Jean Baptiste Tavernier, a 17th century traveler, was particularly impressed by a Mughal calico “so fine that when a man puts it on, his skin will appear through it as if he were quite naked.” His description of it enthused not a few western traders to beat a path to India, though it must be admitted that the emphasis then was on calico’s suitability for the female wearer.

Some three hundred odd years later, retailers from the West are once again diligently making their way to India, but for quite different reasons. It is not calico’s exclusivity (or its translucence) that appears to draw them, though quality is still of great importance. Rather, it is—no surprises—the price.

A Lit Fuse
There is a boom in the offing. Raghav Gupta, associate director of KSA-Technopak, a management consulting firm, puts the value of textiles sourced by U.S. retailers from India at over $1.5 billion, across various categories, in 2002-2003, up from a mere $50-100 million in 1990.

And though the growth started several years ago—sometime in the second half of the ‘90s—it has been receiving a lot of attention only lately.
There are several reasons for this. The first—and probably one of the most significant—factor is the removal of quotas under the WTO regime in 2005. This means that importers in developed countries no longer have any upper limits on the quantity of goods they import. This throws open the markets to various developing nations, much to their delight.

A glance at the compounded annual growth rates for India justifies such enthusiasm. From 1990 to 2003, it stood at 5%, but post 2005, KSA puts the figure as high as 15%, no small a leap into the two-digit realm. Currently some 45 percent of the textile markets in the U.S. and Europe are import-based, and the trend seems to indicate that the rest is to be opened up soon, leaving India, China, Brazil, Vietnam and several others smacking their lips at the remaining 55 percent. And that is not all.

The second factor is that big retailers in the U.S. (and elsewhere) are having to tighten their purse strings more and more. And one of the hard lessons they have learned is: outsource, or go bust. Pillowtex, the third largest player in the home textiles segment, had to shut shop. The second ranking West Point Stevens has filed for Chapter 11. With operating margins of some 2.2 or 2.3%, even restructured debts wouldn’t do too much to see these companies out of the red.

Now these two retailers account for some 7% to 9% of global textile capacity each. If such capacities are dying out in the U.S., it shouldn’t be of any wonder that there are signs of frenetic activity in developing countries vying for as large a share as possible of this pie.

Chapter 12
Nor should the fact that the surviving ones are looking at sourcing their textiles from India and other developing nations come as any surprise. Wal-Mart, Target, Gap, JC Penny are all in India in a big way.

It is no sudden interest on their part. S. Jagannath, one of the pioneers instrumental in getting prominent retailers to look at India, says, “Like in everything else, people in textiles want to narrow down markets from where they buy. And the first countries that come to everybody’s mind are those where textile infrastructure exists—large cotton growing, spinning, and weaving capacities, where they can benefit from low capital investments, take advantage of duty or tariff benefits and avail of cheaper labor costs. Now with quotas removed, it seems the most logical thing to look at India. It is something that had to happen and has happened.” A glance at Figure 1 reveals why this is so.

A company sourcing textiles begins by saving on the cost of labor—in India (and some other Asian players) it would cost them just 80 percent of what it would back home. Other cost advantages would see the cost come down by another 30percent or so. The only disadvantage would be additional freight costs (necessitated by geographic distance) and duties. This would take the cost up by some 8 percent of the total; but by no means detract from the overall benefits—the final cost would come to a mere 60 percent of what it would have otherwise come up to.

The Second Bus
But the going hasn’t been all that smooth. Sugata Sarkar, deputy director of Texprocil—an export promotion board—points out that the first textile outsourcing wave—indeed the first wave of outsourcing itself—happened in the 80s, long before “outsourcing” meant anything. But bad policy resulted, as Sarkar neatly puts it, in India “missing the bus.” Several Central American and South-East Asian countries didn’t. Even Bangladesh and Morocco have clambered quickly on board.

Till a few years ago, textiles were confined to the small-scale industries. There were investment limits that kept the bigger players from any major expansion plans. If they thought of importing fabrics to process and then export, they were stopped short by illogically high duties. All this ensured that India simply did not achieve economies of scale. Why are these so important for competitive export capabilities? Explains consultant Arvind Singhal: “Wal-Mart has just placed a trial order for 46 million pairs of Levi’s Signature label of jeans. This requires 60-70 million meters of cloth of the same quality and consistency. Since few mills in India can deliver such huge quantities of cloth, how can one expect domestic garment units to deliver such a large export order?” It has been a longish wait for the second bus. Now that it has arrived, the question is whether we have boarded it and— if we have—whether we have found a seat.

Better Prepared than Not
This time at least we appear to be better prepared. Critical policy changes have already been made and the ridiculous restrictions on industry size have been consigned to the wastebaskets of history.

One major advantage that India has is the cost of labor. Labor costs are one of the least in the world—only in Indonesia does it come cheaper. In fact, this is one area we score over our closest competitors, China and Mexico, both of whom have labor that comes at higher prices.

As for raw material, the situation is finely pitched. Those in the business like to believe that India is a net exporter of cotton fiber, while China still imports. This, however, is not quite true. Like its neighbor to the north, India also is a net importer. It is only that we have massive exports of yarn, which goes some way in giving the impression of India being an exporter of cotton fiber.

