vijaya ramchandram textileunderreview1

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EXPORT COMPETITIVENESS AND THE MARKET FOR TEXTILES:key issues, evidence from firm interviews, and policy suggestions

Vijaya Ramachandran

(assisted by Melissa Himes)Center for International DevelopmentHarvard UniversityRevised July 2001


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Abstract

This paper reviews the literature on the production and exports of textiles and garments inIndia and reports the results of a firm survey undertaken in September and October 2000.Textile production is a very significant part of the Indian economy but has not grownvery much in the past decade. This paper identifies weak links in the production chain,key obstacles to productivity and to exports, and policy changes that must be made forthe growth of production and exports in the textiles and garments sector.


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Section I: Textile Production in India

This paper looks at the dynamics of textile production and export in India. It summarizes

available research as well as data from firm interviews, and discusses policy options forthe sector in an era of intense competition.

This section outlines the major structural features of production in the textile sector inIndia.1 Garments and textile production constitutes the second largest source of employment in India after agriculture. Indias garment exports have grown in the pastcouple of decades but there is great scope for further expansion. Indias share of worldexports of clothing was 2.6 percent in 1994, up from 1.5 percent in 1980. However,India's share of world clothing exports has not improved since 1994 and declinedmarginally to 2.3 percent in 1997. The value of garment exports was $3.8 billion in1997-98 with a growth rate of 0.6 percent. Tables 1-5 present the relevant data on textileproduction in India.

The garment sectors exports has grown substantially in the last five years. Indias shareof exports in 1994 was 2.6 percent, up from 1.5 percent in 1980. However, India's shareof exports has not improved since 1994 and has declined marginally to 2.3 percent in1997. The value of garment exports was $3.75 billion in 1996-97 and $3.78 billion in1997-98, registering a small growth rate of 0.6 percent.

Indias garments exports largely consist of cotton garments (about 70 percent of garmentexports). Synthetic garments make up the rest; this mix has not changed significantly inthe past decade. A few items dominate the list of exports. Women's outerwear is about 40percent of the total, while men's shirts has about a 20 percent share. These two itemsmake up the majority of exports. The United States and the European Union are India'sdominant export markets, constituting around 70 percent of demand. For atleat the lastdecade, India has fully utilized its quota levels. India has a greater than 50 percent sharefor womens outerwear in the American market and exports more than a billion-dollarsworth of womens outerwear; more than half of it was to the United States. Whileseveral countries compete in export markets, China and Hong Kong have emerged asdominant players. Together, they are the top supplier in 8 of 17 categories of textileexports. This dominance is probably a result of two factors--a higher level of productioncapability and a greater ability to compete in export markets. Section 3 returns to thissubject.

1 This section summarizes the work of T.Roy (1998) and other researchers, as well aspress reports.


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Quality and specialization drives prices for garment exports in the global market. Pricesreceived by Hong Kong are probably the highest, followed by China and Indonesia. Pricedifferences indicate specialization, design, and quality. India is somewhere in the middleof the price spectrum, reflecting its position on the quality-design spectrum. Overall,there has been an improvement in the quality of Indian garmet exports; prices have risen

over the past decade for almost all the products that India exports overseas. There is alsosome product differentiation; India has emerged as a dominant supplier of some garments(such as mens casual shirts) but lags behind in others.

The following paragraphs describe some of the key characteristcis and constraints thatdrive productivity levels in Indian manufacturing. The manufacturing sector in India islargely recognized to be divided into two sectors--registered and unregistered. Theregistered sector is made up of firms registered under the Factories Act 1948 and includesfactories with electricity employing 10 or more workers, or those without electricityemploying 20 or more workers. Firms which do not fall into these categories make upthe unregistered sector.

The production structure of the Indian apparel industry is fairly segmented, leading tosignificant differences in productivity levels. First, there are relatively unorganizedsuppliers who sell to exporters. Then there are organized manufacturers with factoryoperations who export their products overseas. But the majority of apparel productionoccurs in very small firms with manually operated sewing machines. The unregisteredsector is by far the most significant production sector, contributing more than 90 per centof value added. Due to a recently abolished reservation policy, garment productionwas largely reserved for small scale firms. This is partly the reason for the distribution of firms described above.

There are some advantages to the small size of Indian firms. They have greater flexibilityand can cope with a wide range of production, including very small orders. But themost flexible (and arguably the most productive) firms in the garment industry are thepowerloom factories. Powerlooms have the very significant advantage of short lead-time, which is very important for manufacturers who are supplying to niche markets.But in general, Indian firms have had a problem with the procurement of standardizedfabrics for the production of standardized garments. This is one of the weakest links inthe production chain . In particular, the procurement of heavy cotton fabrics as well asfabrics in certain types of thread counts and widths has hampered production. Producershave encountered obstacles in importing these fabrics, largely caused by quantitativerestrictions and high tariffs. Nominal tariff rates (well over 100 percent in the 1980s)have been reduced somewhat are are at present about 50 per cent on cotton fabrics. Thesituation is further complicated by the presence of special licenses, required for theimport of duty-free textile fabrics, components, and accessories for export production.Also, the value of goods that can be imported duty free is determined either on the basisof FOB value of exports of the exporter (the value-based license) or the physical quantity


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of inputs required for a given output (the quantity-based license). Both systems havehampered production. In particular, they have resulted in time delays, which can bedisastrous for an industry that is driven by fashion-based as well as seasonal trends.

Another problem in the production process is the lack of availability of good qualitytrimmings such as lace, buttons, zip fasteners, thread interlinings and packagingmaterials. This problem may be alleviated by the abolition of the reservation policy, asthese products were previously reserved only for small scale production. In the past,exporters have been allowed to import trimmings by paying a duty of 40 percent andobtaining a speical license. The license requirement was abolished in 1996 but obstaclesto the timely importation of trimmings remain. The availability of trimmings is crucialto the success of exporters. Major exporters of garments are almost always significantimporters of trimmings and other specialty accessories.

There is a trend in the consumption of garments that must be taken into account withregard to developing a production strategy. Within India, there has been a steady declinein the consumption of cotton cloth between 1970 and 1991. Sample surveys show apattern of decline as well. Total consumption of cloth was more or less unchanged at 14-15 metres per capita between 1970 and 1990, suggesting that cotton is being replaced bymanmade fabrics such as polyester and blends. But this trend has been reversed recently;cotton and manmade fabric consumption has increased in the 1990s.

There are four types of textile firms in India-- handloom, powerloom, composite mills, andprocessing houses. Composite mills are equipped to handle the entire production of textilesfrom cotton spinning to design, weaving, and processing. Handlooms include those infactories or households. Powerlooms can be described as weaving factories. They weave ahigher share of manmade cloth than of cotton. They have no organizational homogeneity.Many powerloom manufacturers survive on low wages and obsolete looms, and areunregistered as factories. But a fair number have plants with 100-200 looms, and cloth-finishing processes. Both the composite mill and powerloom sector have suffered under agovernment policy of being prohibited to import powerlooms more than 10 years old. Thecost of looms under 10 years old, but operating on the same technology as slightly olderlooms, is prohibitively high and prevents firms from upgrading to comply with internationalstandards of technology and quality. Some composite mills reported that until recently theywere using looms as old as 80 years!

The share of mills in cloth production is steadily declining. Mills consist mainly of bankrupt and obsolete factories. They do produce and export a certain quantity of yarn,though the main supply of yarn comes from specialized spinning mills of relatively recentorigin. Integrated mills make generic cloth, which have no demand either at home orabroad, and they make them at far higher cost than powerlooms. Most composite millsproduce a certain amount of greys or unprocessed fabrics, although many now produce


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more specialized products such as made-ups, industrial fabrics, and high-quality cottonfabrics for both export and domestic consumption. The reason why the mills continue atall is the dominance of the public sector-owned National Textile Corporation. Almost alltextile exports from mills are accounted for by 10-12 private composite mills, whichaccount for about 10 per cent of capacity but well over half of production. In general,

policies have been very discriminatory towards the composite mills, with taxes levied atevery segment of production, in addition to extremely high income taxes. The currentlabour policy makes it infeasible for mills to move to areas with lower infrastructure costsand has greatly increased the burden of paying utility costs as well as supporting anexcess of labor.

Interestingly enough, recent expansion in demand has been met largely by relativelyunorganized producers i.e. by powerlooms and knitting factories. Exports of knittedgarmets have grown recently. Powerlooms have increased their share of exports as well.The standard argument explaining powerloom growth is that the wage-differentialbetween formal and informal sectors is advantageous to powerlooms. It is also allegedthat the informal sector routinely evades taxes, which gives them the edge in terms of profitability. Neither of these hypotheses is confirmed by the available empiricalevidence. Rather it appears that powerlooms have a competitive edge, particularly withrespect to manmades, and are more productive than handlooms and mills. The evidenceindicates also that smaller-scale, labor-intensive firms are the most productive in thetextile sector. However, there are complicating factors which deserve further study.Anti-composite-mill policies may have resulted in making powerlooms morecompetitive. While they can be more flexible and produce at a much cheaper price, somemanufacturers argue that their quality is rarely up to international standards; hence themajority of garment manufacturers import their man-made raw materials. In particular,powerlooms have not been successful with respect to blended yarns, high-quality finishesand rigorous standardization.


