India’s Textile Industry:

What Will Happen When the Quotas are Lifted?

Brian Carver
Christy He
Jonah Hister

Final Project
Presented at GTTL Conference on
June 2, 2004 at the
University of Washington for
Professors Tom Schmitt and Greg Shelton
India’s Textile Industry GTTL Final Project

Introduction and Problem Definition

The global textile industry is about to undergo a significant transformation. On December 31,
2004, the Agreement on Textiles and Clothing (ATC) will expire, and with it the quota
system for international trade in textiles and clothing will no longer be used to govern
international trade. By 2005, all quotas on clothing and textiles will have disappeared.

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 textile trade requires. India’s
industrial sectors have grown at a modest rate in the 1990s, albeit at a slower pace compared
to the previous decade. In contrast, its services and information-based industries have grown
at such a fast pace as to become the dominant sector in GDP growth and it appears this trend
is likely to continue. 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 make a
poor situation appear more desperate.

This paper first gives an overview of the Indian Textile Industry, starting from its ancient and
established roots more than 5000 years ago until present times. We assess the current
situation and present the country’s business structure, major competitors, as well as current
changes and challenges. In addition, we interviewed an expert in India from the Textile
Commission who shed light on the current condition of the industry from a more practical
viewpoint.

A History of the Indian Textile Industry

Textiles have historically formed an important component of India's exports. There is
archaeological evidence from Mohenjo-Daro, which establishes that the complex technology
of mordant dyeing was being used in the subcontinent from at least the second millennium

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B.C. It is believed that the use of printing blocks in India started in 3000 B.C., and some
historians have concluded that India may have given birth to textile printing. Marco Polo’s
records show that Indian textiles used to be exported to China and South East Asia from
Andhra and Tamil ports in the "largest ships" then known. Buddhist era scripts reveal that
woollen carpets were known in India as early as 500 B.C. and the technical skill that went
into Indian carpets of the Mughal period is still hailed today.1

India’s historical prominent role in textile production stems from its wealth in natural
resources. Silk, cotton and jute, all natural resources found in India, are important textile
crops: cotton goes to the clothing industries and jute is used to make hessian and sacking.
Hemp, whose stem fibers make tough materials such as canvas and rope, is also abundantly
grown.

India developed its textile industry at an early stage and along with it, its textile
manufacturing technology. Prior to colonization, India's manually operated textile machines
were among the best in the world, and served as a model for production of the first textile
machines in newly industrialized Britain and Germany.

A mild climate meant that the lower strata of society could survive relatively cheaply. The
huge trade surplus the country enjoyed thanks to its wealth in natural resources enabled the
nobility and the middle classes to live in luxury and comfort. This inhibited revolutionary
change and cultured an atmosphere of complacency, parasitism and conservatism, which is
still felt today.

Colonization brought an end to India’s glorious textile past. The competitiveness of the
Indian textile industry was such that the British knew they could not compete with it. While
all other countries were becoming industrialized, India’s textile industry was destroyed and
the country was transformed from a country of both agriculture and manufacturing into an
agricultural motor for British capitalism. By 1880 the domestic market had grown to be
serviced solely by British textile manufacturers: India, once one of world’s leading exporters
of textiles, was now forced to become a net importer. Tariffs were imposed to make sure that
British goods entered the Indian market virtually free while Indian goods were kept out of
Britain’s market.

This system remained in place until the Indians began the fight for independence. One
example of Gandhi’s non-violence opposition was to weaken the British textile industry by
1
http://members.tripod.com/~INDIA_RESOURCE/trade.html

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wearing homespun clothes. Gandhi was convinced that the textile sector could be a catalyst in
the advancement of the Indian population by creating employment for the excess labour pool.
This teaching would lie at the base of the policies followed by the government in the textile
sector from independence until the late 1980s. Inspired by Mahatma Gandhi, the Government
of India (GOI) put numerous policies and regulations to ensure that mechanization did not
occur and that labor-intensive textiles were produced.

