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1. Executive summary
The textile industry is enormously important for India not only for its historical importance
but also due to the potential it has in the post liberalised era. With the abolishment of Multi
Fibre Agreement and the lifting of quotas as a trade barrier, opportunities are abound in the
world market.
This work is an attempt to understand India’s preparedness for the global competition as well
as the parameters that need to be taken into account for the quota free world of textile and
apparel industry. Our approach is more strategy based than econometric. We analyse China
in particular as a threat and try to chalk out a general action plan that India needs to adopt as
well as the scheme of things that may eventually turn in India’s favour despite the current
appearance of a seemingly uphill task.
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2. Introduction
The global textile industry is going to undergo a substantial change. On the 1st of January,
2005, the Agreement on Textile and Clothing (ATC) will no longer be in enforcement and
consequently, the trade barriers and quota system which used to dominate the textile trade
scene will also disappear.
As a result, the textile industry in India is going to face greatly increasing competition after
2005. Much of this competition will come from China, whose high capacity to produce
textiles is held back today only by the ATC quota system. As in many other countries, India’s
textile sector is one of its oldest industries and tends to be more traditional in terms of
organization and business practices. The traditional nature of the textile sector is likely going
to be a significant barrier to India for stepping up its performance after the elimination of the
quota system.
Recently, India has been very successful at supplying the global service economy, which has
not required the robust build-up in physical activity that industrial sectors require. Clothing
and textiles, unfortunately, falls within the industrial category and even without the
expiration of the ATC, its domestic producers undoubtedly face tough times ahead. The
increased competition from countries like China is only going to expose the relative under
preparedness of the sector even more.
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3. The Indian Textile and Apparel Industry
The structure of the Indian textile industry is both complex and unique. It represents a sharp
contrast to the textile industry in other countries and can be characterized by several aspects.
• Employment of co-automated technology.
• Dualistic manufacturing structure dominated by a fast expanding decentralized or
unorganized small-scale manufacturing segment and a declining, vertically-
integrated, large-scale composite mill segment.
• The industry is dominated by cotton as a primary raw material.
• Existence of a large public sector, which is composed mainly of nationalized and
‘sick’ mills that have been taken over by the government.
• Predominance of the small-scale sector. This might be seen as a major advantage,
for example, in comparison to China. While the Indian textile companies are
capable of producing very small amounts of cloths for its clients, China is only
able to produce large quantities.
During the last decade, the industry displayed rapid growth in output and exports. But
existing structural weaknesses and the current regulatory environment will increasingly
hamper the industry's ability to sustain this performance.
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4. The global scenario: post ATC
The Multi-Fiber Agreement (MFA) in place since 1980’s, provided a framework under
which developed countries including the United States, the European Union and Canada
imposed quotas on exports of yarn textiles and apparel from developing countries. The
Agreement on Textiles and Clothing (ATC) concluded during the Uruguay Round of
multilateral trade negotiations provides for the phase-out of import quotas established under
MFA for a period ending in December 2004. During the ten year transition period, the ATC
agreement calls for a progressive phase out of these quotas and the integration of traded
textile and apparel products within the GATT system which disallow quantitative restrictions
such as import quotas.
During the 1990’s a significant portion of bilateral textile trade from MFA-constrained
suppliers (India, Pakistan, Hong Kong, Korea, Taiwan and China) has shifted to preferential
sources (Mexico, CBI countries). Nevertheless, MFA-constrained suppliers continue to hold
substantial shares of total trade and the removal of MFA quotas is expected to have a
significant impact on global trade in these products as well as to induce a reversal of these
trends in favor of MFA-restricted suppliers.
The implications of post-MFA on U.S. textile and fiber sector will be quite different for
apparel, textile and cotton sectors. Without MFA quotas, U.S. firms currently sourcing
apparel imports from preferential suppliers such as Mexico, CBI, Andean, or AGOA
countries may have economic incentives to shift to Asian suppliers. This has direct
implications on U.S. textile industry since a large share of apparel imports from preferential
sources is made in large part from U.S. fabrics whereas MFA sourced apparels use little U.S.
fabric. This is critical given that the United States is relatively more competitive in capital-
intensive textiles compared to labour intensive apparels. The MFA-induced shift in apparel
imports from preferential to MFA sources will also impact the U.S. textile patterns. In fiber
markets, the United States is a major cotton producer and exporter. It is expected that MFA-
induced changes in textile and apparel global trade will also affect domestic and foreign
demand for fiber inputs. Increases in demand for textiles will have opposing effects on cotton
demand both from adjustments in domestic textile industry as well as from new and
expanding export opportunities in global markets, which could be even larger if further tariff
liberalization takes place.