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It is worth noting that the textile machinery industry is in desperate need of investment.The lack of availabilty of up-to-date machinery is another weak link in the production chain. Access to the world markets has led to a collapse of demand for domestic machinery butalso to an increase in the demand for textile machinery.

The supply of textile machinery is dominated by about five firms. One in particular, theLaxmi Group, is the dominant player. These firms make up about two-thirds of themarket for textile machinery sourced in the domestic market. All the key players haveforeign collaborators and are focused on the export market. However, there are another100 or so firms that make machines and/or components. These firms are showing verymixed results; some are actively moving away from textile machinery and diversifyinginto other products. Finally, there are about 500 component manufacturers, who aremainly small-scale producers of machine parts. While the largest firms have beensteadily successful, the smaller firms have largely been unable to cope with increasedcompetition. Imports of textile machinery and components have skyrocketed whileexports of components and machinery have fallen during the past decade. It is importantto note that some policy changes have been implemented which could turn this industryaround. Duties and licenses have been reduced or abolished on imports, and age-restrictions on imports have been lifted. The market for secondhand machinery isgrowing, and will probably need some policy intervention to enable a larger share of imports. While some researchers argue that this may be counter to the process of modernization, it is widely recognized that the overall liberalization of the machinerymarket can only be helpful to increasing productivity in the garment industry in the longrun.

Small Scale Sector

Government policy has played a fundamental role in shaping the growth, structure andtechnological evolution of the textile sector in India. There is a distinct trend towardsdecentralized, small-scale manufacture in the unorganized or informal sector, accountingfor nearly four-fifths of the total cloth output. Most of the small scale firms in India are inthe spinning sector or in fabric weaving and processing and operate with handlooms orpowerloom. The handloom sector would typically consist of units with 2 to 6 manuallyoperated looms.2 Their production could be as low as 5 meters/day. They buy yarn andsell grey fabric to local buyers. The decentralized sector accounts for the bulk of Indiasfabric production. There are also several small scale industries built around processing,that is dyeing and finishing. However, units in the informal sector may or may not be

registered and reliable statistics of employment and output are generally not available.Concessions given to the small-scale sector led to the proliferation of powerlooms. Someof the negative consequences of this policy were dubious entrepreneurial practices suchas dispersion of manufacturing over several units in order to avail of the protectionsreserved for the small-scale sector, and growing numbers of workers in this sector with

2 In 1998, the handloom sector accounted for 23% of totalvolume production and the powerloom for 71%, with millsaccounting for 6%.


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wages far below those of the organized sector of the textile industry. At the same time,low technology hand processing and standalone process houses have zero or negligibleexcise duty resulting in poor quality and lower revenues for government.

The powerloom sector weavers typically use powered shuttle looms and some even

shuttle-less looms. They do not have as stringent labor regulations as the factories andthis gives them more flexibility. Most are located in industrial areas and benefit fromlower tariff. Most powerloom units operate on a small-scale basis, typically using three tofour looms per unit, which places them outside the ambit not only of the Industries(Development and Regulation) Act (which applies to all units which employ fifty or moreworkers and use power), but also Factory Act (which is applicable to all units whichemploy ten or more workers and use power) and are therefore not subject to theirprovisions. (There are essentially two forms of organization prevalent-the master-weaversyatem and the owner-entrepreneur system. The former is a kind of a putting outsystem with the master-weaver providing the raw-materials to the loom owners who inturn are paid conversion charges according to the quantity of cloth produced. In thesecond system, the owner-entrepreneur undertakes all the investment and consequentlybears the entire risk.) The looms may be operated by family or hired labor, or acombination of both. In contrast with the organized mill sector, almost the entirerequirement of working capital and fixed capital of powerlooms is met from non-bank sources.

While the organized and unorganized sectors compete with each other in the productionof cloth, the latter is almost wholly dependent on the former for the supply of the basicraw material (yarn). Similarly, a substantial part of the processing of cloth produced inthe decentralized sector is done in the organized sector, emphasizing the intimatelinkages that exist between the two.

It is interesting to note that upgrading of facilities and technology by small and mediumenterprises in Japan (classified by government as enterprises with less than 300employees and capital of less than Yen 100 million), and renovation of their operations tocontrol increased costs in labor and materials, following the oil crises, has given theexports of these enterprises a competitiveness in international markets. In the Indiancontext, rather than induction of costly technologies, what is required is more intensivemachinery utilization, renovation of existing equipment, introduction of work norms, andrationalization of surplus labor.

While in most other countries, small industry (SSI) is defined by employment size, inIndia it is defined in terms of capital employed in plant and machinery. Over the years theSSI has enjoyed numerous tax and other benefits which have encouraged entrepreneurs toremain in the small category. Instead of graduating from small to middle and large,there is a vested interest in continuing to be classified as small. The definition of smallscale in India has prevented vertical growth of small enterprises into competitive-sizedunits and resulted in horizontal proliferation and fragmentation of production capacities.Therefore, small scale industry is more of a fiscal artifact than a marketing andtechnological reality. Greater sub-contracting by large firms will stimulate the growth of


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small enterprises. Since small industry is clustered in certain locations, area-specificprograms will have great utility.


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Section II: Indias Export Potential

The value of world apparel exports was estimated to be $166 billion in 1996 (WTO,1998). Until the end of the 1980s, the top four garment exporters were Hong Kong, Italy,

South Korea, and Taiwan. China emerged as a leading exporter in the second -half of the1980's and today occupies the number one position in the world. Tables 6-8 present therelevant data on exports.

According to Ramaswamy and Gereffi (1999), globalization of production means that agarment could be designed in New York, with fabric made in South Korea, cut in HongKong, and assembled in China for distribution in Europe or North America.3 The mainfactors determining this pattern of production are the labor-intensiveness of apparelproduction, the loss of comparative advantage of developed countries, the dramaticdecline in transport and communication costs, the search for production sites with lowerlabor costs, and the shift in apparel exports to countries less restricted by quotas. It isreported that about half of the total production capacity in the apparel industry has shiftedfrom developed countries to less developed countries over the past three decades. Thefundamental factor driving the location of production is the difference in wage-levelsbetween countries.

Textiles and garments make up the second fastest-growing product category of globalexports, second only to office and telecommunications equipment; both sectors arecentral to the process of global integration (GATT, 1994). China has emerged as a majorplayer in the textile sector and now occupies the number one position in the world. In1995, China and Hong Kong together had a share of 21.2 percent of the world; bothcountries will continue to dominate the textile industry for a long time to come.

On the demand side, the United States and the EU together imported over 70 percent of world's clothing imports in the 1990s. It is interesting to note that the composition of their suppliers has changed substantially. The share of largest three suppliers to theUnited States--Taiwan, Hong Kong and South Korea--declined from 59 percent in 1983to 38 percent in 1990 to 18 percent in 1996. Mexico and some Central Americancountries have increased their combined share from 6 percent in 1983 to more than 24percent in 1996. According to US trade data, Mexico actually moved ahead of China tooccupy the top position in apparel exports to the US (USITC, 1998). The situation haschanged elsewhere as well. China and Turkey replaced Hong Kong and South Korea asthe largest suppliers to the European Union in the mid-1990s.

3 This section summarizes a paper by K.V. Ramaswamy and Gary Gereffi (1999) entitled Indias

Apparel Exports: The Challenge of Global Markets, as well as press reports.


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The majority of trade in textiles and clothing is regulated by the Multi Fibre Arrangement(MFA), which was established in 1974. Under the MFA, developed countries negotiatebilateral agreements with their trading partners, in order to restrict the quantity of exportsfrom each partner. The intention is to protect domestic producers in the developedcountries from external competition. These annual quotas cannot be increased by more

than 6 percent every year. The MFA contains certain types of provisions in quotaadministration like the 'swing provision' ( which enables a switching of quotas amongproduct categories), as well as carryover and carry-forward provisions. Most researchersagree that the MFA has been highly discriminatory and that it has become morerestrictive over time.

