The Hindu Business Line : Commodities as building blocks

With rising incomes, there is propensity to spend more on apparel and clothing. The textile industry is poised for a boost in the global market. The phase-out of quotas and the end of the Multi-Fibre Agreement have provided a shot-in-the-arm for the industry.

THE BALANCE of textile power is shifting.

After food, fibre is a major commodity group certain to enjoy tremendous surge in consumption demand over the coming year. Fibres — cotton, jute and mesta, silk and synthetics — are integral to the apparel and clothing sector. They serve as raw material for the production of a wide range of fabrics and textile products to suit factors as diverse as weather conditions, culture, activity (occupation, sports, and so on), gender and age (children clothing).

Demand-driven areas

The production of fabrics has been rising at 7-8 per cent a year (49,577 million sq m in 2005-06). Textile exports show robust growth and were valued at $17.1 billion in 2005-06. The fabrics and textile market is essentially demand-driven. The existing low per capita consumption of these products creates great opportunity for investment in production, marketing, branding and distribution. Franchising opportunities exist in a free trade regime. Consumption is set to expand as a result of rising incomes and demographic pressure. Dress habits and lifestyle and the changing fashions are also seen as key demand-drivers. Many of the modern products are targeted at youth. With rising incomes, there is propensity to spend more on apparel and clothing. Interestingly, the Indian textile industry is poised for a boost in the global market. The phase-out of textile quotas and the end of the Multi-Fibre Agreement have provided a shot-in-the-arm for the industry.

Rising production costs in the developed economies force manufacturers to relocate units in the developing countries such as Asia. An important component of the country's export basket, textiles are set for a further boost. A major thrust is on to take textile exports beyond $17 billion.

Huge investments have been planned for modernising the existing mills and setting up new ones. Schemes such as the Technology Upgradation Fund and Integrated Textile Parks are aimed at boosting production.

With rising demand and investment flowing into building production capacities, the consumption of raw material (cotton and other fibres) is sure to expand. The cotton output has already taken a big leap from 170 lakh bales in 2001-02 to 270 lakh bales in 2006-07. Therefore, fibres as a group of commodities, is expected to attract the attention of investors. Globally, too, the "balance of textile power'' is slowly, but surely, shifting from the West to Asia.

Construction, Housing and Infrastructure

Next in our list of major growth sectors with strong commodity bias is construction, housing and infrastructure. Commodities that are integral inputs for this sector include industrial metals (mainly steel), base metals (aluminium, copper, nickel, zinc, tin and lead) as also cement.

Admittedly, housing and real-estate constitute not only a major proportion of national wealth but also an important and fast-expanding component of the services sector. Again, rising incomes and demographic pressure together with nuclear families (slow disintegration of joint families) have ensured rapid growth in housing and creation of fresh demand. Yet, serious shortage of housing is a matter of reality. No wonder, the real-estate market is buoyant.

Currently, infrastructure constitutes the soft underbelly of the country's economy. The needs are large and growing, while supplies are woefully short. To realise the targeted GDP growth rate of 10 per cent, there is a strong need to bridge the cumulative capacity deficits and plan for the future. The country urgently needs more power plants, road corridors and expanded capacities of airports and sea ports, to name a few. Special Economic Zones (SEZs) are also becoming increasingly popular among entrepreneurs.

Investment needs

The estimated investment needs for infrastructure projects are rather large. A research report indicated that infrastructure investment in the country is expected to double to $47 billion by 2009 (representing 4.7 per cent of GDP) from the current $24 billion (3.5 per cent of GDP).

Contrast it with China's capital spending. The country spends $150 billion, representing 10.6 per cent of GDP on infrastructure. If India has to keep up with the 8-9 per cent GDP growth per annum, we need to spend an estimated $100 billion a year. A committee on infrastructure development under the chairmanship of the the Prime Minister has indicated the investment needs in major areas. By 2012 (coinciding with the Eleventh Plan), the investment required in national highways is $40 billion; seaports $11 billion; and airports $9 billion.

To achieve the goal of adding 100,000 MW of generation capacity, and to erect transmission and distribution facilities, power sector investment requirement over the next five years would be as high as $190 billion. Even if a part of these needs actually fructify, there would be huge demand surge for several commodities, including metals and cement. Out of every one billion dollar spent on housing and infrastructure, the commodity component is estimated at about 60 per cent.

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