On January 1st, 1974, the Arrangement Regarding the International Trade in Textiles, otherwise known as the MFA came into force. It superseded all existing arrangements that had been governing trade in cotton textiles since 1961. The MFA sought to achieve the expansion of trade, the reduction of barriers to trade and the progressive liberalisation of world trade in textile products, while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production in both importing and exporting countries. Though it was supposed to be a shortterm arrangement to enable the adjustment of the industry to a free trade regime, the MFA was extended in 1974, 1982, 1986, 1991, and 1992. Because of the quotas allotted, the MFA resulted in a regular shift of production from quota restricted countries to less restricted ones as soon as the quotas began to cause problems for the traders in importing countries. The first three extensions of the MFA, instead of liberalising the trade in textiles and clothing, further intensified restrictions on imports, specifically affecting the developing country exporters of the textile and clothing products. Increased usage of several MFA measures tended to further erode the trust which developing countries had originally placed in the MFA. The MFA set the terms and conditions for governing quantitative restrictions on textile and clothing exports of developing countries either through negotiations or bilateral agreements or on a unilateral basis. The bilateral agreements negotiated between importing and exporting country’s contained provisions relating to the products traded but they differed in the details. The restraints under the MFA were often negotiated, or unilaterally imposed at relatively short intervals, practically annually. The quotas could be either by function or fibre 22
Under the MFA, product coverage was extended to include textiles and clothing made of wool and manmade fibres (MMF), as well as cotton and blends thereof. With regard to applications of safeguard measures, import restrictions could be imposed unilaterally in a situation of actual market disruption in the absence of a mutually agreed situation. However, in situations involving a real risk of market disruption only bilateral restraint agreements were possible. The Textile Surveillance Body (TSB) was set up to monitor disputes regarding actions taken in response to market disruptions. The MFA permitted certain flexibility in quota restrictions for the exporters so that they could adjust to changing market conditions, export demands and their own capabilities. The MFA also provided for higher quotas and liberal growth for developing countries whose exports were already restrained. The MFA asked the participants to refrain from restraining the trade of small suppliers under normal circumstances. In general, developed countries, under MFA, chose not to impose restrictions on imports from other developed countries The TSB ensured compliance by all parties to the obligations of bilateral agreements or unilateral agreements. It called for notification of all restrictive measures. A Textiles Committee – established as a management body consisting of all member countries – was the final arbiter under the MFA and worked as a court of appeal for disputes that could not be resolved under TSB. The eventual outcome of prolonged negotiations was the Agreement on Textiles and Clothing. Agreement on Textiles and Clothing (ATC) The ATC calls for a progressive phasing out of all the MFA restrictions and other discriminatory measures in a period of 10 years. In contrast to the MFA, the ATC is applicable to all members of the WTO. The Agreement on Textiles and Clothing (ATC) is made to abolish MFA quotas marked a significant turnaround in the global textile trade. The ATC mandated progressive phase out of import quotas established under MFA, and the integration of textiles and clothing into the multilateral trading system before January 2005. Estimated Gains in USA and EU For China and India 23
(US $ Billions) Textiles Clothing Total Markets Present Future (2014) Present (2003) Future (2014) 2014 (2003) Gains in China India China India China India China India China India USA 3.6 1.5 13.0 5.0 12.0 2.3 67 13 80 18 (20) (8.4) (32) (13.5) (16.9) (3.2) (42) (8) (40) (9) EU 2.8 1.9 12 8 12.3 3.0 60 16 72 24 (5.3) (3.2) (12) (8) (12.2) (3.0) (30) (8) (24) (8) Textiles and Garments Exports from India The share of textiles and garments exports in India’s total exports in the year 200304 stood at about 20 percent, amounting to US $ 12.5 billion. The quota countries, USA, EU and Canada accounted for nearly 70 percent of India’s garments exports and 44 percent of India’s textile exports. Amongst nonquota countries, UAE is the largest market for Indian textiles and garments; UAE accounted for 7 percent of India’s total textile exports and 10 percent of India’s garments exports. In terms of products, cotton yarn, fabrics and madeups are the