India needs to open up textile sector: McKinsey

India needs to eliminate various restrictions which result in poor operational and organisational performance of local textile manufacturers. This also discourage investment, particularly foreign direct investment, in the country's apparel-export industry.

According to consultancy firm McKinsey's report on 'Freeing India's textile industry', regulations still protect small scale producers in a number of ways. While the production of ready-made garments is no longer reserved for small-scale players, a few product markets such as hosiery are still there.

In addition, Indian manufacturers often set up small plants to take advantage of labour laws and a complex and inefficient tax regime that tends to favor small factories. As a result, Indian clothing plants typically have 10-20 per cent of the machineries that Chinese plants have.

Union textile minister Shankarsinh Vaghela had recently said that "the scope of marketing the Indian textile industry is bright. Our present textile exports are pegged at around Rs 25,000 crore and we will make all the efforts to increase it to Rs 80,000 crore. "

"The end of the quota regime will lead to a shake up in the sourcing bases of retailers. The entry of more players in the global market would mean pressure on prices. It would also lead to further squeeze on lead times. Operational excellence would be a necessity to meet the buyers' need on price and lead times. Over 90 per cent of the textile manufacturers are fragmented and unorganised and will be worst hit by Chinese competition post-quota regime," said Raghav Gupta, associate director, KSA Technopak.

KSA Technopak is a joint venture of Krut Salmon Associates, one of the world's largest management consulting firm specialising in textile, consumer goods and retail sectors.

According to the report, duties of around 25 per cent on fabric imports limit the ability of Indian manufacturers to produce apparel made from a wide range of fabrics, thus making these companies less competitive in the global market.

"To encourage the Indian manufacturers to build scale, the government should relax labour laws, remove all remaining set-asides for the small scale players, and further reduce import duties on apparel, textiles, and machinery to 10 per cent level, the current standard in majority of the Asian countries."

"Gujarat being one of the leading textile exporter in the country has taken various policy reforms in the textile sector, which include setting up of special economic zone for the textile sector, with relaxed labour laws and no import duty. With Gujarat accounts for over 25 per cent of the Indian textile exports, the state government will come up with a policy to boost the textile and apparel industry in the state to be competitive in the post quota regime of the World Trade Organisation," said Anil Patel, state minister of textiles.

The report states that India must reform its local market in order to attract foreign direct investment, which has spurred growth in China's apparel-export industry.

Restrictions on hiring and firing, including a law compelling companies with more than 100 workers to obtain government approval before reducing their work force, should be removed.

All indirect taxes on manufactured goods, such as excise and central and state sales taxes, should be replaced by a single nationwide value-added tax. And the total taxes on manufactured goods should be reduced from 25 to 30 per cent of the wholesale price to 15 per cent, the current level in China, the report said.

Other desirable government-led reforms that would help attract foreign investment and intensify competition include improving India's infrastructure such as port capacity, and creating manufacturing clusters, so called apparel parks.

Eliminating barriers to competition forces manufacturers to improve their organisations, the Indian apparel companies suffer from a much higher rate of absenteeism and more shipping delays than average Asian exporter.

"India is all set to win over five per cent of the global apparel-exports in the next three years. With the full-blown reforms, it is estimated that Indian exports could increase by over 15-18 per cent annually, much higher than the historical growth rate of six per cent. The expansion would enable India to win over five per cent of the global apparel exports market by 2008 and to capture $25 billion to $30 billion by 2013," states the report.