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5. SWOT analysis of the Indian textiles industry:
We now do a SWOT analysis of the Indian textile industry keeping in mind the global
changes that have taken place in the post quota regime.
STRENGTHS-
WEAKNESS:
1. Fragmented industry
2. Effect of historical govt policies
3. Lower productivity and cost competitiveness
4. Tech obsolescence. Quality is not consistent
5. Caters mainly to the low-end class.
6. Low level of training.
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7. The export-import policy of India changes too frequently due to which it becomes
very difficult for importers to import goods.
OPPORTUNITIES:
4. Large Indian Expatriate community. Hence there is large demand for Indian
garments.
7. Extensive commercial interactions have greatly helped in laying the foundation for
the development of a multi-dimensional relationship between India and the US.
THREATS:
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4. Developed countries are bound to increase the non-tariff barriers like safeguard
measures and anti-dumping duties to protect their domestic industries.
5. Creation of trade blocks on the lines of EU and NAFTA, which runs against the free
and fair trade.
6. Tariff on most of the industrial items have been decreased by 38 percent as against 22
percent deduction in case of readymade garments. The tariff imposed by most of the
developed nations is very high in case of textiles.
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6. Trade factors without quotas: a framework
We now give a basic framework within which the potential of each country can be
ascertained-
1. Business Climate and Infrastructure: Here three factors can be termed as critical-
3. Domestic demand: In countries like India and China, the wealth increase and the
general growth rates are higher than the developed countries. This translates into
higher scope of growth for textiles and apparels also and equips the manufacturer
with opportunities and skills that were previously unavailable.
5. Raw material Input: The availability of local or regional raw material greatly
improves a country’s ability to respond to orders with shorter lead times. As
purchasers consolidate and rationalize their sources, the degree of vertical integration
in countries or firms becomes an important competitiveness factor.
6. Level of Service Provided and Reliability of Supplier: Today’s sourcing decisions are
increasingly based on which factories can best meet customers’ ever-increasing
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requirements. Level of service required by buyers is evolving and that a “full
package” from design to delivery of the finished product, inclusive of fabric and trim
sourcing, right down to the delivery of store-ready items to individual shops is
nowadays being demanded.
7. Market access: In general, suppliers that are not constrained by quotas and/or benefit
from preferential trade agreements have an advantage over quota-constrained as well
as other non-constrained suppliers. Although preferential access to European and U.S.
markets will not be completely removed (since preferential tariffs will remain), it
would be somewhat diluted with the 2005 elimination of MFA quotas and the
extension of such privileges to a larger group of countries.
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7. Chinese Textile Industry: Opportunities and Threat
China is undoubtedly India’s biggest competitor and threat, particularly in the post quota
regime. We thus analyse the Chinese textile industry vis-à-vis the positively and negatively
related factors that it faces. Here, the challenges and struggles with the US textile industry
are also given a thought.
a) For a long term, the advantages of China's textile products in the international market have
not been brought into a full play due to the quota limitation. China's exportation of textile and
clothing products is likely to experience a stage of rapid growth in the post quota era,
especially in the European and American markets that formerly set limitation.
b) After the abolishment of quotas, the Chinese textile industry will attract overseas elements
like funds, advanced technologies, and advanced management, strengthen its cooperation
with various countries in the textile domain, and drive the upgrading of the textile industry.
c) China's advantage on the labour cost is gradually weakening but China still has certain
comparative advantages on certain textile technologies. With the cancellation of quotas, The
Chinese Textile industry may have the opportunities to make investment, set up factories,
and explore diversified markets in North America, Central & South America, Africa, Mid-
East, Europe and neighbouring countries and areas.
a) There exists a global overproduction of textiles and clothing and the profit margin in the
industry is very narrow. The market for China's textile and clothing products is under the
pressures from both advanced countries and developing countries.
d) International trade barriers in the textile and clothing industry still exist. After the
cancellation of the quotas, trade barriers, especially non-tariff barriers like quality,
technological barriers, green barriers, anti-dumping, and anti-subsidy etc will become a
major trade-protecting tool for developed countries.