The MFA is to be phased out under the Uruguay Round Agreement in four differentstages by the end of 2005. The ATC (Agreement on Textiles and Clothing) specifies thephase-out program of activities, during which trade in textiles and clothing will begradually integrated into the WTO. At the start of each phase of integration, importingcountries must integrate a specified share of their textile and garment imports into thenew framework. This would be based on total trade volume in 1990, for the items listedin the annex to the agreement, and provide for progressive relaxation of quotas forproducts remaining under a quota system. While the most sensitive products will see afull relaxation of quotas only towards the end of the ten year period (2005), the growth of quotas by 6-7 percent a year for Indian production has helped tremendously.

American companies are increasingly relying on imports to remain competitive inconsumer markets. Americans now purchase more than 50 percent of their garmentsfrom overseas producers. American retailers used apparel wholesale-importers to buyimported garments in the past; most of them now have buyers in many parts of the world.Branded manufacturers like Liz Claibore, the Gap, Banana Republic and Express relylargely on local producers in exporting countries. Contracts between such companies andlocal producers are made via local buyers or company offices in the exporting country.

According to Ramaswamy and Gereffi (1999), certain trends in retail behavior are worthnoting in terms of maintaining competitiveness in export markets. Retailers appear tohave increasing leverage over suppliers in terms of determining prices and product lines.This also increases pressure on suppliers to adopt new technology such as electronic datainterchanges, that enable suppliers to fill orders rapidly, efficiently and flexibly.Suppliers are penalized for incorrect orders and suffer harsh consequences if orders aredelayed. Third, retailers are offering greater variety of apparel products in order toincrease their market share. This drive on the part of retailers has led to greater demanduncertainty. As a result the demand uncertainty previously associated with fashionproducts has spread across product categories affecting basic products like men's shirts.Retailers are therefore abandoning the practice of ordering large quantities in advance of any given season. Instead, they prefer to order in small quantities and refill their orders asthe season goes on. This has led to shorter lead times for the suppliers and has forcedsuppliers to develop capabilities to respond sudden changes in demand. This is


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ten years from $11 billion today to $50 billion. Half of this target is to be met by garmentexports. This is perhaps the single most important step that the government has taketowards improving resource allocation, firm productivity and export growth in the longterm.


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Section III: Exports and Competition from China

A number of changes are taking place in the Indian textile sector. As described earlier,the Indian government has abolished the reservation system, which favored small-scale

producers over others. The abolition of this system means that firms are now in a muchmore competitive environment. However, there is a general fear that market share will belost in the post-MFA world. Attempts are being made to modernize the industry througha Technology Upgradation Fund, but producers believe that this Fund may not adequatelyaddress the concerns of large firms. While the TUF is a scheme introduced to meet theneeds of a sick industry, in reality it is only accessible to firms with healthy bank balances and production levels. To meet its target of 5 percent of world trade, India willhave to increase its exports to $25 billion annually (trade is at 2 percent of world totalsnow). Large investments needs to be made in order to improve the productivity of weaving and processing. This is yet another weak link in the production chain, one that occurs further downstream . In particular, investments must be made in the acquisition of technology that will make the weaving and processing of textiles more efficient, lessprone to error and more oriented towards the production of high quality textiles.

There are many questions about Indias export potential in the long run. The lack of well-defined policies on agricultural exports, a fairly limited range of exports, and theinability to penetrate new markets are all problems that need to be addressed. NorthAmerica, Western Europe and Japan remain the largest importers; not much progress hasbeen made in exploring new markets in Latin America or elsewhere. Also, India mustbegin to explore new markets outside of North America, particularly in light of the NorthAmerican Free Trade Agrement (NAFTA) which shifts advantages to producers withinthe region covered by the agreement. While some exporters have business in CentralAmerica, there are other regions which have serious potential, including the Middle Eastand East Asia. These are issues that must be addressed, particularly because the threat of competition from China looms large.

China is emerging as a very powerful competitor, ready to compete in the post-MFAworld. The Chinese government has picked the textile industry to make breakthroughs inreversing the losses of state-owned enterprises. It has achieved some of its goals a yearahead of schedule. From January to November 1999, the industry as a whole turned outnet profits of 116m yuan, according to press reports. The value-added of Chineseindustry in total reached 3,485 billion yuan, up 8.8 percent over the previous year.Chinese exports are expected to grow by 6 percent in the coming year to 195 billion USdollars. Government investment remains a major force in China. the Chinesegovernment has issued 160 billion yuan worth of treasury bonds to finance infrastructureconstruction and technological upgrading. Total investment in 1999 was 2,200 bn yuan,up 7.8 percent from 1998.


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Section IV: Data from Firm-level Interviews

Avariety of firms were interviewed in October and November 2000 as part of this project.A broad range of manufacturers were covered, from garment manufacturers of small,

medium, and large sizes to large, organized mills. The following discussion containscomments from selected firms. We have summarized these comments below.

Firm #1, Chennai

This company is unique in that it is the only wholly foreign-owned garmentmanufacturing company in India. This firm can be considered a benchmark manufacturerin both management style and labor conditions.

The firm manufactures exclusively for Victoria's Secret (USA) and Triumph (EU). Thisis a large scale operation, turning out approximately 8000 pieces per day, and has aturnover of around $30 million. Because they are a niche manufacturer, they are not veryconcerned about competition from China, which typically does not manufacture similargarments (we believe this could change in the coming years).

Because of their size and the extremely high quality of infrastructure, the firm does notconsider itself to have insurmountable barriers, with exception of excessive regulationinvolved in obtaining quotas. All power is generated onsite, and the company has its ownwater treatment plant. Workers have extremely good working conditions, which isevidenced by the low turnover (2 percent) and low absenteeism (4.5 percent). Workersare provided with full training, receive transport to and from work, are paid slightlyhigher than average wages, have full health benefits, are provided with educationalopportunities for their families as well as subsidized meals in the cafeteria, and work in aplant that is completely air-conditioned.

The firm ships all their goods by air , which enables them to circumvent the antiquatedport system in Chennai. They say that airport infrastructure is excellent and that this typeof shipping has caused few problems. However, the firm would like to see the Indiangovernment actively promote Indian garments on the international market. Currently theAEPC does this to some extent with its trade shows, but it seems that there is much roomfor expansion. The primary role of AEPC as of now is to deal with quotas; there is muchroom for growth in terms of the AEPC actually becoming a true promotion council. Intimate would like to know more about what kinds of promotion policies the Indiangovernment is currently considering.

The firms biggest concern as a manufacturer is keeping its customer base, so whathappens in the American market is of prime importance. They inquired about theperformance of Victorias Secret in the US; perhaps information re: customers could beprovided to a greater extent and in a more timely manner.


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On the whole the firm is optimistic about the lifting of quotas. The manager believes thatbeing in a niche market, the quota release should only increase export opportunities.They recognize that manufacturers who cater to the lower end of the market and have tocontend with China may have much more to worry about.

Firm #2, ChennaiThis firm is another large manufacturer, and is entirely Indian-owned. The company is11 years old and was financed through the State Bank of India. The owners did not havea problem financing this company because it was done via a larger company. The firmsaid its interest rate was low (12%) because it is a completely export-based company.Additional credit to finance orders is also easy to obtain, because their banks providefinancing based on your total order amount.

The total number of employees is around 3500, and they do all levels of production withthe exception of fabric production. They produce exclusively for branded apparel in theUSA, EU, and Mexico, for companies such as Gap, Columbia, Casual Men andTimberland. Their main production items are men's/boy's shirts and men's/women'strousers. They deal directly with importing firms, in addition to using brokers.

In terms of dealing with importers, the firm finds that there is no centralized system within the importing firms. Instead they have to go through many different departments,and they lose valuable time as a result. In addition, they find most internationalcompanies to be inflexible, because they effectively dictate terms of manufacturing(factory conditions etc.). There is often a clause in the contracts whereby if goods arrivelater than the scheduled date, the company does not have to purchase the goods.Therefore, shipping delays can lead to very high losses.

In terms of infrastructure, the port was the biggest complaint. Firm managers feel thatthe berthing facilities are inadequate and that this is the main cause for mother vessels notdocking in Chennai. In addition, they find the wharf charges to be overly high. The factthat mother vessels do not dock in Chennai delays their delivery.

General infrastructure was found to be adequate with the exception of electricity whichthe firm generates on-site. However, the roads are considered adequate as aretelecommunications (particularly because Chennai is currently installing fibre opticcable). The firm feels that the growth of the IT industry in the area has led to an overallimprovement of infrastructure.

Firm managers do not find labor to be a problem; the reason for this is that the firm has astrong incentive system, is very team oriented, and hires primarily women. Firmmanagers believe strongly in training and feel that this is the key to success. They alsohelp with family issues and other sorts of welfare problems. They feel there are fewobstacles to expanding their business, and are currently in the process of launching adomestic private label. They have received financial support through TUF


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(Technological Upgradation Fund) which provides a government subsidy of 5 percent onbank interest rates.