A majority of the textile units are reeling under debts, mostly at high interest rates. These are being offered a hand out of the hole; with the government helping them restructure their debts, as suggested by the NK Singh committee some time last year. Banks and institutions will reduce the interest rate from some 15-17 percent to around 7 percent on outstanding loans of over $2 billion. The domestic textile industry has accumulated debts of about $3.2 billion, according to textile ministry estimates. In the last 10 years, one of the key reasons for low profitability was the high interest cost.

On the energy side too there have been changes. Companies are now allowed to open their own captive power plants. Since the fuel is internationally benchmarked, energy costs have seen drastic drops. The current rates stand at 6-7 cents a unit, well up to international standards. Further, another consignment of manna is due soon, in the guise of a gas grid that the Gas Authority of India Limited (GAIL) is laying across the country. This form of energy is the cheapest after hydroelectric power. This could see the costs drop to as low as 4-5 cents. What more could one ask for?

Not that TUF
Well, one could ask for technology, or at least funds for new technology. This too is provided in the form of the initially dormant, but now awake Technology Upgradation Fund, or TUF. The TUF puts up somewhere between $4 to 6 billion for investment in state-of-the-art technology. The standard rate of interest is 11 percent, but under this fund, the companies can avail of a rebate of 5 percent. In terms of cost of capital, this too comes up to international standards. This implies the creation of new capacities with optimum use of existing ones.
With these rates, India stands in a very competitive position indeed. Pakistan, Bangladesh, Indonesia, and the rest haven’t seen any such interest rate advantage, though China again appears to have stolen a march—and a longish one—on us: the interest rate for technology upgradation in that country is a mere half of India’s, at 3 percent.

However, a depressing fact is that a majority of TUF funds—a staggering 85 percent—has gone to the bigger players, who could have afforded this anyway. At least, they seem to be doing fine. Welspun, which makes towels and other “made-ups” (a category also containing bed linen, kerchiefs and such) for Wal-Mart, JC Penny, Target and numerous other big names, is presently running close to 100 percent of its toweling capacity—some 10,000 tons per annum.
This is worth about $60 million, out of which about 60 percent goes to the U.S. market. Amrish Goel, the General Manager, revealed that they have expansion plans on the anvil, having set their sights on 23,000 tons by 1st April 2005. (At present, Welspun itself outsources from the domestic market.)

So how come Welspun was chosen? “Obviously, price is a constraint and an issue one would be mindful of,” he says. “More importantly, the deciding factor for any buyer would be the product design capability. Also how close to the market the supplier is. How good their produce development is. How often, and how well, new design features are incorporated.”

Well Begun, but Half Done
Although we have come a long way, there is still a lot to be done. It is a competitive arena and only the fittest survive. China is still a long way ahead, and the one of the few reasons for respite we have is the fact that being a late entry into the WTO, their quotas are to go only in 2008. This gives us a breather, but only just.

When quizzed about what remains to be done, Jagannath mentiones two main issues. One is that scale still remains a cause for concern. Though the big players are in the game they aren’t big enough yet. What India needs is “a Reliance kind of model in textiles.” The other is that even these big players haven’t yet got over a fear of taking bold steps forward. Most of them show an inclination to wait and watch.

As an afterthought, he adds that there is another fact that has left him quite puzzled: the lack of Foreign Direct Investment in this sector. It is coming, but only in bits and pieces. He doubts if its failure to manifest itself is due to any regulations, though. The answer to this, however, might not be too hard to come by. There was all that blinkered policy before 2000, and the rectification of this met with a streak of bad luck in the form of the recession that struck the sector and pretty much the rest of the economy.

Another crucial area that India scores quite low is what the pros call the “speed-to-market.” This encompasses a wide range of factors, but, simply put, is how fast the finished product can get to the market. It is increasingly difficult to predict what the customer will buy, so retailers prefer not to buy much ahead of season. This means that the manufacturers will have to ship it to them in minimum time. In India, even a “super-efficient” supply chain like Wal-Mart's cannot do better than 50 to 55 days.

This is where the Central Americans have a huge advantage over India. Even China is much closer to the U.S. However, the blame does not lie entirely on geography. Infrastructure and the ease with which the knots in the red tape can be untied are as vital.

Missing the Boat Too
Transport of finished goods is a large deterrent. India hardly has any mother vessel that starts off from its shores and goes all the way to the U.S. First the feeder vessel has to be loaded in some Indian port; a process that takes at least a week, as opposed to a day or two in China. This makes its way to Singapore, where the cargo is unloaded and then reloaded onto the mother vessel, which finally wends its way to the U.S. coast. By 2010, says Gupta, assuming a 12 percent CAGR, total exports should stand at $30 billion, up from $13.5 billion today. Its share of world market should stand at 5.5 percent—not too good when compared to China’s 14% today, but nonetheless better that our 3.6 percent level as it stands of now. Out of the $30 billion, 20 would consist of apparels and made-ups, with yarns and textiles taking up the rest. The domestic industry would be worth $25 billion.

To achieve these not-too-lofty goals, we would need investments to the tune of $18-20 billion over the rest of the years till 2010. Besides, of course, managerial and technological changes that, as we all hope, would result in greater productivity.

Then and Now
A long time ago, Benaras used to be famous for two things—silk cloth that reputedly fit into matchboxes, and bulls. There is a little known story of how one of the kings—in a fit of bad policy making—banished both bulls and brocade weavers to the outskirts of the city; something to do with the low status attributed to both.
Wiser council prevailed and, happily, this decision was reversed, much to the benefit of all parties involved, not to mention (though there are hardly any records) the economy.

History never repeats itself, it is said, but it rhymes.