However, in following this ideological aim, the GOI did not realize the negtive impacts in
terms of decreased productivity and reduced competitiveness: It provided favorable and
protective taxes and other regulations to the small-scale sector, as the GOI presumed that this
sector created more employment. Large-scale production was curtailed by restrictions on total
capacity and mechanization on mills. Strict labor regulations resulted in disincentives for
capital investment and high production costs. From the price side, the GOI cornered the
sector by imposing price restrictions. The more mechanized and the higher the capacity of the
textile producing company, both in terms of quantity and quality, the more it was
discriminated against by the GOI which used tax policies and other regulations to sanction
these practices. 1990 sounded a new era to India’s textile sector as the GOI came to realize
that efficiency and competitiveness were suffering under the numerous regulatory burdens.
This led to the relaxation of many of the constraints previously imposed on the textile sector.
Licensing was removed in the early 90`s by the Statement of Industrial Policy and the Textile
Development and Regulation Order. In 1995, India signed the General Agreement of Tariffs
and Trade bringing its liberalization policies to an international level.

The Current Situation and Problems Facing the Industry

The Different Sectors of the Textile Industry

The Indian textile Industry is currently one of the largest and most important sectors in the
economy in terms of output, foreign exchange earnings and employment in India. It includes
several sub-sectors: spinning, weaving, knitting and garmenting. Also, it uses different
materials like cotton, jute, wool, silk, man-made and synthetic fibers. The textile (non-
clothing) industry has three main sectors: the organized mill sector (traditional weaving and
spinning), the powerloom sector (mechanized looms) and the handloom sector.

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The total production of fabrics in all the three sectors combined was around 42 billion square
meters, with 59 percent of the total fabric production produced by the powerloom sector, 19
percent by the handloom sector, 17 percent by the knit (hosiery) yarn sector, and the rest by
the organized mill sector. The large share of powerlooms (an intermediate category of looms,
operated by power) has resulted from a government policy that supports the unorganized
sector in the form of reservation of product categories, mandatory export entitlement quotas,
and input pricing interventions.

Fiber Mix
Cotton is the predominating fabric used in the Indian textile industry – nearly 60% of all
overall consumption in textiles and more than 75% in spinning mills is cotton. India is among
the world's largest producers of cotton with over 9 million hectares and an annual crop of
around 3 million tonnes. In 2001 cotton fiber production was of the order of 14 million bales,
and has been declining steadily from the 18 million level in 1996, mainly due to crop
disasters and calamities in important growing areas. To meet its consumption demand India
imported more than 2 million bales of cotton fiber each in 2000 and 2001. The cotton sector
is controlled by the Government through intervention pricing, export licensing, and diversion
of specified yarns to the handloom sector. Quantitative restrictions on yarn exports are
announced every year, depending on the local supply position.

Man-made Fiber and Filament Yarn

In 2000-01, man-made fiber and yarn output each stood at 0.9 million tonnes. Polyester fiber
and polyester filament yarn are the major products in the segment, accounting for more than
three quarters of the overall production. The man-made fiber industry consists of fewer than
100 medium and large players. During the last five years, imports have shown a generally
declining trend, and were a little over 98,000 tonnes last year. India also exports man-made
fibers and yarns, and export volumes have been higher than imports in the last two years.

Wool
India’s wool industry is principally located in the northern states of Punjab, Haryana, and
Rajasthan. These three states alone have more than 75% of the production capacity. The
sector consists of both licensed players (composite mills, combing units, worsted and non-
worsted spinning units and machine-made carpet manufacturing units), and the decentralized
players (hosiery and knitting, powerloom, handlooms, and hand-knotted carpets, and
independent dyeing processing houses). India’s apparel wool consumption is approximately
32 million kg clean, of which knitwear consumes nearly 12 million kg. In all, there are more

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than 700 registered units in the sector, and more than 7000 powerlooms and other
unorganized units. The large players in the sector have made significant inroads into the
world market, as a result of supply tie-ups and joint ventures with important brands in EU
and other developed countries. India depends upon imports of fine quality wool required by
the organized mill and, to a lesser extent, the decentralized hosiery sector. Imports, estimated
at Rs 6 billion in 2001, have been mainly from Australia and New Zealand: the major
supplier is Australia. New Zealand wool is being imported mainly for the carpet sector for
blending it with indigenous wool.

Silk
India is the second largest producer of silk, contributing about 18 per cent to world
production. The sericulture industry is concentrated in the three Southern states of Karnataka,
Tamil Nadu and Andhra Pradesh, and to an extent in Assam and West Bengal, too. Growing
demand for traditional silk fabrics and exports of handloom products drives silk demand.
India’s requirement of raw silk is much higher than its current production, resulting in net
imports.