Other issues which they feel are of concern is the exchange rate of the Rupee on theworld market, which is significantly stronger than the rates of Pakistan and Bangladesh,

whose currencies have been depreciating against the dollar. In addition, their importersare looking for higher quality but the prices they are offering for goods decreases everyyear.

They would like to see the government work on the development of polyester fibrefabrics, which up to now has been completely neglected. Also, they want to understandhow to lower costs of production, given that Pakistan and China can currentlymanufacture more inexpensively. As manufacturers they are concerned with quality,timeliness, a bit more give and take with their customers, and teamwork.

Firm #3, Chennai

This company is part of a larger group, and the group controls marketing and finance. Itis a wholly Indian-owned company with 5000 employees. They do everything fromcutting to finishing, and produce branded apparel only. This was the only companysurveyed that was located in an EPZ. They claimed no advantage except for the fact thatthe Ministry of Commerce was located there and all customs was done in the EPZ. Therewas no advantage in terms of infrastructure.

This firm manufactures men's and women's trousers and tops for markets primarily in theUSA and also in the EU. They manufacture for big names like the Gap, BananaRepublic, Tommy Hilfiger, etc. Their annual turnover is 300 crore. They deal withcustomers directly, and find using a buying agent to be slower. In the past, agents were akey link to the customer, but this is changing.

The manager does not feel that there are ineffieciencies in the ports, and think the factthat mother vessels don't berth in Madras is due to some other reason (but didn't knowwhat that was). The only general infrastructural issue they felt they had was with watersupply, which is scarce in Chennai.

The firm picks completely inexperienced labor and train them intensively. The firmmanager felt this was important as workers wouldn't be bringing bad habits or differentworking standards with them. They also provide an extensive welfare package and payslightly above the market wage rate. They also have full time counselors who walk thefloors, find out who is having problems at home and see what the company can do tohelp. The manager feels this has made a significant impact. Despite the welfare costs,higher wage payments etc, he has reduced his overall labor costs by 20 percent. Having astrong relationship with your workers and promoting a feeling of oneness will preventyou from having problems with unions and unproductivity, according to this firmmanager. He feels people need to view meeting international compliances as aninvestment and not an expenditure.


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He feels the government needs to work on providing direction for the industry. He feelsthere is no networking and that people in the industry must get together to compare whatthey are doing and work together to strengthen each other. He felt very strongly that theindustry needs to develop open-mindedness and be willing to learn from each other rather

than being secretive and having a "cut-throat" attitude. He cited an example where hewas a speaker at a NIFT seminar on the garment industry and out of 400 attendants only25 were actual manufacturers. He feels that if Indian manufacuturers can work togetherto develop the industry and save the competitiveness for other countries than they canimprove a great deal. People need to be willing to allow people into their factories to seewhat's going on and develop friendly business relationships.

The manager feels that the most successful manufacturers in India are family-owned butrun by professionals. His top five concerns are quality, timeliness, good attitude, rightinfrastructure, and the right blend of education within the company.He also says that the industry must improve productivity. The way this can be done is by-educating people-having systems in place for quality-providing the best working environment-involving yourself personally in your workers' livesHe thinks India's advantages are:-cotton-traditional designs and dying methods-make-up (embroidery and bead work)-skill levels-acilities

Finally, he sees India as moving up the value chain, whereas China may be focused onthe lower-end of the market and on volume. He said that labor regulations in China arevery different which allows them to work workers longer and harder for less money.

Firm #4, Chennai

This firm is jointly owned with a New York-based company. It is three years old, andfinanced completely by personal finances. It has 500 workers, and manufactures bothprivate and branded label clothing. It makes both mn's and women's wear, and has a $5million annual turnover. About half of its exports goes to the USA and the other half tonon-quota countries (Latin America and the Carribbean).

This firm does not have difficulties with banking system, the manager feels that key toobtaining good financing is having a good relationship with your bank. He also believesthat knowledge of the industry and market is critical. He thinks that the reason for lack of openness in industry is because competitors will go to buyers and make lower offers. Hethinks it is very important to have good relationships with buyers, and to foster honestyand openness. However, this company gets all its contracts from its New York partner,so it has a strong advantage.


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The company did report some problems. It argued that there are too many holidays forIndian customs officials. Other countries customs work seven days a week. It alsoreported that customs officers are indifferent and like to exercise power by making lifedifficult for exporters. There are other problems with corruption as well; in particulary

factory inspectors often look for bribes.The firm reported no infrastrucutral constraints because it self-generates power and hasits own water supply. (We found this to be fairly commonplace). The firm does use theairport and found those facilities to be quite adequate.

The biggest complaint was about the requirements of the buyer, and what the firm viewedas unreasonable standards. Buyers demand certain requirements knowing it is beyond thecapablilities of a single factory to produce it, this often leads to sub-contracting atunreputable factories which don't adhere to standards.

The firm felt that labor not a problem; labor problems only arise when companies don'tcare for their employees. But other problems were reported. Importing of accessories(zips etc) was felt to be very cumbersome, involving too much paperwork and bank guarantees for the import of raw materials.

The firm also believed that there was a need to slash duty rates (currently, if you importless than 50 lakhs rupees, you cannot import duty free). It believed that this policy isdiscriminatory to small scale firms, especially considering that they contribute 60 percentof the value of the industry. It feels that smaller firms will do well after quotas are lifted,the lack of economies of scale in labor-intensive industries will favour small firms. Butthe firm also thinks that medium sized manufacturers stand to benefit the most.

The firms biggest concerns are the following:-quality-timeliness-availability of finance-quota policies (feels that large manufacturers influence quotas)

Finally, some general comments on textile firms in Chennai. All factories interviewedwere medium to large in terms of production. Labor unions were generally not a problembecause the industry employs mostly women, and women are typically not involved inunions. Infrastructure on the whole seems to be good because the firms largely providetheir own. There were some complaints about the port; manufacturers on the wholeshipped by air cargo which is very good in Chennai. Factory conditions in Chennaiappear to be among the best in India and most forward thinking in terms of treatment of labor and benefits they receive. These factories also generally catered to the big namebrands.


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Firm #5, Bangalore

This is a wholly privately owned firm, owned by Indian owners. It is 25 years old, has4,000 employees, would not give out annual turnover or any financing information, butstated that credit is generally easy to obtain. It produces exclusively for branded apparel

in the US, Canada, and the EU. It manufactures every type of garment and also makesshoes. It deals directly with companies and also uses brokers. The main concerns wereregarding competition and quality.

Firm #6, Bangalore

This firm is private and Indian-owned. It is 24 years old. All financing for expansioncomes from internal sources. It feels that credit is hard to obtain, that entry barriers arevery high, and that there are a lot of delays and too much paperwork. It has 500employees, and manufactures all branded apparel (men's and women's wear). It is amedium-sized firm, with annual turnover of $2 million plus (it wouldn't be specific). Ituses brokers and also deals directly with customers, it feels direct dealing is best and doesnot like using agents. It manufactures for catalogs in the EU, USA, Australia and SouthAfrica.

The firm reported the following problems:Power: cost too high and supply irregularPorts: bad infrastructure, theft, and corruptionCustoms: inadequate but feels this is improvingRaw material availability: irregularImport duties: too high, particularly on all non-cotton materialsLabor: undisciplined and over-protected; exit-policy exacerbates the problemIncome tax: recently reintroduced and increasing by 5 percent every year, feels willoutprice them internationally and will kill the industry

This firm received technical assistance on machinery from an agengt from Hong Kong,and wants to use the TUF to further raise productivity. The manager wants to see thelabor exit policy done away with; he feels that this will improve productivitydramatically.

Firm #7, Bangalore

This firm operates under private Indian ownership, is 12 years old, has 700 employees,and exports 75% of its production as branded apparel and sells 25% of its production asdomestic private label. It manufactures only outerwear and has a $3 million annualturnover. It deals directly with international companies in the USA and EU.

This firm reported the following problems:Banks: interest rates are too high, newcomers feel that obtaining credit is next toimpossible (that manager says that this mentality stems from Gandhi era when loans were


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readily available and there was a high rate of default, so now excessive caution hasbecome the norm) and communication is slow.Customers and their regulations: This was by far and away his biggest complaint as aconstraint to his doing business. He feels that factory standards imposed by companiesleave no scope for creativity. Importers demand higher standards but are decreasing what

they pay to manufacturers. This manager thinks that regulations are used selectively, andsees the USA as a big bully. Finds customer company technicians to be overly aggresive,feels that there is no partnership anymore, and that trade is less fair.