leading export items in the textile category. In the clothing category, the major item of exports was cotton readymade garments and accessories. However, in terms of share in total imports by EU and USA from India, these products hold relatively lesser share than products made of other fibers, thus showing the restrain in this category. Critical Factors that Need Attention Though India is one of the major producers of cotton yarn and fabric, the productivity of cotton as measured by yield has been found to be lower than many countries. The level of productivity in China, Turkey and Brazil is over 1 tonne / hector, while in India it is only about 0.3 tonne / hector. In the manmade fiber sector, India is ranked at fifth position in terms of capacity. However, the capacity and technology infusion in this sector need to be further enhanced in view of the changing fiber consumption in the world. It may be mentioned that the share of cotton in world fiber demand declined from around 50 percent (14.7 mn tons) in 1982 to around 38 percent (20.12 mn tons) 24
in 2003, while the share of manmade fiber has increased from 44 percent (13.10 mn tons) to around 60 percent (31.76 mn tons) over the same period. Apart from low cost labour, other factors that are having impact on final consumer cost are relative interest cost, power tariff, structural anomalies and productivity level (affected by technological obsolescence). A study by International Textile Manufacturers Federation revealed high power costs in India as compared to other countries like Brazil, China, Italy, Korea, Turkey and USA. Percentage share of power in total cost of production in spinning, weaving and knitting of ring and OE yarn for India ranged from 10 percent to 17 percent, which is also higher than that of countries like Brazil, Korea and China. Percentage share of capital cost in total production cost in India was also higher ranging from 20 percent to 29 percent as compared to a range of 12 to 26 percent in China. In India, very few exporters have gone in for integrated production facility. It is noted that countries that would emerge as globally competitive would have significantly consolidated supply chain. For instance, competitor countries like Korea, China, Turkey, Pakistan and Mexico have a consolidated supply chain. In contrast, apart from spinning, the rest of the activities like weaving, processing, madeups and garmenting are all found to be fragmented in India. Besides, the level of technology in the Indian weaving sector is low compared to other countries of the world. The share of shuttle less looms to total loomage in India is 1.8% as compared to Indonesia (10%), Bangladesh (10%), Sri Lanka (12%), China (14%) and Mexico (29%). The supply chain in this industry is not only highly fragmented but is beset with bottlenecks that could very well slow down the growth of this sector. As a result the average delivery lead times (from procurement to fabrication and shipment of garments) still takes about 4560 days. With international lead delivery times coming down to 3035 days, India needs to cut down the production cycle time substantially to stay in the market. Besides, erratic supply of power and water, availability of adequate road connectivity, inadequacies in port facilities and other export infrastructure have been adversely affecting the competitiveness of Indian textiles sector. 25
Measures taken by Government To promote exports of textiles from the country and to strengthen the textiles sector of the country, Government has taken a number of measures from time to time as follows: (i) To improve productivity and quality of cotton for manufacture and export of competitive downstream textile products, Government has launched the Technology Mission on Cotton (TMC). The Mission has achieved success in increasing the productivity and reducing the contamination through upgradation of cotton market yards and modernisation of Ginning & Pressing factories. (ii) The Technology Upgradation Fund Scheme (TUFS) was launched to facilitate the modernization and upgradation of the textile industry both in the organized and unorganized sector. The Scheme has been further fine tuned to increase the rapid investments in the targeted subsectors of the textile industry. The cost of machinery has been further brought down by reducing the customs duty on imports. (iii) To provide the textile industry with worldclass infrastructure facilities for setting up their textile units meeting international environmental and social standards, a Public 26