Apparel/ Clothing
The total apparel market in India, including tailored and ready-made goods, is estimated to be
U.S. $20 billion. More than 50% of the Indian market is for traditional wear (sari, dhoti,
salwar, etc.), which does not go into fabrication or is tailored at home. The western apparel
sector market is around U.S. $9 billion, of which exports accounted for more than U.S. $5.5
billion in 2000-01. The $3.5 billion domestic market is essentially in urban areas, where the
consumption of ready-made apparel has risen significantly in recent years.

Ready-made apparel accounts for only 20% of the domestic market (with revenues of $1.05
billion). Given the low penetration of ready-mades, most of non-urban India still depends on
custom tailoring as the major source of apparel. However, brands account for nearly two-
thirds of the ready-made apparel segment. Overall, apparel consumption has grown at a pace
of 5-6%.

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Table 1: India’s domestic apparel market size

Category Market size $ bn Volume share% Population

share%
Men’s wear 1.25 36.0 33.0
Women’s wear 1.51 43.5 31.0
Children wear 0.50 14.5 24.0
Infant wear 0.21 2.70 13.0
TOTAL 3.47 100 100
Source: Ace Global research study 2001

The industry is highly dispersed and unorganized on account of government policies that
restricted the entry of large players in manufacturing woven garments and several items of
knitwear such as socks, inner wear, and woollen apparel.

Table 2 Growth of the Branded Apparel Market (Rs bn)

Category 1998-99 1999-00 2000-01 2001-02

Men 30.67 36.50 43.80 53.45
Women 17.00 20.75 25.32 31.14
Children 3.90 4.36 4.80 5.45
TOTAL 51.57 61.61 71.52 90.04
Source: Images 2001, supplement

The textile industry in India makes an enormous and multi-directional contribution to the
domestic economy. The sector accounts for a significant portion of the total industrial output
of the country and plays a vital role in the country’s economy with regard to employment and
foreign exchange. The industry has witnessed phenomenal growth during the last four
decades. It accounts for 9% of GDP, for nearly 20% of the total national industrial production
and 35% of the export earnings, making it India’s largest net foreign exchange industry. It
directly employs 35 million workers and has widespread forward and backward linkages with
the rest of the economy, thus providing indirect employment to many more millions2. In
addition, India’s economic situation has improved dramatically since the Indian government
introduced new economic reforms in 1991, leading to liberalization in government policies
and a significant increase in its foreign exchange reserve position.

2
Office of the Textile Commissioner (2002): „Compendium of Textile Statistics 2002”

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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. 3
First of all, it employs co-automated technology. A second characteristic is the 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. Furthermore the textile industry is dominated by cotton as a primary raw
material. A fourth characteristic is the existence of a large public sector, which is composed
mainly of nationalized and ‘sick’ mills that have been taken over by the government. The last
characteristic is the 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. Like this India can establish its company production in this niche of
the market. 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.

India’s Major Competitors in the World

To understand India’s position among other textile producing countries, it is necessary to
look at its export rates in detail. Although the textile industry contributes 9% of GDP and
35% of foreign exchange earnings, India’s share in global exports is only 3% compared to
China’s 13.75 % per cent.4 Expressed in U.S. Dollars, India’s exports value $10 billion, in
sharp contrast to China’s $77 billion. And while India is still concerned with its “fine-
tuning”5 policy, China seems to have its sights on a more strategic dimension.

It is believed that China is vacating the ‘commodity’ end comprising yarn and grey fabric,
and moving into high value processed fabrics, with sizeable investments in value-added
processes. Meanwhile, India is still in the phase of upgrading at the commodity end. Indeed,
an Indian textile delegation has scheduled a visit to China in March 2002 to scout for
business opportunities in lower-value intermediates.

In addition to China, other developing countries are emerging as serious competitive threats
to India. Looking at export shares, Korea (6%) and Taiwan (5.5%) are ahead of India, while
Turkey (2.9%) has already caught up and others like Thailand (2.3%) and Indonesia (2%) are

3
See Chapter: India and its competitors for further details
4
Economical & Political Weekly Editorial: „Textiles: Preparing for 2005“, Economic & Political Weekly, January 2002
5
S. Ganesh: “Indian Textile Industry: Stifled by Warped Policies”, EPW March 2003

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not much further behind. The reason for this development is the fact that India lags behind
these countries in investment levels, technology, quality and logistics. If India were
competitive in some key segments it could serve as a basis for building a modern industry,
but there is no evidence of such signs, except to some extent in the spinning industry.