The firm reported domestic problems as well. It felt that the political atmosphere was notgood and that politicians try to interfere with work. With regard to the supply of electricity, the manager felt that there was irregular supply and poor quality, and that thefirm was paying for bad service. Roads are poor and mother vessels won't berth ininadequate ports, small vessels are ineffective because of weather and frequent stops,ports are over-unionized and have frequent strikes, mother vessels in Colombo givepreference to local cargo so the cargo from the Madras feeder vessel may not go with theship. The manager says that shipping companies prefer to hire their own workers toguarantee efficiency, but that this not allowed in India. Also, they prefer larger dockingspaces. Finally, goods from Madras to USA take 30 days, whereas goods from Colomboto USA take 19 days.

The manager also expressed concern over the labor exit policy, which he believes leadsto undisciplined workers. Past policies have discriminated towards non-cotton fibres, soIndia is now weak in this area. He thinks they China is the main threat and thinks itsadvantage is that the government takes a hands off attitude with entrepreneurs.

Firm #8, Bangalore

This firm operates under private Indian ownership, and is part of a large group. It is 21years old, has financing from internal capital, has 8,000 employees, and manufactures allbranded apparel for big names like Tommy Hilfiger, Gap, Liz Claiborne etc. Itmanufactures all types of clothing items, has a $60 million annual turnover, deals withbrokers and directly with firms, and exports to the US, EU, and Canada.

This firm reports the following problems: Banks: high interest rates make upgradation difficult; the firm has used TUF butdid not obtain a subsidy, the TUF does not cover many types of equipment such assecond-hand equipment (the firm does think that the banking system is ok once you areestablished). Quotas: USA discriminates against India in favour of South America. Customs: slow and inadequate Labor: exit policy is inefficient Shipping availability: lack of mother vessels docking in India Inspection procedures: cumbersome Electricity: has to generate own supply Roads: poor


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Air and sea ports: lack of available space, slow clearance time, no link facility Availability of raw materials: inadequate Exchange rate: current rate makes India uncompetitive compared to Pakistan and

others

The firm would like to see the following: opening of the import of fibres at low duty rates developing of multi-fibre capabilities as a country

Firm #9, Bangalore

This is a private Indian company, 9 years old, financed through an Indian bank, with 800employees. It manufactures only branded apparel (men's/women's/children's), has anannual turnover of 18 crore, and primarily exports to the EU and US. It deals bothdirectly and through brokers but prefers direct dealing.

Banks: financing is difficult to obtain until well-established, the firm typicallyuses internal resources or loans with high interest rates

Customs: problematic with regard to imported inputs Electricity: poor and self-generated by most firms Transport system: poor Labor: exit policy and 8-hour day, not productive Taxes: high No investment benefits Difficult to obtain licenses Government is too bureaucratic Exchange rate is hurting exporters

This firm would like to see the following: a decrease in bureaucracy easily available credit

Finally, some general comments about firms in Bangalore. We interviewed firms thatwere of varying sizes. They made the following common points: Infrastructure in general is poor (with the exception of water and

telecommunications) Labor unions are not an issue, but most firms found labor inefficient and all firms

complained of the labor exit policy Ports were a big problem across the board

Firm #10, Mumbai

This firm has public shareholders and is a large organized mill which manufacturersfabrics, cotton and cotton yarn. It has an annual turnover of $120 million, of which $75million is export-oriented. Yarn is exported to the Far East, Middle East, and Mauritiuswhile denim is exported to the USA, Canada, Hong Kong, Israel, Egypt, Dubai, and


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Nepal. The firm also finishes and exports finished goods. This firm is 103 years old andreceives financing from Indian banks. It deals directly with customers and onlyminimally with brokers.

This firm reported the following problems:

Banks: high interest rates lead to difficulties in upgrading and make marginstight. Cotton: prices are high (25 30 percent increase since January) and high quality

is hard to get Govt. systems are bureaucratic Exchange rate: Indian rupee has weakened 3.5% compared to Pakistans

exchange rate decline of 13.5% which is making Indian firms uncompetitive. Taxes: reintroduction of income tax on exports Licensing procedures: streamlined but more work is necessary Electricity: prices too high (Mumbai has the highest electricity cost in world, acc.

to this firm) Fuel prices: too high Freight rates: too high Ports: inadequate; procedural time too high (lead time needs to be reduced) Road systems: poor Labor: exit policy problematic Technology: unable to modernize (even with TUF ) because interest rates are too

high

Firm #11, Mumbai

This is one of the most prominent firms in the Indian textile industry. It is Indian ownedwith public shareholders, and is over 100 years old. It has 5000+ employees andmanufactures fabrics and finished household goods. It deals directly with internationalcompanies of which 35% are in the USA, 50% are in the EU, and 15% in other countries.Financing comes from internal sources. The firm produces 3 lakhs metres/day, and has500 domestic retail outlets.

The firm thinks that Indian companies must become more global thinking and bewilling to provide world-class services; companies in India are currently not forwardthinking enough.

This company just completed a major global assessment with a consultant and the threebiggest factors hurting them are labor, power, and finance. The issues mentioned aresimilar to the problems described above. Additionally, the firm thinks that the removal of quotas will simply lead to an increase of anti-dumping complaints. It does believe thatthere is a move towards higher value added.

This firm reports the following problems: Cotton prices: increasing Utility costs: too high and increasing


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Inflation: rising Infrastructure: very poor (hindrance in servicing customer) Bureacracy: excessive Foreign exchange: main competitors Indonesia, Bangladesh, Sri Lanka, Thailand

who all have more rapidly depreciating currencies

Import duties: still high Labor: exit policies are too stringent (they could release 3,000 workers with noeffect on production!); also prevents them from moving out of very expensiveMumbai real estate; highest labor costs in India

Voice: textile producers have little voice or influence on government Retail prices are stagnant while costs are increasing TUF: thinks of it as "noble intention" but too hard to obtain in reality

The firm does highlight that fact that India is relatively well-positioned globally andproduces 32 percent of the worlds cotton.

Firm #12, Mumbai

This firm manager spoke both about garments and textile production and this summary isbased solely on a conversation. This is a well-established firm, with 50/50 domestic andexport production. The manager voiced concern that big multi-nationals are driftingtowards Bangladesh and that most of the firms fabrics go to off-shore locations forapparel manufacturing by big multi-national companies. He also expressed concernabout quota prices for garments [from discussions with others the price of quotas is sky-rocketing]. Most textile manufacturers worried about imports, including those formeeting domestic market demands.

The manager argued that it is essential for quota prices to stabilize and declines quickly.He also said that the government is preferential towards small-scale manufacturers andthat his company is at a disadvantage because it is a big mill.He would like to see rationalization in export duties charges and would like to seebanking support in financing and investment, better working capital margins and lowerinterest rates.

Technology upgrades are not possible because of the high cost of capital.Two of the biggest problems are differential duty structures [we think this refers tohaving duty imposed on every level of production] and the high cost of capital.Finally, the quota system is distorting industry production.

Firm #13, Mumbai

This is a privately Indian owned company, although it is looking for a joint venturepartner. It is a 104 year-old company with 3500 employees and produces cotton/polycotton/poly viscose/100% poly fabrics. Its annual turnover is 150 crore rupees, downfrom Rs. 250-300 crores previously. It exports primarily to the UK but also to the US,and deals directly with international companies.


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This firm reported the following problems:

Banks: there is a reluctance to lend because the industry is not viewed asprogressive; banks have high interest rates which can be high as 20 22 percent

International Competition: Far East and lower value currencies Technology: not modern enough but cannot afford to upgrade Labor unions; uncooperative; high cost; bad exit policy; inefficient Ports: improving, paperwork being reduced Utilities: water and power too expensive

The firm would like to see the government change labor policy and do a study on what isailing the industry (we hope that this paper is a contribution in that direction). Overall,the manager thinks that India fails to compete because of lack of modernization and highcost and inefficiency of labor, despite it's strong raw material base.

The Apparel Export Promotion Council is a private body with the support of the Ministryof Textiles. The Director-General is a government official but he emphasized that theCouncil is private. He said that the government listens to their concerns andrecommendations seriously. They have a membership of 25,000 exporters, and theirexecutive committee is composed from these members. He said they are looking stronglyat issues of transparency and doing what is good for the country. They do certificationwork between the Indian govt., EU, USA and Canada, which the govt has given them theauthority to do. The Council has recommended changes in bilateral agreements. Theirgoals are--certification; export promotion activities (including informing manufacturersof seasonal changes, apparel training and design and fashion trends), and the creation of an apparel mart (250 show room for garment exports only, already under way).

The Director has the following concerns:

Lack of linkages between the textiles industry and garment industry

Procedural Problems: Timeliness Ports Import regulations

Policy Problems: Customs duty Labor environment Labor exit policies (firing)

The Indian labor law is common to all industries. He would like to see a labor law wherepeople are allowed to be fired or laid off. He views as India as lowest among othergarment producing countries in terms of labor productivity. Therefore he is concerned


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about how India will compete in 2005. He does not think there would be a clash betweengovernment and labor unions over a new law. He thinks that such a change in law willsimply promote discipline among workers.

