Indian Textile Industry: A Fact Sheet

In the post-quota regime, the Indian textile industry is poised to become a major player in the US $395 billion global textile and clothing market. With the global retailing industry exploring opportunities for outsourcing, Indian exports are expected to surge from the current levels of $14 billion to $50 billion by 2010. ICFDC.com presents an analysis of the sector, the key drivers and the opportunities for Indian players.

India is fast emerging as a key player in the $395 billion global textiles and clothing market. Clothing accounts for roughly 60 per cent of the market while textiles constitute the balance 40 per cent. The dismantling of the quota regime has brought the entire market at an interesting stage with players like China and India beginning to make their presence felt. On 1 Jaunary 2005, the WTO Agreement on Textiles and Clothing (ATC) came into operation replacing the earlier Multi-Fibre Agreement (MFA). The phasing out of the MFA is expected to trigger exponential growth for global textile trade.

Currently the US imports nearly 85 per cent of its clothing needs while the EU imports 60-70 per cent.  In 2004, the US imported $76 billion of textiles from across the world. China at $18.2 billion was the frontrunner in meeting this demand with a 24 per cent share of the market, a little less than the total share of Mexico, India, Canada and Indonesia. In the first quarter of 2005, India's textile exports to the US has risen by an estimated 22 per cent.A key driver of global textile trade is low cost sourcing of textiles and clothing. Global retailing industry is exploring opportunities for outsourcing to deal with pricing pressures. As a result outsourcing budgets of retail giants like Wal-Mart, JC Penny, Tommy Hilfiger, Marks and Spencer, K-Mart and Tesco are on the rise. China is expected to get a bulk of the advantage due to its economies of scale and superior infrastructure. India too will be a major beneficiary, thanks largely to its low cost labour, its skilled manpower and the fact that it is a low cost sourcing base for cotton. What's more, the anti-surge initiatives launched against Chinese exports will benefit the Indian industry and experts believe that India could emerge as the second largest textile outsourcing hub. Indian exports are estimated to grow from the current levels of $14 billion to $50 billion by 2010. And its share of the global textile trade is expected to double from 3.5 per cent currently over the next five years.

Textile Sector  in the Post-MFA Regime

	2004	2010 (estimated)
Global Textile Trade	$395 billion	$600 billion
China's Exports	$97 billion	$220 billion
India's exports	$14 billion	$50 billion

The key advantages of the Indian industry are:

• India is the third largest producer of cotton with the largest area under cotton cultivation in the world. It has an edge in low cost cotton sourcing compared to other countries.
  
• Average wage rates in India are 50-60 per cent lower than that in developed countries, thus enabling India to benefit from global outsourcing trends in labour intensive businesses such as garments and home textiles.
  
• Design and fashion capabilities are key strengths that will enable Indian players to strengthen their relationships with global retailers and score over their Chinese competitors.
  
• Production facilities are available across the textile value chain, from spinning to garments manufacturing. The industry is investing in technology and increasing its capacities which should prove a major asset in the years to come.
  
• Large Indian players such as Arvind Mills, Welspun India, Alok Industries and Raymonds have established themselves as 'quality producers' in the global market. This recognition would further enable India to leverage its position among global retailers.
  
• India has gathered experience in terms of working with global brands and this should benefit Indian vendors.

Government Policy

Recognising the immense potential of the textile industry to spur economic growth and drive exports, the Indian government has taken initiatives to encourage investment and enhance global competitiveness of the sector. In the recent Budget reforms the textile sector has been given some major concessions. Prominently, the government has removed the disparity in excise duty structures between organised and unorganised sector. Reduction of custom duty on textile machinery, polyester, viscose, and garment making machinery further acted as an impetus to the industry. The excise duty on polyester has also been reduced from 24 per cent to 16 per cent, which has brought the duty structure in line with ASEAN countries, providing filament yarn processors with optional excise duty of nil or 8 per cent excise duty with cenvat credit.

Challenges for Indian Companies

While Indian exports to the US has risen 22 per cent in the first quarter of 2005, profits are sliding as prices have dropped 8-20 per cent and the industry is on the verge of a shakeout. With importers preferring suppliers that have 'vertical' production systems rather than dispersed production facilities, Indian exporters need to shore up their mass production techniques. Of the 1,500 Indian exporters only 15 have turnovers of $50 million-plus. Infrastructure development is the need of the hour. Power and water contribute to nearly 37 per cent of total production costs. In contrast, in China, this cost comprises just 24 per cent. India also has to deal with inefficient port handling facilities.

Labour laws also comprise a stumbling block in the growth of Indian textile companies. Political considerations have prevented successive governments from instituting an exit policy. As a result, manufacturers cannot employ short duration labour as they cannot lay them off when the global trade cycle turns. Low labour productivity is also another constraint.

On the technology front, the Technology Upgradation Fund Scheme has been instituted by the government in an effort to encourage manufacturers to go in for enhanced technology. The grant during the current fiscal has been enhanced to nearly two-and-a-half times the amount that was granted the year before. But this does not get utilised in the appropriate manner as the technology imported is obsolete and virtually no new technology is developed indigenously.