Table 3: India's Competitive Position in Stages of Textile Manufacture

India's
Determinants of
Process Competitive Emerging Competition
competitive Advantage
Position
Spinning Quality, cotton price Medium Indonesia, Turkey
Technology, automation,
Weaving Low Vietnam, Philippines
power, finance
Scale economy,
Processing technology, environment Low China, Vietnam, Philippines
issues, finance
Labor cost, productivity, Bangladesh, Sri Lanka,
Garmenting Medium
brand fashion design Morocco, East Europe, Mexico

Changes and Challenges Facing the Industry

Government Regulations: The Agreement on Textiles and Clothing

The last decade has been characterized by the progressive relaxation of policies imposed on
the textile industry and a greater emphasis on improving efficiency and competition. An
important turning point in the development of the textile industry is the Textile Policy of
1985 which began to relax some of the restrictive policies handicapping the textile industry.
A second milestone is the far-reaching economic liberalization program of the GOI beginning
in 1991, which placed major emphasis on export-led growth. In line with the general policy
of liberalization, several measures were undertaken to reduce controls and bring about greater
transparency in the textile sector. The textile industry was de-licensed as per the Statement of
Industrial Policy of 1991 and the Textile Development and Regulation Order of 1992. Further
reforms were also pursued on the fiscal front. The tax differentials between and within the
weaving sectors and between cotton and man-made fibers were reduced.

India’s signing of the General Agreement of Tariffs and Trade (GATT) in 1995 prompted
greater liberalization on the external front. The Agreement on Textiles and Clothing (ATC)
included as part of the final act of the GATT provides for a dismantling of the discriminatory
quota regime practised under the Multifiber Agreement (MFA) within ten years. It shall
create new opportunities for an increase in textile exports as well as open the Indian markets

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to textile product imports6. In the interim years, trade policy continued to be revised to make
it more consistent with GATT commitments.

The dominant concerns of government policies towards the cotton textile industry until 1985
centered around import substitution rather than an export thrust, protection of existing
employment in the organized sector, support of the decentralized sector, and protection of the
cotton farmers’ interests.

Even now, the key controls are that raw cotton exports are allowed depending on the local
crop with a view to ensure fair price to growers. Stock holding restrictions on growers,
traders and mills are to prevent speculative manipulation. Hank yarn should be at least 50%
of yarn produced by non-export orientated units (EOU) so as to ensure easy availability of
yarn to the handloom sector. Quantitative restrictions on yarn exports are announced every
year for non-EOUs depending on local supply position. EOUs are exempt from hank yarn
obligation and quantitative restrictions on yarn exports. All of these controls have led to a
stifling of the industry.

In June 1985, the New Textile Policy was announced based on a package of specific
recommendations of the Expert Committee on Textiles. It accepted that the crises in the
industry were neither cyclical nor temporary but rooted in deeper structural weaknesses. It
identified the main task of the textile industry as the need to increase production of cloth of
acceptable quality at reasonable prices to meet the clothing requirements of a growing
population. It was envisaged that this basic objective would be met through cost efficiencies
and a freer play of market forces rather than through controls and restrictions. The main
elements of the Textile Policy included the following points:

1) Dismantling the sector approach to the industry, retaining a special role for non-power
technology
2) Adopting a multi-fiber orientation and fiber flexibility
3) Providing adequate raw materials at reasonable and stable prices
4) Reducing the level of duties on synthetic raw materials
5) Removing entry and exit barriers
6) Emphasizing modernization and technology and machinery imports at international
prices and
7) Making Indian textiles more competitive in the world market7.
The 1985 Textile Policy illustrated GOI’s initial attempts to relax the regulatory burden on
the composite mill sector. This included three aspects: first, the elimination of the

6
See Chapter: „MFA and its consequences for India“ as well as „MFA phase out“
7
P. Anubhai and V.L. Mote, 1994, „India`s Textile Industry: A Case Study of Subsectoral Restructuring“, in S. Meyanathan
(ed.), Managing Restructuring in the Textile and Garment Subsector, Examples from Asia, Washington, D.C.:EDI

