With right policy, textile sector can head for great future

The textile sector, along with construction, agriculture and tourism is one of four most labour-intensive sectors of the economy. It has huge potential for generating sustainable jobs as well as export earnings. Currently, it employs about 35 million people, and contributes 12% of exports.

But just 15 years ago, the share of textiles and clothing in India’s manufacturing exports was more than 25%. How did this sharp decline happen? Why are textile and clothing exports declining, and not growing at double digits? India’s garment exports have now been overtaken in dollar terms even by its neighbour Bangladesh, and Vietnam may not be far behind.

Of course, Bangladesh has benefited from duty-free access to the European Union, and indeed some Indian entrepreneurs too have located themselves in that country for that reason. But Bangladesh’s transformation of its garment sector within a decade is nothing short of fantastic, offering some lessons for us as well.

India has a unique opportunity to reverse the decline in its export share and seize a global leadership position. Some of this opportunity is arising due to changing labour dynamics in China, which has been the world’s textiles behemoth. 

Chief Economic Advisor Arvind Subramanian has been championing the cause of this sector with very compelling data.  For instance, he points out that the most sustained East Asian growth of past decades was on the back of the textile and clothing boom. Most tellingly, a unit of investment in the clothing sector generates 12 times as many jobs as the automobile sector and 30 times that of steel. Clearly, there is a big bang for the investment buck in textiles. Not surprisingly, the CEA’s passionate advocacy is showing results.

Reforms announced recently by the Cabinet under a “textile package” address some key impediments and the package is timely. First, the reforms removed some of the embedded tax burden from exports through a duty drawback scheme. Secondly, firms are provided incentive to hire more workers through a subsidy to meet the EPF costs. But clearly, much more needs to be done to harness the great promise.

A recent study for textiles, made-ups and apparel estimates that the sector can generate 50 million jobs in the next nine years. Of these, more than 70% will be for women (The Bangladesh garment industry has close to 90% women). The study also shows that the shift of textiles and garments away from China (due to rising labour costs) is an annual opportunity of about $280 billion for other developing countries.

This is a huge opportunity. India has some advantages in being present in all parts of the value chain – from fibre, yarn, fabric and going all the way to clothing, branded apparel and fashion. This is not to mention the new, emerging markets like technical textiles that have industrial applications.

But here are two additional considerations that need close attention. First is the issue of fibre neutrality. In India, there is a curious frenemy relationship between cotton and man-made (synthetic) fibres. The global consumption pattern is 65:35 in favour of synthetics (like polyester, rayon, acrylic), whereas in India, it is exactly the reverse. The net imports of the US and the EU show a steady decline in cotton textiles vis-à-vis manmade fibre products over the past five years.

If we are to tap into the export opportunity to these developed nations, our domestic mix has to mimic the global demand pattern. In India, cotton makes up 80% of all fibre consumption whereas in China, it is 50%. This skew has been made worse due to the highly unequal excise tax treatment of cotton versus the rest. The textile ministry is aware of this asymmetry, and a fibre-neutral policy is on the anvil. Hopefully, the GST regime will also discontinue the sharp asymmetry that has persisted for the last 10 years.

Trade deficit

The second is the impact of free trade agreements. Fortuitously, the CEA himself is heading a committee to evaluate the costs and benefits of the several FTAs that have been signed by India in the past couple of decades. Prima facie it appears that India’s trade deficit has uniformly got worse following several FTAs. No doubt, there has been trade enlargement, but not necessarily to India’s benefit. The reasons could be many – some fair, some unfair.

For instance, if our trading partners inherently have a lower cost of doing business, more efficient logistics and transportation and higher labour productivity, then naturally their goods are cheaper, of better quality and flood our markets. But if in addition, they also resort to unfair practices like dumping, then it is a cause for serious concern. Let us not forget that China still has a huge overhang of excess capacity in fibre, yarn and fabric parts of the value chain. Their manufacturers get power subsidy and non-transparent VAT rebates against which our manufacturers cannot compete. 

There is also the looming shadow of the mega treaty called the Trans Pacific Partnership which goes much beyond trade and makes it compulsory for the entire value chain to be located in member countries. India is not a member of Trans-Pacific Partnership (TPP) and can potentially be at a serious disadvantage.

Fortunately, the TPP is losing political support, so it may be several years into the future.

Finally, despite these various hurdles, let’s not lose sight of the huge promise of this sector (it is after all one of the trinity of roti, kapada, makaan), in generating large-scale jobs, especially for women, and healthy foreign exchange earnings. With proper policies and reforms, the textile sector in India is definitely heading for a high noon of great fortune.

(The writer is a senior economist based in Mumbai)