The Hindu Business Line : Textiles and apparels

The textile and apparel industry is yet to overcome some of the major challenges facing it if it has to succeed in becoming a major outsourcing centre for international retailers. The huge backlog of modernisation because of decades of neglect is a major problem confronting it. India will have to strive hard to move up the value chain by capitalising on its inherent strengths and making the most of the growing synergy between the textiles and apparel segments, says S. D. Naik.

Both the textile industry and the Government will have to redouble their efforts to make up for the lost time and to derive maximum benefits from the opportunities that will open up from 2005.

IN HIS Budget for 2004-05, the Finance Minister, Mr P. Chidambaram, has tried to provide a big boost to the textile industry to enable it to prepare itself for the big leap into the quote-free regime from January 1, 2005. The aim of the attractive textile package is to make this industry "efficient and competitive".

The cotton textile industry has now been freed from the mandatory Cenvat duty. Every segment of the industry — handloom, powerloom and composite mills — is allowed to choose between complete exemption from payment of excise duty or taking the Cenvat route. This will provide the much-needed relief to millions of handlooms and powerlooms spread across the length and breadth of the country as also the textile clusters and the mill sector.

However, blended textiles and pure non-cotton (polyester, viscose, acrylic and nylon) will have a different tax regime. There will be a mandatory excise duty on man-made staple fibre at 16 per cent; on polyester filament yarn, including textured yarn, at 24 per cent; and on other man-made filament yarn, including textured yarn, at 16 per cent.

Industry observers feel that this segment of the industry too should have been given a better deal by the Finance Minister. Perhaps, Mr Chidambaram may be trying to induce this segment to opt for the Cenvat route, where the duty burden will be less.

It is believed, some of the large organised sector players may still prefer to choose the Cenvat route. In that case, they will be allowed to claim credit for all the excise duties paid at the earlier stages. At the final stage of production, they will have to pay a uniform excise duty of only 4 per cent on pure cotton yarn, fabrics, garments and made ups.

For blended textiles and pure non-cotton sector, the uniform duty rate under Cenvat will be 8 per cent. The Finance Minister has expressed the hope that in course of time, some manufacturers of handloom and powerloom may also opt for the Cenvat route and take advantage of the low uniform rates of excise duty.

The Budget has also drastically reduced the Customs duty on select textile and garment making machinery from 20 per cent + cvd to 5 per cent + cvd. The duty on textile machinery used in silk industry has been brought down to 5 per cent + cvd from 10 per cent + cvd. The duty reduction is expected to provide a boost for modernisation plans of weaving, processing and garment segments.

According to the Minister for Textiles, Mr Shankersinh Vaghela, the Budget proposals could see new investments of about Rs 60,000 crore flowing into the sector and creation of an additional one million jobs over the next five years. The Government, he said, was committed to launching modernisation programmes for the textile industry to help it face up to the challenges thrown up by the phasing out of textile quotas at the end of December 2004.

The Textile Ministry is also attempting to address the infrastructure needs of the industry and, recently, 11 proposals have been cleared for setting up Apparel Parks at various locations, including Ludhiana, Surat and Tirupur.

Under the Textile Centre Infrastructure Development Scheme (TCIDS), 13 project proposals have been sanctioned for upgrading infrastructure facilities. Besides this, the proposed Apparel International Mart at Gurgaon and India Exposition Mart at Noida are expected to provide one-stop-shop and permanent display facilities for the industry.

Unfortunately, despite all the inherent advantages such as a strong raw material base, abundant availability of low-cost skilled labour force, and the vertically integrated industrial structure, the Indian textile and apparel industry was rather in a bad shape until recently because of the wrong policies pursued by the Government over the past decades.

Not only was there a freeze on weaving capacity expansion in the mill sector, but there was also a discriminatory duty structure between the organised mill sector and the decentralised powerloom sector. The readymade garment sector was reserved for the small-scale sector. Because of such distortions, the industry could not reap the benefits of the growing textile and apparel trade for a long time.

The policy distortions of the past years led to the fragmentation of the industry's structure with the dominance of small-scale uneconomic units. The share of the organised mill sector in total fabric output came down drastically to just around 5-6 per cent from about 60 per cent in the 1950s. It was only after the announcement of the new Textile Policy that things have started changing for the better.

The new policy freed garments from SSI reservation and allowed 100 per cent FDI in the sector. It also removed the earlier condition of 50 per cent export obligation for infusing foreign equity. The policy statement set an ambitious export target for the textile industry at $50 billion by 2010 with garments accounting for $25 billion.