Private Partnership (PPP) based Scheme known as the “Scheme for Integrated Textile Park (SITP)” has been introduced in August 2005. (iv) In 200405 Budget, the entire textile sector, except for manmade fibre and filament yarn was provided optional exemption from excise duty. In 200506 Budget, Central Valueaided Tax (CENVAT) on Polyester Filament Yarn has been reduced from 24% to 16%. These modifications in fiscal levies aim at attracting more investments for modernization of textile sector. (v) To facilitate import of state of the art machinery to make our products internationally competitive in post quota regime, in 200506 Budget, the customs duty on textile machinery has been brought down to 10% except 23 machinery appearing in List 49 which attracts Basic Customs Duty (BCD) of 15%. The concessional duty of 5% continues to be at 5% on most of the machinery items. (vi) Government has launched the Debt Restructuring Scheme w.e.f. Sept., 2003 with the principal objective to permit banks to lend to the textile sector at 89% rate of interest. (vii) Government has allowed 100% Foreign Direct Investment in the textile sector under automatic route. (viii) Government has dereserved the readymade garments, hosiery and knitwear from SSI sector so that large scale investments may be encouraged in these sectors. (ix) National Institute of Fashion Technology (NIFT) has been set up to provide the leadership role in sensitizing the Industry to the concept of value addition by inducting trained professionals to manage the industry. This has resulted in an increased demand for trained professionals in various sectors servicing the industry. (x) Government has extended a number of relief measures to textiles exporters such as enhanced DEPB & Duty drawback rates, reduced ECGC premium, subvention on credit rates, refund of service tax paid by exporters on various services etc.; (xi) Apparel Training Design Centres (ATDCs) have been set up throughout the country to cope up the requirement of skilled / semiskilled manpower for the textile industry. 27
(xii) To take a serious look at Fashion Education in the changing business context of the opening up of World Economies, Government is taking steps for: a) Establishing an institution of National Excellence for imparting Fashion Business Education with International Benchmarking. b) Appointing a nodal agency for standardizing and benchmarking Fashion Business Education in the country. c) Setting up an Apex Body to train the teachers / trainers imparting Fashion Business Education in the country. How to promote Textile exports For promotion of exports the measures which should be taken up are Up gradation of textiles sector • Simplifying the procedures and bringing down transaction costs; • Procedures for obtaining trading licences were also relaxed and simplified • and public awareness of licensing rules and regulations increased. Reinforce export promotion, especially with India, by market studies to • explore the potential for textile industry. 28
Conduct training courses/workshops for the private sector on export • documentation procedures, business negotiation, changes in the world trade scenario and adjustments required. Liaise with the Government of India with regard to the road, transit, customs • and related facilities in India. Promoting innovation in both products and production processes, through • increased research and development, the uptake of new technologies, and leading edge design that meets customer needs and expectations; Improving market access and development through better servicing and • developing the domestic market, identifying and developing export markets, and ensuring interested domestic firms have appropriate products and processes; Policy level decision to achieve export target • Woven segment of readymade garment sector and knitwear have been de • reserved Technology Upgradation Fund Scheme to be pursued till next five years • Liberalization of FDI Policy with up to 100 per cent foreign equity • participation Import of capital goods at 5% concession rate of duty with appropriate • export obligation under Export Promotion Capital Goods (EPCG) Scheme and clearly laid out EXIM • policy Advance Licensing Scheme with standard inputoutput norms • Prescribed Duty Exemption Pass Book (DEPB) Scheme credit rates • Duty Drawback Scheme wherein the exporters are allowed refund of the • excise and import duty loss on raw materials Construction of Apparel International Mart by Apparel Export Promotion • Council to provide a world class facility to the apparel exporters to exhibit products and built international reputation Setting up of quality checking laboratories • Apparel Park for Exports Scheme to invite international production units • along with inhouse production floors. By putting more retail outlets, with better value added products, • By taking the lowest end of the chain into confidence and building their • capability to innovate more and more. By upholding the market knowledge at every level that happens at higher • end that lifts the chain. 29
By building on the expertise for technical textiles that include bed sheets; • filtration and abrasive materials; furniture and healthcare upholstery; thermal protection and bloodabsorbing materials; seatbelts; adhesive tape, etc which need skilled
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