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8. Recommendations
After studying the Indian and Chinese Textile industry structures in the international
market environment of post quota regime, we can suggest the following steps that should
be useful for the Indian textile industry-
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• Small players should develop supply linkages with big producers. This would
prevent them from getting eliminated in the export markets.
• An unusual suggestion is to look at China as an opportunity rather than a threat.
With more than $60 billion of exports and one of the most cost-effective
destinations for textile products, China can be considered as an important
destination for partnerships and outsourcing.
• Moving up the value chain by offering a strong brand of finished as well designed
goods. Currently India is considered strong only in medium to low value clothes.
• There are also some points in the Chinese industry that may be taken advantage by
the Indian firms-
US threatens to impose safeguards measures on China
Chinese currency is unnaturally devalued, creating a false export
competitiveness
Post WTO, labour norms will have to be adhered to, diminishing
China’s abysmally low labour costs.
• Remove manufacturing of knit garment and fabric from SSI reservation list. This
will help creating the necessary economies of scale.
• Develop ‘apparel parks’ which would aim to develop deep backward and forward
linkages, up to and including yarn at one end and marketing at another.
• An interesting way would be to develop linkages and coordination with the textile
industries in the SAARC region. For instance, raw fibre is exported from India to
Sri Lanka where it is re exported after processing. Such linkages can help in
providing the economy of scale.
• Most importantly, a lot is expected from the government in this area. This includes
rationalising the labour laws, duty structure, promoting fair competition as well as
removing policy biases against certain kinds of fibres and yarns.
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9. References
1. Pant, Manoj (10th September, 2004) The warp in the Indian fabric, The Economic Times,
New Delhi.
2. Bhattacharyya, B. (1999), Non-Tariff Measures on India’s Exports, An Assessment,
Occasional Paper No. 16, Indian Institute of Foreign Trade, New Delhi.
3. Chandra, P. (1999), Competing Through Capabilities, Economic and Political
Weekly, 27 February
4. Prasad, A.C.H. (1997), India’s Competitiveness in Export of Garments in the MFA
Phase-out and Post-MFA Phase-out Periods, Occasional Paper No. 10, Indian
Institute of Foreign Trade, New Delhi.
5. Porter, M.E. (1998), The Competitive Advantage of Nations, The Free Press, New
York.
6. Verma, S. (2001), “Impact of WTO Agreement on Indian Textile and Clothing
Industry” in Chadha, G. K. ed., WTO and the Indian Economy, Deep & Deep
Publications, New Delhi
7. Gokhle, C., Vijaya Katti (1995), Globalising Indian Textiles- Threats and
Opportunities, Tecoya Publication.
8. Salvatore, Dominick (2003), International Economics, John Wiley and Sons.
10. URLs
1. www.wto.org
2. www.atmi.org
3. www.ncto.org
4. www.blonnet.com
5. www.economictimes.indiatimes.com
6. www.equitymaster.com
7. www.sharekhan.com
8. www.businessworldindia.com
9. www.ieport.com
10. www.washingtonpost.com
11. www.icrier.res.in
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11. Appendix
Source: www.wto.org
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Source: www.wto.org
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India: Textile Exports
(US$ m) Target for 2002-03 Achievement 2002-03 (E) Proposed 2003-04
Textiles 12,550 11,648 13,625
- Readymade Garments 6,000 5,500 6,250
- Cotton Textiles 4,250 3,879 4,775
- Man-made Textiles 1,500 1,520 1,750
- Woolen Textiles 350 300 350
- Silk 450 449 500
Handicrafts 2,455 2,390 2,685
- Other and Carpets 2,170 2,134 2,350
- Jute 85 71 85
- Coir 200 185 250
Total (Textiles+ Handicrafts) 15,005 14,038 16,310
Source: www.equitymaster.com
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Source: www. depts.washington.edu
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Source: Prof K. Rangarajan,, Classroom presentation, Challenges and Prospects for Indian Textile Industry,
IIFT, New Delhi.
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Source: Prof K. Rangarajan,, Classroom presentation, Challenges and Prospects for Indian Textile Industry,
IIFT, New Delhi.
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