India has a dependency on overseas suppliers for poly-cotton blends. Firms require alicense to import such fabrics, and are also subject to import duties. AEPC is requestingthe liberalizing of licensing requirements concerning importing of such fabrics such thatthey will be used for garments to be exported. He would like to see a law where forevery $100 of exports, a firm is allowed to import $10 of fabric duty free. He thinks thatthe government is concerned about pilferage and the loss of import duties. Thegovernment has not been responsive to this recommendation. The D-G also feels that thegovernment is slow to act so that by the time such recommendations reach thegovernment it is too late.

The main problem with ports, according to the DG, is that they are inefficient. Mothervessels do not come to India because of the inefficiencies of docking. It takes a mothervessel 21 days to go from Colombo, Sri Lanka to New York. However, when you haveto add in a feeder vessel, it adds an additional 21 days to turnaround time. This preventsIndian garment manufacturers from entering the niche or branded market (bringinggreater revenue) because of the fact that the seasons change too rapidly, and after 42 daysa new season is practically over (there are 6 fashion seasons per year). Thereforegarment manufacturers are currently focusing on the lower value added market.Additionally, feeder vessels increase costs, adding 8750 million rupees annually. Thismakes Indias costs higher than most other countries. He said that India needs to develop

export strategies, and rate their priorities. Other issues he mentioned include generalcompetitiveness, packaging, and quality of exports.

Textile production must also improve. The D-G says that Indian firms have goodspinning but poor weaving and processing facilities. He feels that processing andweaving techniques need to be studied and improved. He would also like to see thegovernment develop a modernization index whereby they can determine how India ranksin terms of these different areas. He feels there is a complete lack of supply chainmanagement. No awareness of full package capabilties or of the need to develop it.He recommends a national cotton seed policy, feels there should be a reduction invarieties in order to strengthen them. The D-G predicts a drop in exports by 2007, if theabove-mentioned problems are not addressed. He also thinks that a better understandingthe legal framework of the WTO is essential, in order to know how producers will beaffected. He thinks that the trade wars will essentially be won on technicalities, and thatIndia should be asking itself about its preparedness for 2005 and beyond.


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Section V: Conclusions and Policy Implications

India has successfully undertaken policy reforms in order to improve efficiency andcompetitiveness. However, India's share of world apparel exports has not risen

significantly since 1994. In the short term, the decline in the import growth of India'smajor markets, namely the US and the EU, is the main reason for this trend. But in thelonger term, it is clear that the apparel industry must be restructured to meet thecompetitive challenge of the new trading environment. There is a dire need for greaterinvestment in technology, and for policies that will enable more efficient resourceallocation and much needed increases in productivity.

The bold and very necessary step of de-reservation will open up the garment sector tolarge investors, local and foreign, thereby providing much needed investment in thelatest, most efficient production technologies. The government needs to take additionalsteps towards resolving the problem of excess labor in the garment sector, particularlyemployment in mills. Alternatives in terms of employment and training must be providedfor garment sector employees who will find themselves unemployed in the new, morecompetitive environment.

In the next decade, the pattern of textile exports will change drastically due toliberalization of world trade. India stands to gain from these changes due to its relativelylow costs of production. The relaxation of quotas will inevitably result in a decline of exports from conventional suppliers favored by the current trade regime. This and otherchallenges must be met. In particular, the process of globalization has forced countries tobecome niche players in an increasingly competitive marketplace. Retailers are becomingincreasingly powerful, placing greater and greater demands on the suppliers they sourcefrom. They also favor full-package suppliers, who can buy the fabric, as well as cut,manufacture, and ship the product to its final destination. Finally, regional tradeagreements have placed more pressure on Asian producers. And China poses asignificant challenge in the post-MFA era.

The Indian textile industry has several strengths including a supply of cheap cotton, lowwages, a good knowledge of production techniques and possible emergence as acompetitive supplier of manmades. But there are serious problems as well. The high costand lack of efficiency of infrastructure, from fuel to transport to ports to communicationsto delivery, are all problematic. Uncompetitive firms within the industry will continue todrain resources. The government needs to focus on the following areasintegration of informal sector production into the mainstream economy, investment in much-neededinfrastructure, competitive positioning for the post-MFA trade environment, and a long-term movement towards higher-value added, efficient production.


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The government also needs to develop a more complete view of the textiles and garmentssector. Until now they have been viewed as two separate industries, but the linkagesbetween the two are significant and must be recognized and strengthened in order toincrease the comparative advantage of Indian producers. A major concern for importingfirms is that a country has full-package capabilities, from fabrics and processing to

stitching and finishing. In other words, there can be no weak links in the supply chain.Three key weaknesses in the production chain are identified in our analysisthe inabilityof Indian producers to supply an adequate amount of cloth, particularly manmades; thelack of availability of textile machinery; and the lack of downstream capacity in weavingand processing. These weaknesses must be addressed via investments in technology (andgreater access to the TUF), along with improvements in infrastructure (particular portsand customs).

In terms of policy, the manufacturers we interviewed suggested that several changes mustbe made. These are: revise the labor policy for Export Oriented Units

improve the supply of credit and the functioning of capital markets ease up on taxation of composite mills so as to improve their competitiveness make the TUF accessible to all firms allow for the import of machinery older than 10 years when appropriate privatize the ports (or make them a private/public joint ventures; timeliness is critical

and delays are extremely costly) improve the supply of electric power improve the efficiency and transparency of customs

It is clear that India has the potential to become a major player in the textile and garmentsector in the twenty-first century. Implementing the policy changes described above as

well as the additional changes described below is perhaps the most important step in thisdirection.

Additional Policies and Implementation Issues

In order to make the textile market more competitive and leverage Indias strength as alow cost producer, the governments role should be that of a facilitator to create a levelplaying field, facilitate infrastructure build-up, and bring about policy changes tofacilitate labor rationalization. On the demand side, the government should encourageproactive marketing efforts for promoting Indian products. The National Association Of Software and Service Companies (NASSCOM) in India is a good example of how an

industry association can successfully market and build the profile of an industry.

On the supply side, the following aspects need to be urgently addressed to make thetextile sector more cost competitive:

Investment in agricultural research - The government should consider adopting taxbased incentives for research (either directly by corporates or through Textile ResearchAssociations) to encourage investment in seed and fertilizer technology. Apart from


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cotton, technology for man-made fabric needs to be developed. Improving cotton acreageand productivity is key because high cost of cotton is one of the main reasons foruncompetitiveness . The setting up of the cotton technology mission is a step in the rightdirection.

Labor - The government needs to take further steps to allow scrapping of excesscapacity. A combination of excess capacity in spinning and idle capacity in weaving hasbrought the industry to a near level of asphyxiation. It may be instructive to followChinas example. China has recently scrapped 10m spindles and converted the area intorecreation centers. It is a fallacy to think that employment generation is helped bypreventing closure of mills because the bulk of mills are not in a position to pay workers.In working out an exit policy, one of the options for re-deployment of labor would be toencourage consolidation and setting up of modernized mills in a cooperative model andemploy existing workers. The other options could be to try and increase acreage undercotton production or encourage multiple cropping etc in cotton growing areas to increaseincome/employment potential of farmers who currently might be involved in farming andspinning/weaving. Employment potential could also be increased by encouraging growthof ancilliary industries like processing fabrics, fabric and dress design, by encouragingadditional investment in technology and training in the latest fashion trends. Anotherway of redeploying labor would be to use displaced labor in some of the infrastructuralinvestments that the government would be making concurrently as the integrated policymeasures to be undertaken to improve competitiveness of the textile industry.

Investment in Training --China imparts 70 hrs of training per year vs. 10 hrs in India forworkers in the textile and garment sectors. Further investments in training would enabledeepening of value added and transition to higher-end production.

Mechanization - improving accessibility by all sectors, such as composite, small-scale,etc. For example, the weaving mills need to switch to shuttleless looms to enhanceproductivity and ensure quality to face global challenges. India has 16.5 lakhpowerlooms, but only 1000 are shuttleless vs China which has 1.5 lakh shuttleless looms.The government could consider allowing imports of second hand shuttleless looms duty-free. Similarly subsidy for effluent treatment plants would help the processing sector togrow.

Improving infrastructure Expansion of power, water, and port facilities are crucialfor example, the cost of power in Tamil Nadu where a large section of the textile industryis concentrated, is generally not reliable and of poor quality. Captive power generation isalso costly because of the high road tax and excise duty on fuel oil. A viable option is toprivatize the ports and the power sector.