While China is clearly the leading exporter in the world of textiles and clothing, China and India are not direct competitors. While China mainly uses man-made fibre and serves mass markets, India essentially produces natural fibre and caters to niche markets. India is now the No. 1 producer of man-made fibre, thanks to Reliance Industries, but is only No. 3 in cotton. A garment-driven and export-led strategy is expected to help the Indian industry to grow to a $85 billion industry by 2010, according to a CRISIL report. The focus should be on moving up the value chain instead of exporting intermediate stage products, say industry analysts.
The investments needed to make the Indian industry a dominant player in the global textile market is estimated to range between $15 and $30 billion. Increase in foreign direct investment will benefit the industry but this is largely dependent on the reforms process.

Growth Segments for Indian Players

The domestic market is expected to boom with demand for high value branded items and household items showing a sharp increase. Not surprisingly, yarn manufacturers are shifting away from exports and focusing on domestic markets. The industry is ready to utilise high quality yarn in the domestic market, which was earlier meant exclusively for exports.

The global home textiles market, estimated at US $ 70 billion offers tremendous opportunities for Indian players. The US and EU imports nearly $30 billion worth of home textiles. The US market is growing at 5 per cent per year while the EU market is growing at an estimated rate of 9-10 per cent. Japan, Australia, New Zealand are also large consumers of home textiles. McKinsey estimates that the global trade in home textiles will grow from $8.6 billion to $23 billion in 2010. India's presence in the US home textile market is growing. India is the largest supplier of terry towels, bed linen and second largest vendor of cotton made-ups to the US markets. China, Pakistan, Bangladesh and Vietnam are major competitors for India in this segment. In the post-quota regime, India's share of US imports has grown (between January and August 2004) for sheets (20%) terry towels (21%), pillowcases (19%) and total made-ups (11%).

While China is slated to be the biggest beneficiary in terms of market share in US apparel imports, India and Pakistan are expected to benefit substantially as well. China's share in total US apparel imports is 16 per cent compared to India's 3.5 per cent. In cotton apparel imports, China's share is 10 per cent while India's is 5 per cent, in wool apparel, the shares are 9 per cent for Chinese products and 6 per cent for Indian. In man-made fibre apparel, China's share is 15 per cent compared to India's 2 per cent.

Another segment in which India is a strong player is the embroidery market. The Indian market for embroidery is valued at Rs 7.5 billion and is growing at 18 per cent per year. This is a highly fragmented market with the organised sector constituting 40 per cent of the industry. Demand for embroidery is on the rise and export to countries like the US, UK, Africa, Middle East offers a huge market for embroidery products.

Key Indian Players:

• Welspun India is Asia's largest terry towel manufacturer and fourth largest in the world. It supplies to leading global retailers, meeting 15 per cent of Wal-Mart's terry towel requirements, 85 per cent of Tom Hilfiger's and 100 per cent of Shopko's. It has plans to double its terry towelling capacity to 23830 TPA, enhance yarn capacity by 25000 spindles and introduce bed linen with a 35 million metres capacity and has earmarked a Rs 6 billion budget for its expansion plans.
• Alok Industries has the largest processing capacity in India and offers fully integrated facilities for yarn texturising, weaving, knitting, processing, made-ups and garments. It has initiated plans to expand capacities across all segments by investing Rs 10 billion. It is focusing on home textiles and garments, which will contribute to nearly 50 per cent of its revenues by 2007. It has already got an impressive client list that includes brandnames such as JC Penney, Tommy Hilfiger, TARGET, Wal-Mart and international buying houses such as Britannica Home Fashions, Elite Home Products, etc.
  
• Arvind Mills boasts of a wide product range in value added fabric, from fabric to garments in denim, shirting and knits. It is a supplier to brands such as GAP, Marks & Spencer, Levis, Tommy Hilfiger and Nike and is upgrading its garment capacities to 14.3 million pieces per annum. Arvind Mills dominates the Indian denim market with a 72 per cent share of the estimated 80 million metres denim market.
  

Future Outlook

The future prospects for the Indian industry are bright, particularly in the post-quota regime. The industry is in an expansion mode and is likely to benefit from growing demand both in the domestic as well as global markets. Further, the anti-surge mechanism which the WTO has imposed on Chinese exports is expected to benefit India. Turkey is the first country to set quotas on textile and apparel imports from China. The EU is also in the process of adopting measures to avoid surge in imports from China. China has announced exports tarriff on textile and clothing with effect from January 2005 that will last until 2007 as measures to avoid penal duties. Even though these tarriffs are nominal, it will increase export prices and curb demand for low priced Chinese goods in world markets. This should enable Indian industry to offer competitive products to global markets and increase its share in US and EU markets.



[www.icfdc.com. This Fact Sheet has been compiled by Adite Chatterjee. For more details and in-depth analysis of the sector please email adite@icfdc.com. 9 July 2005]