The policy statement said that efforts would be made to restore the organised mill sector to its position of pre-eminence to meet the growing international demand for high value, large volume products. To achieve this objective, the policy proposed to encourage setting up of large integrated textile complexes and entering into strategic alliances with international majors, with focus on new products and retailing strategies.

Now both the industry and the Government will have to redouble their efforts to make up for the lost time in order to derive maximum benefits from the opportunities that will be opened up from 2005 onwards.

China has already taken a big lead over India since it had started the restructuring process way back in the early 1980s by focussing on building large-scale capacities in every segment of the industry. It has also made efforts to channel a large part of the production towards the export market; it exported textiles and garments worth $63 billion in 2002, more than India's total merchandise exports.

The Indian textile exporters would find it an uphill task to compete with the volumes and delivery schedules that China is capable of offering today. Despite this disadvantage, however, the Indian textile industry is emerging as the next best alternative to China because of a number of favourable factors. In fact, the major importers from developed countries are trying to reduce their excessive dependence on China for their requirements of textiles and apparels and increase sourcing from India.

More than a dozen international retailers have set up shop in India over the last three years to source their apparel requirements, dispensing with the earlier practice of operating through local buying agents. This development coincided with the Indian Government's decision to throw open the garment sector to large players three years ago and the entry of a number of domestic textile majors into the apparel segment in a big way.

Of late, most textile majors in India have sensed the fast-growing opportunities in apparels. Not only are the existing garment manufacturing firms expanding capacity and creating new ones, but even those who were predominantly in spinning and weaving are also diversifying into the apparel segment. For instance, the Gujarat-based Arvind Mills has set up plants to manufacture shirts and knitted garments in India and a jeans unit in Mauritius through a subsidiary company. It is also in the process of setting up a cotton trousers unit and a jeans plant in Bangalore.

Raymond is setting up a new suit and formal trouser manufacturing facility at Bangalore with annual capacities of 5 lakh suits and 10 lakh trousers per annum. It is also setting up a denim manufacturing facility with three million garments a year at the same location.

Similarly, the Rs 483-crore Bhilwara Group flagship, Rajasthan Spinning and Weaving Mills, is shifting focus from exporting yarn and fabrics to garments by investing Rs 150 crore this year. Others such as Welspun, GTN textiles, S. Kumars and Orientcraft have also drawn up expansion plans in a big way.

This list is by no means exhaustive. There are a number of other medium units in different parts of the country that have either entered apparel manufacturing or have drawn up plans to enter into apparel business. For instance, textile manufacturers in the South have also sensed the growing potential of this segment, and players such as Loyal Textile Mills, Renuka Mills and Superb Spinning Mills, just to name a few, have decided to go in for apparel manufacturing.

In the traditional textile and apparel clusters such as Tirupur, Ludhiana, Surat and Delhi also, one finds renewed enthusiasm to augment and upgrade apparel production facilities for the export markets. This is because there is an upswing in the overseas demand for their products since India is fast emerging as a major outsourcing centre for textiles and apparels.

Of course, the Indian textile and apparel industry is still to overcome some of the major challenges facing it if it has to succeed in truly becoming a major outsourcing centre for the international retailers.

A major problem confronting the industry is the huge backlog of modernisation because of decades of neglect.

Some time back, the Report of the Steering Group on Investment and Growth in Textile Industry, headed by Mr N. K. Singh, former Member, Planning Commission, had estimated the total funds required for modernisation of all segments in the industry at a staggering Rs 98,000 crore.

In the free trade environment, success will hinge more on factors such as quality, price, delivery schedules and marketing skills. The success in these areas will depend on going for modernisation and scale economies more aggressively and to improve the supply chain management. Today, the weakest link in the textile production chain appears to be the processing (dyeing and printing). Hence policy support is needed to set up large processing houses.

What is more important, India will have to strive hard to move up the value chain by capitalising on its inherent strengths and making the most of the growing synergy between textiles and clothing segments.

This will call for a much higher degree of consolidation in the apparel sector with larger units buying up the smaller ones and increasing the share of branded items in the total trade from the present 25 per cent or so.

Unfortunately, the Indian industry is still stuck in the low-volume, low-value end of the international textile trade. What is even more disappointing is that the unit value realisation for the apparel exporters has actually witnessed a marginal decline over the past decade in dollar terms.

Unless this trend is reversed, the achievement of the ambitious export target of $50 billion with garments accounting for 50 per cent by 2010 from the current level of $13.5 billion (with garments accounting for about $6 billion) may not be possible.