Understanding the textile value chain is critical to put an end to the periodic sectoral conflicts that erupt in the industry. To ensure growth, it is important to create a level playing field for all sections of the industry — cotton, yarn, fabrics, and garments and home textiles.
For this, we need to learn lessons from the huge mistakes made in banning the export of raw cotton in 2010 and yarn in 2011. These had a chain repercussion, eventually affecting the cut and sewn products sector (garments and home textiles) as well and causing losses to the tune of $4 billion to the industry as a whole.
The importance of a synergised and coordinated sectoral strategy is explicitly recognised by the Cotton Textile Promotion Council of India (TEXPROCIL), a non-profit body that promotes the exports of everything from raw cotton to garments. After considerable thought, it has put together a clearly articulated policy to ensure: (a) all sectors of the value chain have ‘quantity restrictions-free’ access to international markets and prices; (b) all sectors have access to domestic raw material at below the international price; (c) value addition is rewarded through focus product schemes and duty-free import schemes.
One way to achieve these objectives is through a modular drawback approach. This will enable drawback (rebate of duties paid on inputs) benefits to a sector to be carried over while calculating the drawback of the next sector in the value chain, which uses the output of the previous sector.
This approach ensures that the domestic price, net of the drawback component, is always lower for the domestic value-adding firm. For a given ex-millgate realisation, the price net of drawback on that product will be below the price at which the same product is made available to an overseas user.
Focus product scheme
Similarly, the focus product scheme (FPS) incentives start from the finished product end and flow down towards the raw materials stage. The excess of FPS incentives given to the cut-and-sewn products sector over yarn and raw cotton exports is an additional incentive given by the Government to motivate value addition.
Besides, duty-free import of accessories up to 3 per cent of export value is given to garment makers. Home textile exporters are, likewise, allowed 1 per cent duty-free imports benefits. These benefits are not factored into the drawback computations — which is only another way of encouraging value addition by garment makers
In all, garment exporters avail around 3 to 4 per cent more benefit than yarn makers in order to encourage value addition. This, even after ensuring that the raw material — be it yarn or fabric — is made available to garment exporters at a price lower than that for overseas garmenting firms through the modular drawback scheme.
In other words, garment and cut-and-sewn product exporters have sufficient policy-based protection and additional benefits over other firms in the value-chain.
As part of its efforts to reduce the country’s ballooning current account deficit, the Government has sought to encourage exporters by announcing focus market schemes and incremental exports incentives. Since our exports have traditionally been skewed towards the developed world the Government has rightly identified potential new markets for shipments. These markets are in countries that are far-flung and to which Indian products have not been exported before.
Exports incentives
In recognition of this, the Government came out with FMS and incremental exports incentives. These covered all products whose exports weren’t restricted, including raw materials attracting export tax. At the same time, there has been an unjustified withdrawal of these incentives for export of yarn and raw cotton even though their exports are not restricted, thereby making for a policy inconsistency. This move has been welcomed only by the Apparel Export Promotion Council and the Tirupur Exporters Association. These organisations have been raising issues over yarn prices and in the process inflicting injury on spinning mills.
There is enough data with the Textile Commissioner to show that domestic yarn prices are and will continue to remain lower than international levels. Moreover, yarn is produced on a 24x7x360 basis and is consumed daily. So, any supply-demand mismatch should show up in the monthly closing inventory levels.
Yarn stocks now are 20 per cent higher over last year and increasing. Add to these the grey fabric stocks with weavers, which are also at an all-time-high, given poor domestic demand and rapid increase in production.
On the other hand, exports of garments and cut-and-sewn products are growing faster than ever before, but are simply not enough to consume the surplus yarn and fabrics production in India.
Yet, the Tirupur garment makers’ representatives are engaged in a game of one-upmanship with the spinning industry, for reasons best known to them.
End the conflict
The Government needs to put an end to such sectoral conflicts causing unnecessary damage to our economy and job creation opportunities. This can be done by recognising once and for all (a) the policies put in place to ensure lower costs to domestic firms; (b) the higher incentives already given to the garmenting sector with a view to promote value-addition in exports, and; (c) using the available data to keep a watch on yarn availability for the domestic industry.
Simultaneously, it must be appreciated that the poor man’s fabric today are synthetics and blends. Their prices, including that of raw materials, need to be closely monitored.
Also, it should be understood that the spinning industry has achieved what no other manufacturing industry has. It operates on very low profits in a perfectly elastic market, where there are thousands of reasonable-sized players. The Indian spinning industry has one of the world’s highest productivity, 30 to 40 per cent more than China’s. It uses energy frugally, which comes from having its base traditionally in the power-starved southern States.
The industry also trains its workforce through its own in-house facilities using modules prepared by the South India Mills Association and South India Textile Research Association, among others. Indian mills produce some of world’s best yarn and have the highest depreciation-to-turnover among all industries, clearly evidencing the hunger to stay invested with the most modern technology. They have forced all global leaders in machinery-making to set up manufacturing units in India.The total overheads including cost of staff and management are just 1.5 to 2 per cent of turnover. Profits over the last five years have been less than 5 per cent of turnover.
The National Manufacturing Competitive Council should consider undertaking an in-depth study to understand the making of a globally competitive industry in a country suffering from serious infrastructure disabilities and struggling to get its manufacturing costs right.
This industry which has been able to export to China deserves to be promoted rather than be dragged under by counter-productive sectoral conflicts.
(The author is chairman, Loyal Textile Mills Ltd.)