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Having Lost its Competitive Advantage, Textile Industry Faces Decline

Author: Sanjay K Jain
Joint MD, TT Textiles Limited
Having Lost its Competitive Advantage, Textile Industry Faces Decline -By-Sanjay K Jain
The Indian textile industry has been one of the foremost contributors to the country's employment, exports, and GDP. The industry has been rated as one of the key drivers of the Indian economy and a bold target of exports of $50 billion (currently it’s $22 billion) had been targeted by the year 2012 by the government after the dismantling of the quota regime in 2005. However we are still far away from that target. Though now it can be blamed on the worldwide recession, I think we need to do some soul searching as to was it anyways possible. Globally, the Indian industry is recognized for its competitive advantages, especially in the cotton segment. The government has set huge targets for the industry and expects to attract investments of about Rs 1.5 lakh crore during the eleventh Plan period. This would meet the export and domestic targets, while taking various initiatives like setting up textile parks, training centers, and ‘made in India label promotion’ to global markets. It also assured continued interest subsidy through the Textile Upgradation Fund.

I keep hearing in many conferences that India has a lot of potential and we are very confident about the industry meeting its potential and that the current situation is just a blip on the monitor. Speakers talk about getting more efficient, delivering more value added products, and adopting new technology to meet the new challenges. However, no one talks about what is the country’s real competitive advantage against its existing competitors like Pakistan, Bangladesh, China, Indonesia, and the newly upcoming ones like Vietnam, Cambodia, and may be a few African countries.

Currently the textile industry is one of the worst hit sectors in India, as almost 50 percent of the industry is dependent on exports. Hence, maybe this is not the most opportune time to analyze performance and draw conclusions. However, if we go back a bit when the world was still growing we didn’t have any great performances by the textile industry in exports. In the period from April to August 2007, our export turnover saw a meager rise of 0.15 percent in terms of US dollars over the same period last year, while in terms of rupees it fell by 10.52 percent. This shows that it is not only the exchange rate which is killing us, even in terms of dollars we had not grown at all. How will we then achieve those high targets set by us, when in a high GDP growth scenario we have losses? And even more alarming is that cotton garments (which constitute about 45 percent of exports), fell over the same period by 6.86 percent in terms of dollar and 16.6 percent in terms of rupees. It clearly shows that we are losing not only on the aggregate basis, but are losing more on the value addition basis.

I was just going over our competitive advantages to understand our strengths in facing the global markets. Firstly, I looked at the basic raw material – cotton fiber, which looks very promising. We have doubled our production in five years and have sufficient cotton to feed the growth of the industry. We are the second largest producer today and have also become the second largest exporter of cotton. This means that we have a clear advantage on the cost of cotton. However, the shocking news is that it is not necessarily true – the relative advantage of India vis-à-vis competing countries like Bangladesh, Pakistan, Vietnam, Indonesia, and Thailand has come down, with the gap between Indian cotton price and that of the other countries reducing over the last five years due to the acceptance of Indian cotton by other nations and large scale exports from India. The most alarming point is that the landed cost of Indian popular cotton Shankar 6 is cheaper or equal for mills near the ports in the far eastern countries and Pakistan and Bangladesh by road as against the same for the south Indian mills (Tamil Nadu has the maximum number of spinning mills in India). Road transport is much more expensive than sea transportation, for e.g. it costs $50 (Rs 2,500) to transport 150 bales from Mumbai to China and it costs Rs. 75,000 to transport it from the place of production in north and western India to Tamil Nadu.

Further, in a falling global market where prices were falling across the board, the government hiked the minimum support price (MSP) of raw cotton by 40 percent, making the raw material expensive for our local industry, when on the other hand the price of end products were falling. Hence the industry got squeezed both ways. To top the agonies of the industry, in February 2009 the government introduced with retrospective effect five percent license against exports of cotton, hence making our cotton cheaper for our competing nations – We need to rethink whether we want value addition on Indian cotton. We have been talking about a ‘fiber policy’ for the last two years, but still there is nothing offered except promises.

On the manmade fiber side, due to our inherently high raw material prices and import duties, we are clearly out priced. Despite import duties, many manmade textile intermediaries are being imported into the country.

Secondly, let us analyze the technology access and its cost. India has access to the best global technology in addition to its locally available machinery. However, apart from ginning and partly spinning, we are largely dependent on imported technology. Europe is considered a hub for it, but the severe appreciation of its currency has made it more expensive by about 20 percent over the last few years (European machinery is anyways not cheap), which is further compounded by import duty despite export obligations. The Chinese textile machinery industry is much more developed and, in fact, is selling all over the world including India. This, coupled with rising interest rates over the last two years, has made capital expensive and projects like spinning mills difficult. Despite the Textile Upgradation Fund, the effective rates are about 7-8 percent, which is high compared to today’s international funding rates. Even our discounted working capital rate for exporters at 7 percent means a labor plus five percent rate, which makes us uncompetitive. Due to the recession interest rates have crashed globally; but India rates have only fallen marginally and due to the risk premium going up the positive impact is further reduced.