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compartmentalization of the industry, second, the lifting of restrictions on composite mill

loom capacity expansion, and third, the equalization of taxation among composite mills,
powerlooms and independent processing units. At the same time, the GOI supported the
structural adjustment of poorly-performing government-owned mills and the exit of non-
viable units. Unfortunately, this resulted in only limited success. The Board for Industrial and
Financial Reconstruction (BIFR) was constituted under the Sick Industrial Companies
Special Provisions Act of 1985 to decide on the fate of ‘sick’ enterprises. The question was
weather to liquidate or rehabilitate them. (A sick enterprise is defined as a company that has
been registered for 5 years and has negative net worth.)8 The Industrial Development Bank of
India (IDBI) created a Textile Modernization Fund Scheme in 1986 to meet the
modernization needs of ailing textile mills. This involved modernization assistance at
concessional interest rates. In addition, a Textile Worker’s Rehabilitation Fund Scheme
(TWRFS) was established to provide a safety net for workers affected by the closure of mills.

The Textile Policy of 1985 also marked the beginning of the reduction of the bias against
man-made fibers. The 1985 Textile Policy included the flexibility to reduce fiscal levies on
man-made fibers and yarns and intermediates used as inputs for their production. This was
intended to facilitate the increased absorption of man-made and blended fabrics for which
consumers displayed increasing preference.

In 1991 the GOI recognized that the restructuring of public sector enterprises under structural
adjustment would be accompanied by redundancy and unemployment. As a consequence the
National Renewal Fund (NRF) was created. The NRF consists of three funding instruments:

1) Financing of voluntary retirement schemes (VRS)

2) Designing and implementing retraining projects to impart new skills to workers to
reduce the period of involuntary unemployment, and
3) For initiating unemployment insurance.
According to VRS guidelines, money from the NRF is meant to finance 45 days of pay for
every year of completed service evaluated at the latest salary. Under the NRF scheme for
retraining and redeployment, a worker is provided Rs. 40 per day for fifty days while
attending vocational training programs like auto repair, carpentry, welding, tailoring and
driving.

8
accumulated losses exceeding equity plus reserves

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Foreign Investments and Modernization

Foreign investment and market presence is negligible in India’s textile and apparel sector.
Until the mid 1990s, foreign companies were not allowed in manufacturing and marketing
activities in the domestic market. However, with liberalization in investment and
subsequently with the removal of quantitative restrictions on several textile products, the
Indian market now has the presence of several international brands.

However, the presence is more in the nature of brand licensing with Indian players rather than
direct investment. U.S. brands have a larger presence in the market than others. According to
official data from the Secretariat of Industrial Assistance, the total foreign investment
approved in the sector since 1991 is in the region of Rs 3.5 billion ($80 million), of which
E.U. investment is estimated to be Rs 720 million, a little over 20% of total approvals, from
46 applications. The largest number of approvals was for investments from UK (16) and Italy
(14), together representing more than 75% of the cases and 86% of the value approved. A few
companies have also set up export-oriented manufacturing facilities in India. Notable Italian
names include GIVO (Marzotto, Principio) and La Perla, and Brinton, a leading carpet
manufacturer from the U.K. Besides investment, brand licensing and marketing joint ventures
have been on the rise in the 1990s, with some of the world’s most popular apparel brands
entering the Indian market. Some of the highly visible names include: Levi’s, Lee, Wrangler,
Benetton, Pepe, Reid and Taylor, Zegna, Arrow, Louis Philippe, Van Heusen, Lacoste, and
Ralph Lauren. A key trend has been the predominance of men’s wear, ostensibly due to the
higher penetration of branded apparel compared to women’s and children’s wear.

Modernization
Overall, there is a low level of modernization in India in most elements of the clothing and
textiles value chain, especially in weaving and in garmenting. Among powerlooms, which
produce nearly 60% of the fabric output, less than 1% are shuttleless looms. Even among the
organized mill sector, less than 6% have shuttleless looms. These levels are much below
those of several developed and developing countries, which have seen a high replacement
rate of old looms with modern shuttleless looms; more than 80% of looms in Taiwan, Korea
and the U.S. are shuttleless. Even in Pakistan, 62% of its looms are shuttleless, indicating
how important that country regards modernization of its weaving sector.

