India banking on Swedish surprise

When Sweden abolished textile quotas, India's exports rose 4.5 times in three years

Talk to almost any expert on India's potential in the post-Quantitative Restrictions world, and each one will talk of how China, not India, will be the main beneficiary of the sharp surge in global trade after January 1, 2005.

Perhaps not without reason, considering how China's market share has risen in the past decade (see graphic), and given how its prices are among the lowest in the world and the scale of its production among the highest.

Well, D K Nair, secretary- general of the Indian Cotton Mills Federation (ICMF), begs to differ, and points out that India and China traditionally compete in different markets, and so the competition is unlikely to be as intense as it is made out to be, at least initially.

The quota-countries of the EU and the US, for instance, account for 70 per cent of Indian textile/clothing exports, but under a fourth of China's, and while Hong Kong and Japan account for just 45 per cent of China's exports, these markets hardly figure in India's scheme of things.

India's main strength is cotton, while that of countries like China, Hong Kong and Taiwan is mainly synthetics. So, according to Nair, when the Multi Fibre Arrangement comes to an end after another 15 months, the biggest beneficiary will be India as it is in these markets that buyers will be freed up in order to hunt for more competitive suppliers. India's competition, in fact, will come from countries like Turkey and the Czech Republic in the EU, and from Mexico in the US markets.

How big the surge in demand for Indian products will be is an open question, and will depend upon India's ability to get over disadvantages relating to the fragmented nature of its industry (see first part of this series yesterday), but a pointer lies in the fact that India's exports to the EU and the US have always been restrained by the availability of quotas.

In 1985, for instance, India utilised just around 86 per cent of its export quotas for different items, but within just two years, India's quota utilisation was over 100 per cent, and it has been that way ever since.

Add to this the fact that, Indian exporters pay an average 30-40 per cent quota price (exporters trade quotas at a premia over the value of exports permitted by each permit), removal of quotas will mean they will get that much more competitive.

An interesting case study of what the post-quota export scenario could look like is that of Sweden which abolished all quotas in 1991 "" after this, India's exports to that country simply surged, from Rs 88 crore in 1991, to Rs 396 crore in 1994. In 1995, as part of the deal for it joining the EU, Sweden re-introduced quotas, and India's exports fell to Rs 208 crore by 1997.

Another pointer to how competitive Indian textile exports are is the fact that over the past decade, India's non-quota exports (that is, to countries where it is competing openly with other global players) have grown much faster than the quota exports "" between 1991-92 and 1999-00, quota exports grew 3.39 times while non-quota exports rose 4.39 times.

What will, however, constrain India's export growth, apart from the fragmented nature of the industry, is the fact that the fabric base and product mix is still very limited, mostly cotton and restricted to the low-end casual wear segment. So, ICMF's Nair argues, even if India has a 10 per cent share in this segment, it will still have only a 3 per cent share in global trade.

To get into the remaining 70 per cent market, India needs to diversify into polyester blends, and produce wider-width fabric of the sort needed for men's suits and jackets. And that can happen only if larger units come up in place of the smaller ones that dominate India's textile space at the moment.