Thirdly, we can talk about labor – our favorite listing when it comes to analysis of our advantages. However, in absolute terms we are higher than many of our competitors like Bangladesh, Pakistan, and other developing countries and if adjusted for productivity we are higher than all major textile nations like China, Indonesia, Thailand, and Vietnam.

Further, we have a restriction on labor flexibility, making it very difficult for the garment industry, which has seasonal loads of work – thereby allowing very limited space for companies to adjust to the changing times and seasonal demands.

The Government has a minimum guarantee employment program of 100 days (NREGS). Why can’t it,on a similar basis, allow a 200 hundred days guaranteed employment to laborers of the garment industry? The important point is that the industry would pay higher wages and would also enhance skills of the workers.

Fourthly, we have the ‘cost of power’, which is probably the most expensive amongst all the nations globally. Our power costs are 10-12 cents per unit and still we don’t have uninterrupted supply leading to higher costs of self-generation. On the contrary, most other nations have power costs in the range of 5-7 cents per unit. Textile industry is fragmented, making it difficult for self-generating units to be set up and reduce the power cost impact (the steep oil price hike in 2008 made them anyways unviable unless based on coal or wind).

Fifthly, we have the issue of markets. India is in a unique position where it has no preferential access for any product nor does it enjoy any proximity advantage. Turkey has the whole of Europe at its doorstep, the ASEAN countries can trade amongst themselves with preferential duty structure and even Korea is giving them preference. Pakistan and Bangladesh have enjoyed preferences for various markets. We are, on the contrary, opening up our markets to the low and competitive nations like Bangladesh, Pakistan, and Sri Lanka with duty free access to our growing consumer population.

Hence, even our growing domestic market is under pressure of duty free imports from SAARC nations and other major countries like China and Thailand due to their competitive cost structure of manmade fiber.
The question is, under these circumstances how will the industry move ahead? In the absence of internal accruals, loss of fancy of equity investors, and no FDI – how will the industry invest? And without equity how will debt come in? The large investment and turnover targets are fast becoming a pipe dream. Unless problems of each of the pillars of the industry are not tackled very soon in a cumulative manner, we may be headed for a disaster.

And for those who think that it is only the exports that are affected and the local industry is doing fine, just have a close look once again. Has there been any increase in prices of the manufactured textile products domestically over the last three years? We say our economy is growing, there is pressure on prices but still price levels of this industry have even fallen in some segments. The prices in retail selling may have gone up in some cases, but that is due to the strength of branding and marketing, not due to manufacturing costs. We need to understand that the basic raw materials are interchangeable and are the same for both exports and domestic sales. In the case of lower export prices and weak demand, the exporters try to shift their capacities to the domestic segment, thereby putting pressure on the domestic market, which is not deep enough to absorb any additional capacity. This causes depression and players that are not in exports but operate in the domestic sector also get hit indirectly.

The Indian textile industry will no doubt survive and move along by the strengths of its traditional position and domestic market. However, the growth envisaged and it being re-classified as sunshine industry over the last three years from a sunset industry may turn out to be a myth. We forget that dismantling of quotas (remember that China has not been fully let loose) does not mean increase of global demand; it just means re-organization of sourcing strategies on the basis of ‘buy from the best place’. For India to capture market share it has to be more competitive than other competitors on a cumulative basis. The fact that we have become a big exporter of raw cotton and are selling to all our competing textile nations including China does not change the equation greatly.

China, despite being the largest producer of raw cotton, is also the largest buyer, which goes to show how under developed our textile industry is – since we are not able to add value to our own cotton. India has been a leader in cotton yarn for many years now, and it was expected that we move on the textile chain upwards. Unfortunately, we have moved in the reverse direction towards export of raw cotton fiber over the last 3-4 years.
It is well accepted that textiles is one of the worst affected industries in India, its downturn started much earlier at the end of 2007 when US economy went into trouble. However, hardly anything has been done for the industry except sympathizing with them. Some of the significant government policies that worked against the industry last year were:

* Increase of MSP for seed cotton by 40 percent
* Introduction of five percent export incentive for raw cotton exports
* Reduction of duty drawback rates
*Removal of interest subvention of 4 percent and later restoring to 2 percent

It is difficult to find anything special done for the industry over the last year or even in the 2009 budget. Usual pre-budget tall promises were made and it was assured that something would be done, but unfortunately nothing new has been done. Still worse, huge incentives are pending from the various departments of the government for over a year and this is adding to the already tight liquidity woes in the face of huge losses. The government has followed a policy that effectively meant 'first pay, then do immense amount of documentation and then wait for the government to have funds to pay the money you have paid to them as excess'.
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