Rationalization of tariffs --The government needs to move to an ad-valorem dutystructure. The government should also remove excise concessions and exemptions thatlead to cross subsidization, fiscal distortions, and encourage inefficient production. (e.g.until the most recent budget, composite mills paid higher duty than independentprocessors on finished fabrics.) The thrust should be on transparency of procedures and


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speed of transactions. The cost of producing one metre of cloth by a power loom is 0.22paise as compared to Rs 1.60 in a composite mill. More composite mills are beingclassified as sick. The discriminatory tax regime towards composite mills has loweredscope for value addition. Moreover discriminatory tax policies and evasion of taxes hasonly resulted in lower funds/investment by government for furthering growth of the

textile industry.Dismantling of regulatory framework Further work is needed on the dismantling of regulations. The duty structure currently encourages import of finished product anddiscourages import of raw material which is a handicap for the industry. Currently theweak links in the industry are weaving and processing. Processing could be encouragedby subsidy for effluent treatment plants. While garments have been de-reserved, activesteps to implement garment industrial parks would help. Chinas success in raising itsshare in the global garment market is attributed to its large and integrated garmentfactories which use the latest technologies and reap economies of scale. Mexico is a stepfurther. Its La Laguna textile park produces 4.5 million pairs of denim jeans every week.It employs 70,000 workers and the entire work of assembly, laundry, cutting, stitching,labeling and selling takes place in one complex. Government should allow relocation of industries to low cost areas, and give export- related tax incentives to composite mills toimprove competitiveness.

The use of information technology has to be encouraged. Adoption of Supply ChainManagement, possibly in an Application Service Provider mode is a necessity to shortendelivery times. Similarly front-end customer relationship management is going to beessential to achieve effective mass customization. Setting up of a venture-capital fundcould help tap knowledge-based entrepreneurs of the industry. The technologyupgradation fund should fund ventures for investment in new designing techniques formass customization such as three dimensional non-contact body measurement and digitalprinting. Linking textiles and garments will help to provide full package facilities tocustomers.

One of the greatest challenges facing the textile industry today is the lack of a coherentlong-term vision and futuristic perspective on where the industry is headed in the near-term and medium-term. Given the increasing challenges being faced by Indian textiles,the only solution seems to lie in addressing the issues head-on, focusing as much on thebasic issues of improving quality, and upgrading technology as on exploring new marketsand implementing an exit policy.

Political constraints and other implementation issues

The main obstacle in implementing the above recommendations has been the need toprotect employment and the inability to implement an exit policy. State governmentshave found it difficult to legally permit closure of mills because of implications foremployment especially of the politically potent organized work force and the lengthylegal and other procedures involved in closure. Government takeover of sick millsdemonstrated the strength of political constraints on the leadership and the lack of


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manouvrability vis--vis labor. Given the escalating losses in public sector mills, thetakeovers only mean that workers are redeployed in mills which continue to beunproductive and terminally sick. Additionally, it was reported by the Bureau forIndustrial and Financial Reconstruction (BIFR) that in some cases, promoters wereunwilling to play their role in bringing in fresh equity contribution necessary for

implementing a modernization and expansion program.Corruption is fairly widespread and is manifest, for instance, in the large scale evasionof duties, indifference of customs officials, and factory inspectors looking for bribes.Cumbersome procedures and paper work are deeply ingrained in the work environment.Building enduring relationships with buyers, and fostering a culture of honesty andopenness are as essential for the success of the industry as knowledge of the industry andmarket. It is beyond the scope of this paper to elaborate upon this topic, but there is awide range of options proposed in the academic literature and by policymakers to combatcorruption at the local and central government levels.

Finally, it is necessary for government to muster the necessary political will to focus onimproving infrastructure as infrastructural bottlenecks lead to delays and have adampening effect on competitiveness. Privatization of power and port facilities must beseriously considered. The Indian textile industry stands at the crossroads today, facingboth challenges and opportunities. Whether the industry will flourish or perish willdepend on the will and ability to overcome the above obstacles.


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Textile Production in India

Table 1: Consumption and Export of Cloth Per Capita (metres)

Consumption Export Final Demand Export-share inFinalDemand(%)

Cotton Manmade

Total Cotton Manmade

Total Cotton Manmade

Total

1985-6

1986-71987-81988-91989-901990-11991-21992-31993-41994-51995-6

14.18

13.4012.0713.1412.5013.9312.0012.8113.0411.4813.62

6.16

6.456.327.417.147.557.578.238.939.70

11.08

20.33

19.8518.3920.5519.6421.4819.5721.0421.9821.1824.70

2.42

3.194.043.934.564.555.196.027.087.437.01

0.16

0.340.510.541.011.431.751.792.022.702.63

2.59

3.534.544.485.575.986.947.819.1010.139.64

16.60

16.5916.1017.0717.0618.4817.1918.8320.1218.9120.63

6.32

6.796.837.958.158.989.32

10.0310.9512.4013.71

22.92

23.3922.9325.0225.2127.4626.5128.8531.0831.3134.34

11.3

15.119.817.922.121.826.227.129.332.328.1

Source: T.Roy, 1998Note: Please refer to T.Roy, 1998 for variable definition for Tables 1-4


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Table 2: Aggregate Production of Cloth

Quantity (b sq metres) Value (Rs b) Expressed as ratio of GNP (%)

Cotton Manmade

Total Total

Price.1

Total

Price.2

Price.1 Price.2

1985-61986-71987-81988-91989-901990-11991-21992-3

1993-41994-51995-6

12.4712.7312.6313.6613.9415.4314.6516.34

17.7917.0218.90

4.755.215.356.366.667.507.948.70

9.6811.1612.56

17.2117.2117.9820.0220.6022.9322.5925.05

27.4728.1831.46

167.96156.58153.23201.18239.85293.54341.03443.98

522.34576.91720.31

300.51327.39343.98420.73478.13552.41610.18758.84

887.821016.561297.99

7.236.065.245.785.956.246.287.18

7.376.877.44

12.9312.6811.7712.0811.8711.7511.2412.27

12.5312.1113.41

Source: T.Roy, 1998

Table 3: Price-ratios (1985-6 = 100)

Cotton-manmade

(Price.1)

Cotton-CPI

(Price.1)

Manmade-CPI

(Price.1)1985-61986-71987-81988-91989-901990-11991-21992-31993-41994-51995-6

100.0117.5154.3132.4123.8123.4143.8146.8148.6162.75164.6

100.084.4582.684.3589.085.993.9

105.0102.8104.0107.2

100.071.953.563.771.969.665.3571.569.263.965.2

Source: T.Roy, 1998


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Table 4: Sector-shares in Production (percentage of value)

Cotton Manmade Total

Mill Powerloom

Handloom

Mill Powerloom

Handloom

Mill Powerloom

Handloom

1985-61986-71987-81988-91989-901990-11991-21992-31993-4

1994-51995-6

18.116.015.513.311.610.09.46.66.2

6.25.7

63.265.564.370.272.175.775.879.380.3

78.777.9

18.718.320.216.416.214.414.814.113.5

15.116.4

17.417.115.512.610.79.79.16.86.5

9.06.8

80.480.882.386.188.089.590.187.187.2

84.285.5

2.12.12.21.31.30.80.76.16.3

6.77.7

17.816.515.513.111.39.99.36.76.3

7.16.1

69.770.769.575.677.780.480.581.782.3

80.580.4

12.412.814.911.311.09.7

10.111.711.3

12.413.5

Source: T.Roy, 1998

Table 5: Sector-shares in Exports (percentage of value)

Cotton Total

Mill Powerloom Handloom Mill Powerloom Handloom

1985-61986-71987-81988-91989-901990-11991-21992-31993-41994-51995-6

58.550.243.738.138.338.228.525.223.621.022.9

33.543.951.056.557.358.668.271.573.976.975.5

8.05.95.35.44.43.23.23.32.52.01.6

52.444.039.033.130.528.622.120.419.617.118.5

40.450.856.362.266.069.075.476.978.381.280.3

7.25.24.84.73.52.42.52.72.11.61.3

Source: T.Roy, 1998


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Table 7: Growth of World Trade in Clothing

(Average Annual Percentage Change)

1980-85 1985-90

World 4 17

1980-93 1990-94

India 15 10

China 21 25

Indonesia 32 18

Thailand 24 13

South Korea 6 -8

Pakistan NA 12

Source: WTO, 1996 in Ramaswamy and Gereffi, 1999


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Table-8: US Apparel Imports by Major Suppliers i

($US Millions)

Country/

Region 1983

1990 1996

Value Share Value Share Value Share

China

759

7.8 3439 13.5 6340 15.2

Big Three 5734 58.9 9807 38.4 7595 18.2

Hong Kong 2249 23.1 3976 15.6 3998 9.6

Taiwan 1800 18.5 2489 9.8 2066 4.9S. Korea 1685 17.3 3342 13.1 1531 3.7

South-East Asia 806 8.4 3436 13.5 5886. 14.1

South Asia 385 3.9 1716 6.7 4175 10.0

Of which

India 220 2.3 636 2.59 1350 3.2

Central America 389 4.0 1985 7.8 6076 14.6Mexico 199 2.0 709 2.8 3850 9.2

Others 1328 14 4009 16 6996 17

Total 9731 100 25518 100 41679 100

Source: Ramaswamy and Gereffi (1999), estimates based on the official statistics of the US

Department of Commerce, US Imports for Consumption, customs value. Columns do to add up

exactly due to round-off errors.