In the apparel sector as well, India has a much lower investment in special purpose machines,
which perform specific functions and add value to the product. Very few export
establishments have invested in cutting machines or finishing machines. In comparison, other

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Asian exporters have invested heavily in special purpose machines that provide higher quality
and productivity, thereby ensuring high throughput as well as realizing high unit value. The
combination of scale and modernization has resulted in big business volume (organized retail
chains) shifting to China, flanked by Hong Kong and Taiwan, both offering excellent
linkages to the mainland. Meanwhile, Indian units are forced to deal with smaller order
volumes, given their inability to organize large volume production systems under the present
state of the sector.

An Outlook into the Indian Future – The Chinese Challenge

Indian textile companies have tried to focus on niche markets within the wide area of fashion
clothing such as low volume production and manufacturing of a high variety of outputs and
colors. The flexibility in the Indian production system is suited to meet this type of demand
and therefore, demand and the characteristics of the production system are mutually
reinforcing. The disadvantage of depending on fabricators is that there are wide variations for
different lots of output. This could hinder India’s success in becoming an important
participant in the mass market for clothing. China’s clear advantage is its ability to provide
consistent quality over huge volumes of a single item of clothing. For example, Chinese
companies can easily produce uniforms but Indian companies are faced with major
difficulties. Khanna’s study (1993) of 149 apparel manufacturers in five countries of
Southeast Asia found that Indian garments lacked consistency and uniformity in quality.
Furthermore, the average quality in India is still below the middle price range although it has
already improved over the last years. According to one interviewee, China engages in
dumping practices that India is simply not able to compete with. This is mainly due to the low
labor costs in China.

It is interesting to note that all countries with successful garment exports have a much lower
level of subcontracting than in India. As Khanna (1993) points out, apparel firms in India
subcontracted 74% of their output, compared with only 11% for Hongkong, 18% for China,
20% for Thailand, 28% for South Korea and 36% for Taiwan. As a result, these countries
have a wider base of exports and, not surprisingly, they have done very well in the market for
large volumes of uniform products. Khanna also proves that apparel firms are more
productive in East Asian countries in comparison to India. This results from larger
investments in machinery, even for low-wage China. Within machinery investment, Indian
firms tend to invest more in sewing machines; investment in processing and special machines
forms a very small part of the total.

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Table 4: Typewise Average Number of Machines Installed by Each Apparel Export Firm

Precutting machines Cutting machines Sewing machines Special machines Processing machines
S. Korea 2.9 12.3 134.3 77.5 31.0
Taiwan 2.6 7.5 185.1 49.5 12.8
Hongkong 2.3 13.2 455.4 112.7 27.9
China 2.3 13.2 450.5 104.8 34.4
Thailand 2.0 12.8 460.8 72.4 21.9
India 0.0 2.3 103.7 8.6 4.6

Source: Kathuria and Bhardwaj (1998), p. 17, drawn from Khanna (1993)

Some Indian companies are well aware of this problem. They try to invest in modern
machinery but they often face a contradictory situation. These companies lack the money for
long-term investments because the cost of labor is comparatively high in India. But if they
fail to invest in modern processes they will be unable to compete on a global scale in the
future. But, unfortunately, there are also many companies that do share these concers.

Mr. Gopalakrishnan, Quality Assurance Officer of the Ministry of Textiles explained the
situation as follows:

The Textile Industry is a very unorganized industry. There is no planning for the
future so the industry is moving from crisis to crisis. Nobody really has an idea about
were the industry will stand after the next 10 to 20 years. There are so many
problems and challenges that we will have to face. As the costs for machinery is, for
example, very high and the cost for labor in comparison to China is also very high,
many companies have only old machines. This leads to the problem of delays in the
supply chain and product deliveries, which goes hand in hand with low quality. Our
daily job is to explain to the companies to do long-term investments now, even if that
means investing high amounts at this moment. We try to explain to them that the
money they are investing now is coming back to them at the end. Only like this they
are able to stay competitive on the open global market. Otherwise they are soon
meant to be shut down.
Within India, policy makers may have been prepared to accept a slow pace of reform in the
textile and clothing sectors in the past when opportunities were more restrictive. However, to
continue in this vein would mean missing out on potentially much greater direct gains from
productivity improvements. In addition, it would expose these industries to the much larger
risk of losing ground in a fiercely competitive world market. Finally, as trade barriers start to
fall in India and elsewhere, the industries will also face substantially increased competition in
their home markets, which lends a sense of urgency to domestic policy reform.

