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Textile sector needs more reforms, investment IMF study scenarios give little cause for cheer

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G. Srinivasan

New Delhi, Jan. 11

EVEN as a misplaced hype is doing the rounds about the record growth of exports of Indian textiles and clothing in the post-quota regime, an IMF working paper has contrasted the performance of China and India and warned that India's gains would be limited "without stepped-up reforms and more investment to bolster the sector's competitiveness."

In a recent study on the impact on India of trade liberalisation in the textiles and clothing sector, the Fund's senior economists, Mr Prasad Ananthakrishnan and Ms Sonali Jain-Chandra, contend that the extent to which India could leverage its innate assets and benefit from the quota elimination depend on the degree to which it could remove existing constraints.

They said that India's innate assets include a large and relatively low-cost labour force, a sizable domestic supply of fabrics, a strong and diverse raw material base for manufacturing natural and artificial fibres and a capacity-based advantage in spinning.

Not spectacular as China's:

Stating that India's performance since 1995 when the phased liberalisation of textile and clothing quotas began under the Multi Fibre Arrangement (MFA) has not been "spectacular" as China's, they said globally India's market share inched ahead in both the textile and garment sectors between 1995 and 2003. But China's share grew pronouncedly, even as India has expanded its access to US and Canadian markets since 1995 but has lost market share in the European Union (EU) and has managed to capture only a negligible share of the Japanese market.

Citing preliminary US data for the first half of 2005, they said that these show China increased its textiles and clothing exports in products liberalised after January 2005 by about 242 per cent, while India's textile exports to the US grew by 34 per cent.

A similar development is evident in the EU, where China's exports surged by 80 per cent while India's posted a more modest increase of 10 per cent.

Future scenario:

In order to come to a better sense of how Indian textile and clothing exports might fare in the post-quota world, the study scans two scenarios one in which temporary safeguards are in place limiting Chinese exports and another in which the end of quotas is allowed to have its full effect.

The Fund economists said the results of these simulations give India little cause for cheer, as its textile and clothing exports would likely continue to expand in the presence of safeguards limiting Chinese exports but suffer once these safeguards are lifted.

More specifically, in a scenario in which a 50 per cent quota is slapped on Chinese imports to the US and the EU, Indian textiles and clothing exports would grow by 13 per cent and 11 per cent respectively.

In the scenario in which all quotas are lifted, however, India's textiles exports grow by 5.6 per cent and clothing exports fall by 4 per cent.

Weaknesses:

They said the key weaknesses holding the sector's output and productivity cover the low quality of textile products, fragmentation of the industry, a continued concentration on low to medium-priced apparel, lengthy delivery times, delays in customs clearance, little infusion of new technology, lack of scale economies, high transportation and input costs.

They said India has much to gain from improving its infrastructure, removing inefficiencies in its power sector, increasing efficiency in customs procedures and introducing greater flexibility in the labour markets so that India could set up mega production plants similar to those in China.

As technological development will play a more critical role in a competitive market milieu, the Government should encourage technology transfer and diffusion of innovation.

To minimise lead times, India will need to further integrate the supply chain and foster strong textile clusters capable of coordinating all stages of production.

India's image as a major exporter would also benefit from a greater stress on quality certification and branding, over and above encouraging foreign direct investment and transfer of technology in textiles and clothing.

Even as India does not yet permit FDI in its retail segment, it might be apt to allow such investment in retail distribution services for textiles and clothing, they said, adding that India should encourage diversification of established textile firms to produce technical textiles such as those required for packaging, sports, medical and hygiene needs and military uses.

(This article was published in the Business Line print edition dated January 12, 2006)
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