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Appendix: Additional Data on Global Trade Statistics for Textiles and Textile Production inIndia

http://www.corporateinformation.com/cnsector/Apparel.html

Industry Overview : Diversified Textiles The recovery of Chinas textile industry has continued, despite continued rising prices forsynthetic fibers and recent increases in cotton prices. During the first six months of CY 2000, theindustry as a whole posted profits of $1.29 billion, of which $209 million came from state-ownedenterprises (SOEs). The State Economic and Trade Commission forecasts that industry profitswill reach $2.42 billion by the end of the year. During the first six months of CY 2000, yarnproduction reached 3.12 MMT, increasing by 16.8%, and fabric production was 7.28 billionsquare meters, increasing by 12.3%. Recent statistics confirm that the change in prices hasincreased the use of cotton as compared with synthetic fibers. For 1999 as a whole, cotton useincreased by nearly 2% compared to synthetic fibers, even though cotton prices did not fall untillate in the year. A much more dramatic shift is likely to be evident once final numbers areavailable for 2000.

Increased exports have contributed substantially to the improved fortunes of the textile industry.During the first six months of the year, textile and garment exports increased by 41.8%, reachinga total of $23.7 billion, and accounting for over 20% of Chinas exports. General trade has grownmore quickly than processing trade, with growth rates of 71% and 23.9%, respectively. (Note:processing trade refers to partially finished products that are imported, finished, then re-exported). General trade now accounts for over half of total textiles exports, reversing a trend thatfavored processing trade. Japan has become Chinas top market for textiles for the first time, withexports to Japan growing by 38.9%. Exports to Hong Kong have also recovered rapidly, jumpingby 38.81% over last year, when exports fell by 26.4%. Exports have also grown to otherdestinations, particularly to South Korea (50.36%), Southeast Asia (56.93%), the European Union(32.14%) and the U.S. (32.1%).Source: US Department of Agriculture


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Western Europe to

C./E. Europe/BalticStates/CIS

7.1 13 7 -6

Asia to North America 7.0 7 3 4

Intra-North America 4.6 12 7 3

Table IV.69

Share of textiles in trade in totalmerchandise and inmanufactures byregion, 1999(Percentage)

Exports Imports

Share of textiles in total merchandise

World 2.7 2.7

North America 1.2 1.5Latin America 1.4 3.2Wes tern Europe 2.7 2.5C./E. Europe/BalticStates/CIS

2.0 4.6

Africa 1.2 5.6Middle East 1.0 4.2Asia 4.4 3.6

Australia, Japan and NewZealand

1.5 1.8

Other Asia 6.0 4.4Share of textiles inmanufacturesWorld 3.5 3.5

North America 1.6 1.8Latin America 2.3 4.0Western Europe 3.3 3.2C./E. Europe/BalticStates/CIS

3.5 6.5

Africa 4.0 7.9Middle East 3.8 5.6Asia 5.3 5.0

Australia, Japan and NewZealand

1.7 2.9

Other Asia 7.2 5.8

Regional shares in world trade intextiles, 1999


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(Percentage)

Table IV.70

0 10 20 30 40 50 60

Middle East

Africa

Latin America

C./E.Europe/BalticStates/CIS

North America

Asia

Western Europe

Exports

Imports


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Exports of textiles byprincipal region, 1999(Billion dollars and percentage)

Share in

Value Region's exports World exports Annual percentage change

1999 1990 1999 1990 1999 1990-99 1998 1999

World 147.9 - - 100.0 100.0 4 -4 -2

Western Europe

World 63.2 100.0 100.0 53.2 42.7 1 1 -7

Western Europe 42.8 78.1 67.6 41.5 28.9 0 1 -9

C./E. Europe/Baltic States/CIS 7.1 4.2 11.3 2.3 4.8 13 7 -6

Asia 3.5 5.7 5.5 3.0 2.4 1 -24 4

North America 3.5 4.5 5.5 2.4 2.4 4 5 5

Africa 3.5 4.5 5.5 2.4 2.4 4 12 -6

Middle East 1.4 2.2 2.2 1.1 0.9 2 -5 -7

Latin America 0.8 0.7 1.3 0.4 0.6 9 4 -6Asia

World 61.8 100.0 100.0 35.3 41.8 6 -10 2

Asia 36.4 57.9 58.9 20.4 24.6 6 -17 5

Western Europe 8.1 16.2 13.0 5.7 5.4 3 3 -7

North America 7.0 10.4 11.3 3.7 4.7 7 3 4

Middle East 3.9 6.5 6.4 2.3 2.7 6 -8 -1

Latin America 3.1 2.4 5.0 0.8 2.1 15 1 -3

Africa 2.4 2.9 3.9 1.0 1.6 10 -2 6

C./E. Europe/Baltic States/CIS 0.8 2.5 1.4 0.9 0.6 -1 -6 -12

Japan

World 6.6 100.0 100.0 5.6 4.5 1 -12 10

Asia 4.9 60.3 73.8 3.4 3.3 4 -17 17

Western Europe 0.7 14.2 11.0 0.8 0.5 -1 16 -2

North America 0.6 11.2 9.0 0.6 0.4 -1 -1 1

Middle East 0.3 9.5 4.4 0.5 0.2 -7 -5 -20

All other regions 0.1 4.7 1.6 0.3 0.1 -10 -13 -8

Other economies in Asia

World 55.2 100.0 100.0 29.7 37.3 7 -11 1

Asia 31.6 57.4 57.1 17.1 21.3 7 -19 4

Western Europe 7.3 16.6 13.3 4.9 5.0 4 1 -8

North America 6.4 10.2 11.6 3.0 4.3 8 8 -5

Middle East 3.6 5.9 6.6 1.8 2.5 8 -5 0

Latin America 3.0 2.6 5.5 0.8 2.0 16 -1 4

Africa 2.4 3.1 4.3 0.9 1.6 10 3 2C./E. Europe/Baltic States/CIS 0.8 2.5 1.5 0.8 0.6 1 -6 -8

North America

World 11.6 100.0 100.0 5.5 7.8 8 1 4

North America 4.6 28.8 39.9 1.6 3.1 12 7 3

Latin America 4.0 20.2 34.7 1.1 2.7 15 14 23

Western Europe 1.4 25.0 12.0 1.4 0.9 0 -4 -19

Asia 1.2 19.1 10.3 1.1 0.8 1 -22 -4

Middle East 0.2 4.4 1.8 0.2 0.1 -2 -22 -25


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All other regions 0.1 2.3 2.2 0.1 0.1 1 -22 -17

Table IV.71

Textile imports of selected economies by regionand supplier, 1999(Million dollars and percentage)

Canada a United States

Annualpercentage

Annualpercentage

Value Share change Value Share change

1999 1999 1998 1999 1999 1999 1998 1999

Region Region

World 3996 100.0 4 -1 World 14305 100.0 8 6

North America 2610 65.3 4 -1 Asia 7154 50.0 9 7

Asia 806 20.2 2 2 Western Europe 3104 21.7 5 3

Western Europe 397 9.9 5 -5 North America 1781 12.5 10 9

Latin America 125 3.1 2 4 Latin America 1704 11.9 3 8

Middle East 26 0.7 13 0 Middle East 237 1.7 26 11

C./E. Europe/ C./E. Europe/

Baltic States/CIS 16 0.4 -13 -20 Baltic States/CIS 187 1.3 4 -1

Africa 11 0.3 0 0 Africa 138 1.0 27 -14

Suppliers Suppliers

United States 2610 65.3 4 -1 European Union (15) 2601 18.2 3 1

European Union (15) 357 8.9 4 -2 Canada 1781 12.4 10 9China 197 4.9 7 10 China 1692 11.8 5 12Korea, Rep. of 119 3.0 -4 2 Mexico 1342 9.4 6 11India 107 2.7 7 1 India 1065 7.4 14 12Above 5 3389 84.8 4 -1 Above 5 8481 59.3 7 8

Taipei, Chinese 101 2.5 -2 3 Korea, Rep. of 908 6.3 0 4

Pakistan 92 2.3 5 7 Taipei, Chinese 819 5.7 -1 6Mexico 79 2.0 4 4 Pakistan 789 5.5 30 1Indonesia 53 1.3 3 -9 Japan 595 4.2

Documents

vijaya ramchandram textileunderreview1