Tie and die

That there is a divergence of views on whether India will be able to achieve the textile ministry's export target of $50 billion by the end of the decade is not surprising. Those who argue that India will not be able to make the cut, point to how China's share of global exports rose from 31.7 per cent in 1995 to 47.8 per cent in 2003, while India's rose from 7.2 per cent to 8.3 per cent. Exports to the US and the EU in the first half of 2005 show a similar trend, with China's growth outpacing India's by multiples. There is also the rapid rise in the market share of countries like Turkey, especially in Europe, while both the US and the EU have offered tariff exemptions to countries in Eastern Europe.

The more optimistic counter-argument is equally simple: India's exports have grown despite being constrained by quotas""since these quotas commanded a price, the elimination of quotas will make India's exports more competitive. The data also show that India's non-quota trade has grown faster than the export of items subjected to quota limits""suggesting that even these latter would do better in the absence of quotas. Besides, now that small-scale reservation has been done away with, and generous investment incentives are being offered, India's textile investments have picked up; additional capacity will certainly translate into faster export growth.

What happens to textile export volumes, however, is just one part of the story, and doesn't take into account the changes that liberalisation of the global textile trade causes in terms of a decline in prices. A recent IMF working paper constructs a general equilibrium model to estimate the overall result of the change in prices as a result of textile liberalisation. The results are an eye-opener. First, it appears to be the case that the major part of the welfare gains will be to consumers in the US and the EU through lower prices of imports. The analysis also shows that, in case all quotas are removed, India will be a net loser""thanks to the expected reduction in per unit prices (China, in contrast, will be a net gainer). In an alternative scenario, where restrictions are imposed on China (as they have been), the welfare loss for India will be less.

However, when the impact in other areas such as food and other prices is also factored in, the equation changes slightly. The conclusion, however, remains uncomfortably clear. Unless India's export volumes increase significantly, enough to offset the fall in textile prices, the country could end up losing (or gaining very marginally) from the freeing of global textile trade. The policy conclusions that can prevent this end-result are well-known and include, primarily, the liberalisation of labour laws so as to encourage large-scale production and investment. This applies not just to textiles but to other areas as well. In a situation where unit profits are declining, volumes become the name of the game, and unless Indian companies are in a position to scale up to play this game, the country could well be a net loser in the textile sector.