Anil K Kanungo: Time to foster competitiveness

Financial subsidies that are not WTO-compatible will have to be phased out and GSP benefits will not be available for long. Things have just got tougher.

The textiles and clothing sector has been given a boost in the recently announced Foreign Trade Policy (FTP). A special focus on the handloom and handicrafts industry has been given in the Annual Supplement to the FTP that includes exemption from duty on the equipment and machinery which are needed for effluent treatment plants required by these industries. These treatments will help to meet environmental and other standards abroad. In a similar measure to further support the cottage and fledgling industrial sector, the export obligation period has been extended from eight to 12 years. The government is further creating an environment which should attract an investment of Rs 1,40,000 crore in the 11th Plan period which will push the country's textiles and garment exports from the current $14 billion to $40 billion. All these measures look fine, but given the position the textiles industry in India currently is, they need a thorough analysis.

Today, the textiles and clothing industry occupies a significant place in India's economy. It is the largest foreign exchange earner (about 35 per cent of the forex coffers), contributing to over 20 per cent of India's exports and 14 per cent of the industrial output, securing more than 5 per cent of the country's GDP and providing direct employment to 38 million people belonging primarily to weaker sections of the society, including women. It is the second most important sector after agriculture.

The Indian textile industry is a fairly mature one. Since the 19th and early 20th centuries, this industry has formed the backbone of India's economy and fuelled the country's growth by exporting a wide variety of products to the outside world in spite of the restrictive and arbitrary quota regime followed since the establishment of the Multi Fibre Arrangement in 1974. Its major components have been mills, power looms and handlooms. Though the mill sector have been organised, mechanised and modernised, the power loom and the handloom sectors have remained at a disadvantageous position. The lack of infrastructural and technological support and competition from the mill sector, even from the neighbouring countries, have weakened this industry to a large extent. The saving grace has been the potential of the mill sector which has managed to retain a reasonably high share of exports in the world market. Indian textiles and clothing have been contributing about 27-30 per cent of India's overall export trade. With China being the leading exporter of textiles in the world, having a share of more than 10 per cent followed by Korea with 8.1 per cent, India hovers around with a share of 3.5-4 per cent in the world market. If one were to consider the world's clothing exports, China holds a share of 18.5 per cent followed by Italy with 6.7 per cent and India garnering about 3 per cent.

A 3-4 per cent share in the world market may look meagre stastically but in actual monetary terms, it indicates a huge sum. All these data signify the growing importance and potentiality of this sector. Financial help such as subsidies that are not WTO-compatible, will also have to be phased out in a gradual manner. Even benefits like GSP which are available to the Indian textiles and clothing sector may not be available for a long time in view of the increasing share of Indian textiles and clothing in the world markets. All these factors suggest that the Indian textiles and clothing industry will have to compete in the global market based solely on its intrinsic strength and competitive edge. Much is at stake if we choose to ignore the challenges unfolding before the industry in the wake of the quota free regime. The survival and growth of the industry will depend on how fast it prepares itself to face the stiff competition from the world market.

Today, the textile industry faces a host of constraints. A fragmented structure with dominance of the small scale sector, high power costs, interest rates and transaction costs, unfriendly labour laws and logistical disadvantage in terms of shipping costs and time are posing serious threats to its growth. Foreign investments are not coming in as the overall factors influencing the industry are not investment friendly.

Notwithstanding the fact that India is perceived to be a country with a huge potential owing to its superior design and processing capabilities, a large base of skilled and cheap labour, multi-fibre raw material and a large and growing domestic market, it is still unable to capitalise on its market share.

On the other hand, the opening up of the textile sector after the MFA phaseout has posed both an opportunity and a threat to India. An opportunity exists because the phaseout is going to provide a huge market without restrictions of any kind, providing chances to expand and develop new markets, whereas there is a threat in terms of there being no guarantee of a fixed amount of exports and also, exposing the domestic market to competition.

A twin-pronged strategy at the level of the government and the trade should be initiated to meet the challenges. India's core competence in this sector lies in its huge natural resources and factor endowments such as raw cotton and cheap labour. The industry must exploit these before anybody else takes advantage of them. Further, it should invest in R&D, reduce transaction costs and improve raw material base.

The government, on its part, may try to provide market access to Indian exporters through bilateral agreements with large consumer countries, make amendments in the labour and land laws and create an investment friendly environment for foreign investors to pump in resources. The extension of the Technology Upgradation Funding Scheme and higher allocation must be properly utilised to give a facelift to the handloom and power loom sectors. The handloom sector has certain added advantages which need to be exploited. Its ethnicity and offerings in terms of print variety and unique embroidery can attract a huge number of customers from around the world. Among ethnic textiles products, Rajasthani bandini and Sambalpuri and Kanjivarum sarees have charmed the world with their exquisite designs and colourful patterns. Similarly the industry needs to move from lower-end markets to middle level value-for-money markets and export high value added products that meet international standards.

The industry may also contemplate producing a variety of products that could be a mix of cotton and synthetic yarns. There is a huge demand for such mixed products as they are easy to maintain and also cost less as compared to pure cotton products. The diversification of the products range may prove to be hugely beneficial for the industry.

There is no doubt that the Indian textile sector has the potential of leaving an impressive mark on the world market. But what is required is a right mix of strategic planning and action so that strengths are consolidated and weaknesses corrected, opportunities exploited and threats tackled.

The writer is a faculty member at the Indian Institute of Foreign Trade, New Delhi