The textile industry in India is one of the few industries, which has the potential to emerge as
a truly global player. The government has partly embarked on a role as an industry-friendly
and proactive “facilitator”. Recognizing the fact that industry needs a concerted strategy and
time-bound action plan to convert its core competencies in availability of all major raw

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materials, skilled manpower, managerial competence and entrepreneurial skill to a

competitive strength as a producer and supplier of top quality textiles at competitive prices
while protecting its domestic turf, the government has initiated the policy measures as
outlined above. With the growing awareness in the industry of its strengths and weaknesses
and the need for exploiting the opportunities and averting the threats, coupled with the
government’s catalytic role, the Indian textile industry has the potential to scale new heights
in the globalized economy. For this to happen, the industry, the State Governments and the
Central Government have to work in close coordination and cooperation in order to introduce
the necessary political steps that still have to be taken.

The Industry from a Practical View

An Interview with the Indian Textile Commission
The textile industry in India has been aware of the looming intense competition that will
come at the end of 2004 for several years. Many of the players in the industry have attempted
to come together to become more competitive on the international market. They have had
varying success, but they have high hopes for the future.

How India is Improving Quality Standards to Meet Demand

The Textile Commission, under the Ministry of Textiles, has worked on three major
improvements to help the industry become more competitive. In order to compete, the
domestic as well as international perception of Indian textiles has to be one of quality, good
business practices, all the while maintaining a focus on society. The Commission has
facilitated international regulatory approval to reflect these issues. The first focus was on
quality, with ISO 9001. Out of 250 textile companies that were taken up by the commission,
136 are now certified ISO 9001. This has many implications, but one of the primary drivers
was that the E.U. was requiring this certification in many sectors. Now that these companies
are compliant, the E.U. will view them as viable producers.

By improving the quality, demand will increase in more developed countries where people
are willing to pay a premium for quality. The Textile Commission tried to make this quality
more quantifiable because it is inherently a fairly subjective measure. It helped to train
employees on inspection techniques and set up systems for rejecting and reworking articles
that are below manufacturing standards. It provided testing equipment at regional locations
and also helped the companies learn to use the equipment so they could perform internal

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quality inspections. In doing this, quality awareness was increased, quality cost estimates
were made, and goals were set for customer compliance, quality cost, rejection rates, and on-
hand delivery focus. Today, close to 100% of all units produced are inspected. Inspection
commands a significant amount of time, which has caused costs to increase. However, with a
standard rejection rate of 30-40%, it is necessary to ensure quality and the results have been
very positive. Most of the companies have moved their Acceptance Quality Level (AQL)
from seven (7) to around one (1). This means that today, only about 1 out of 100 units are
rejected after the products are released to the market, instead of 7 out of 100.

Looking at these numbers, the question becomes why were the reject rates so high in the first
place? According to the Textile Commission, the quality of the raw material is very poor,
which makes it difficult to manufacture quality textiles. To correct this, a shift has been made
to focus on the entire supply chain. By evaluating the supply chain, the industry will be able
to optimize the overall process instead of each individual process, which will allow India’s
textile industry to become more competitive. Since the industry has been fractured for so
long, the Commission has had some problems in bringing different groups from the supply
chain together. However, there is intense pressure and awareness on the companies to solve
the current problems, so cooperation has taken root.

The Textile Commission has tried to implement new manufacturing techniques to help bring
the costs down in addition to focusing on the supply chain. It has encouraged investment in
capital equipment to increase capacity through automation. This has been bank-rolled by the
Technology Improvement Fund, which is provided by the government. The Commission has
tried to help companies of all sizes, ranging from 10 employees to over 2000. However, these
types of improvements take time to yield results, so costs are still quite high.

Environmental Management and Code of Conduct Management Standards

The other two certifications that have been targeted by the Textile Commission are ISO
14000 (Environmental Management Standards) and SA 8000 (Code of Conduct Management
Standards). The primary issues involved with ISO 14000 revolve around working conditions
and child labor in India. To attain SA 8000, companies must have self-audits and good
documentation and transparency.

