Is Indian textile sector loosing its global competitiveness?
The dismantling of the quotas came as a great boon to Indian textile industry and in the year the quotas were removed, exports grew by 29 percent. The years that followed 2005 onwards, the growth started tapering off. It was just 7 percent CAGR between 2005 and 2008 and in 2008–09; exports have registered a 10 percent negative growth, more so due to the economic downturn.
Cotton prices which were below international prices until 2005 are 10 percent above global prices in 2009 and the duty draw back/DEPB has gone down by 40 percent since 2005. Indian textile industry is inherently competitive; over Rs. 750 billion has been invested in the last seven years along with which the organised sector is highly productive.
What could be the main reason for export growth falling so rapidly? The myth that the international market meltdown is the reason has been found wrong by the in-depth study done by ICRA. Except India, all other Asian economies have increased their market size and share even during this period. India has been losing its market share as it is loosing its relative competitiveness steadily.
For example, China has increased its drawback from 12 percent to 17 percent. Pakistan has introduced an R&D rebate of 7.5 percent while Bangladesh enjoys zero import duty into EU and is attracting large investments from China and South Korea and is rapidly expanding its exports and Vietnam which has competitive costs is also benefiting from overseas investments and is growing rapidly.
Bangladesh has exceeded Indian garment exports and very soon, Vietnam too is set to exceed India. India on the other hand has been reducing the benefits offered to exporters. The draw back over the last four years has come down steeply. In the case of cotton yarn the reduction in benefit is 43 percent and in fabrics the reduction is by as much as 19 percent.
In fact, fabrics today have a lower drawback than DEPB of yarn and dyed fabrics and grey fabrics have the same drawback in spite of consumption of a lot of duty paid dyes and chemicals and in the case of made-ups the reduction in benefits is 19 percent. Huge amounts of government refundable duties like TUF, etc are locked up due to inordinate delays in reimbursement.
Raw materials like polyester and cotton are available at 10 to 12 percent cheaper rates to its competitors, thanks to tariff protection and DEPB on exports of fibres and the peculiar cotton policy adopted by the government particularly with relation to MSP operations and export incentives given to Cotton exporters. Along with all these negatives, interest subvention has also been reduced.
The short and medium term solutions for increasing exports of cotton textiles could be achieved by restoring the competitiveness of the inherently strong Indian textile industry by refunding all taxes and duties including taxes suffered on fuel oils since, most textile exporting companies, particularly from Tamil Nadu, suffer from very large power cuts, forcing them to use gensets.