Analytical View: Growing FDIs in India
'Brand India' – the idea has almost taken its roots, and Indian textiles is making headway in a positive direction and attracting global investor community. Recently, investments in Indian textile sector by biggies overseas have increased. In a decade, the sector has embarked foreign direct investments around US$817.26 million (DIPP Department of Industrial Policy and Promotion)
Series of instances, where international companies viz DKNY (Donna Karan), Brandix, Triumph, Private equity firms TPG and Bain Capital amongst others have taken initiatives to work hand in gloves with Indian players, grounds the view Indian Textile industry is proving itself a sector to be bet upon.
To confirm above findings and know at length about the incentives behind these increased FDIs, fibre2fashion's News team created opportunity to meet up few of the pioneers in investment and finance industry and interview their opinions.
Acknowledging the above point of discussion, Mr Ganesh Shermon, Executive Director-BPS (KPMG India), detailed that India's textile industry plays a major role in the economy and mainly depends upon the textile manufacturing and export. The Indian textile industry contributes about 14 percent to industrial production, 3 percent to the country's gross domestic product (GDP) and 27 percent to the country's total foreign exchange, through textile exports. The industry directly employs 35 million people and is the second largest provider of employment after agriculture. He told that the industry is estimated to generate 12 million new jobs by the year 2010. “It not only generates jobs in its own industry, but also opens up scopes for the other ancillary sectors,” he added.
Mr Shermon also predicts that with the revival of demand in Western markets, India's textile exports may reach USD 24 billion in FY2010-11 from an estimated USD 20 billion in FY2009-10. He confirmed that FDI in country's textiles sector increased 11 percent to USD 201 million (INR 9.6 billion) in 2009 from USD 181 million INR 8.7 billion in 2008 and were mostly from Europe, USA and China.
Mr Shermon further ascribed the growth drivers that boosted India's textile production and demand, by pointing up the increase in GDP per capita, at around 8.5 percent for the past four to five years which has significantly increased the disposable income of the Indian middle class. Besides that, the increased number of working women, young age workforce and the greater use of credit cards has led to the increased purchase of textiles and clothing items, according to him. He also analyze that further, the growing penetration of organized retail to more than 10 percent in 2010 and 20 percent by 2020 would facilitate accessibility and increase purchase of textiles and clothing products.
Mr Sandeep Gadkari, Director (Amfin Finser India Pvt Ltd) a finance consultant company, brings out more specifically about the driving factors for FDIs. According to him, while Indian Textile sector has its own inherent strengths owing to large and fast growing domestic demand for quality fabric and apparels, own cotton production, comparatively low cost of labour and presence in the entire spectrum of the value chain, the industry is characterized by its typical issues concerning the Investor Community, namely (a) Capital intensive nature of the industry, and hence longer pay-back for the investment, (b) High Current asset to turnover ratio, leading to large requirement of working capital, (c ) fragmented nature of the industry in India, (d) Higher proportion of investment by Indian textile industry into yarn and lower value added segments and consequently, (e) Average return on equity (ROE) for the Indian Textile industry falling short of general expectations of Investor community. These factors have been responsible for extremely low level of FDI in the Indian Textile Industry during last decade. He remarks- “FDI in Indian textile sector had been hardly 1.8% of the total FDI, although the country is the 2nd largest textile economy. This also needs to be understood in the light of FDI in textile sector of China crossing 8% of the total FDI in China.”