In urban areas like Bangalore there are very few child workers in the textile industry
according to the Textile Commission. This is primarily due to local laws and the ability to
enforce them. However, in rural areas child labor is quite plentiful. Children enter the factory
between the ages of 14-18. During this time they are trained to be promoted to the next skill
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level. The legal age limit is 18 years old, but children can work if education is provided. The
children are normally doing very mundane work. Even the Textile Commission said that the
children were necessary because more experienced workers would “feel depressed” if they
had to do this type of work. Also, the children have to work to raise money for themselves
and their family. If they don’t work they will have a difficult time surviving, not only today
but also in the future, as they won’t have the skills required to do higher paying jobs.
However, several organizations are looking into these issues including the Concerned for
Working Children (CWC). The government alone will not be able to resolve these complex
issues, but a coordinated effort between NGOs, the government, and the industry should be
able to improve the standard of living for all involved. The Textile Commission is
encouraging compliance with SA 8000, but it doesn’t appear to have done much to provide
alternatives for the companies or the children, so the situation still exists.

Transparency is another concept that has proven to be difficult to implement in India. The
government has not been a good role model in this regard, and many businesses have had
equally poor business practices. The international market demands greater attention to
accounting practices, especially, and business could certainly benefit from these practices.
They would have better control of costs and would be able to better quote orders if they had
more accurate and transparent information. The Commission has tried to encourage these
practices over the last several years, and today several companies are SA 8000 compliant.

The general mood of the Textile Commission was positive towards India’s ability to compete
with China after 2004. It felt that the perception of the Indian textile industry had increased
dramatically in the last couple of years. This perception was reinforced when talking with
several individual consumers from around the world who have seen clothes with “Made in
India” labels in the last few years. There is a lot of work that remains to be done, especially
in pulling costs down, but several steps have been taken in the right direction.

Summary and Conclusion

India’s textile sector is currently poorly organized by virtually any standard. It will probably
succeed in being the major domestic provider for products for this market, but will have a
difficult time moving up the value chain to the international market. It appears to be moving
in the right direction for increased competitiveness on quality, management practices, and
eventually cost but it still has a long way to go before it catches its main global competitors.

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Over the years, the industry has served to bring money into the country to fuel the
development of other industries and in this sense, the country will continue to benefit
significantly by virtue of producing and manufacturing clothing and textiles.

The Textile Industry in India has gone through significant changes in anticipation of
increased international competition. The industry has been forced to tailor products to botht
the domestic and the international market which have traditionally been quite different. The
domestic market is has huge potential but is also very price sensitive whereas the
international market tends to favor mass production while also emphasizing quality, service
rates to the Western world, and price of production. India has the ability to compete on the
global scale but it is losing market share to Asian countries that have cheaper labor, better
investment in machinery and capital, and better ocean transportaion options for export to the
U.S. While its market share has certainly increased over the last decade, India still lags
behind countries like China that have seen phenomenal growth in recent years. When the
ATC trade quotas are lifted at the end of the year one can only picture this trend continuing:

Clothing - Change in Share of World Trade 1980-2000 Textiles - Change in Share of World Trade 1980-2000

16,00% 6,00% 5,6%

14,1%
14,00%
5,00%
12,00% 4,2% 4,1%
4,00%
10,00%
8,00% 3,00%
6,00% 4,4% 1,7%
2,00% 1,3% 1,3%
4,00% 3,0%
2,2%
1,3% 1,00%
2,00%
0,00% 0,00%
China Mexico Mturkey Indonesia India China Taiwan Korea Turkey Pakistan India

Source: International Trade Statistics, 2001 - WTO

There are several areas where China enjoys a distinct advantage over India in a
manufacturing-type industry such as textiles. Perhaps the most noticeable advantage is the
difference in foreign direct investment (FDI), especially by Chinese nationals living abroad.
In fact, China is now the largest recipient of FDI cash inflows, ahead of the United States.
Furthermore, China has undergone significant trade reform in recent years, especially in
opening its market to foreign competitors and privatizing large government agencies. This
compares to the relative stagnation of outdated policies that better describes India’s approach.
And finally, it is simply much more efficient and cheaper for goods to reach the U.S. from the
port of Hong Kong and other China ports, versus from India. However, India enjoys a similar
comparative advantage for serving demand in the European Union.

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