By: Mr. J. N. Singh
Just a decade back, the Indian textile and clothing sector had almost been written off- in fact it was pejoratively called the sunset sector. The erstwhile ugly duckling is now looking very attractive. Indeed the last two years have been a dream run for the Indian textile sector. It has witnessed tremendous growth in raw material, especially cotton; the fabric production is growing at around 10% on an already high base and the all-around investment in the sector has been unprecedented in the Indian textile history. Any study of the prospects of the textile sector in the years to come necessarily engenders three very pertinent questions. First, what growth target is the Indian industry envisaging in the next five years; second, can the Indian textile industry achieve and sustain this growth and third, what will be the new trends and risk factors in the coming years. Let us first examine, however, the performance of the industry in the last few years.
A. Recent Performance of the Textile and Clothing Sector
Raw Material Growth
The raw material situation has been extremely encouraging especially in cotton and from a low of 101.5 lakh bales (170 kg) in 1984-85 we are expecting a figure of 270 lakh bales in 2006-7. There is reasonable price stability and no more uncertainty related to imports.
The position has improved even in Man Made Fibres. A reduction of excise duty from 16% to 8% in 2006 budget has boosted domestic demand of MMF yarn & fabric. A further rationalization of excise duty will certainly work wonders.
Fabric Production Increase.
The growth in fabric production, which is often seen as an indicator of country's textile prowess, has been very encouraging in the last few years. We experienced a growth of 7% in 2004-5 and now expect a growth of 10% in the current year.
Investment in the Textile and Clothing sector
The sector has witnessed unprecedented investment trend in the last few years so much so that for the last five years, the CAGR of investment has been around 100% ! What is more encouraging ,even the erstwhile laggard sectors like processing where India has traditionally been very weak, have also drawn significant investments in the last few years. The graph and the table below amply illustrate this.
B. Weaknesses Still Exist
The immensely satisfying developments of the last few years should not blind us to the fact that weakness still persist in this sector. The legacy of the earlier restrictions has ensured that the Indian textile sector continues to be highly fragmented and poorly modernized. Thus, in weaving sector out of a total of 2 lakh looms hardly 50000 are shuttle-less looms. Also, the average size of the weaving unit in the decentralized sector is 4-5 looms per unit. In processing sector, there are more than 10000 hand processing units using obsolete technology. Even in the power processing units which number 2324, only 227 can be said to be modern. Thus if we have to compete with textile giants like China, the Indian textile industry has a long way to go for technological upgradation, modernization and consolidation (scaling up) of the units.
Another weakness is the very heavy dependence on cotton. While in the rest of the world fashion preferences are dictating 60% usage of Man-made fibers vis-�-vis 40% of cotton, in India the reverse is true. Thus in the export sector India misses on many opportunities where manmade or blended fabric is preferred.
Indian textile sector is also hampered by the absence of big-size global textile and apparel producers, with their attendant marketing and other linkages.
C. Growth Targets for 2007-12
Despite all these weaknesses, however, the Indian textile industry is brimming with unprecedented confidence and optimism. It is no coincidence that two separate studies (though some members were overlapping) in 2006, projected almost identical growth targets for the industry. The first study was the government sponsored 'Report of The Working Group on Textile and Jute Industry for the 11th 5- Year Plan' in which the textile industry is envisioned to grow at 16 percent in value terms to reach the level of US $ 115 billion by 2012. Cloth production is expected to grow at the rate of 12 percent in volume terms while apparels is expected to grow at 16 percent in volume terms and 20 percent in value terms. Exports are expected to grow at the rate of 20 percent in value terms.
The second study was the CITI (Confederation of textile Industries- the leading textile association) sponsored 'Vision for the Indian Textile and Clothing Industry' prepared by CRISIL. The CITI Vision Document envisages a figure of $110 billion by 2012 boosted by a CAGR of 10% p.a. in the domestic and 19% p.a. in the export sectors.
Are these growth targets achievable?
These growth targets envisage a fundamental shift in the Indian textile scenario and its having taken a trajectory of very rapid growth. If we look at some past figures, cloth production registered a growth of 8.6 percent during 8th 5 Year Plan (1992-97), 4.15 percent during 9th Plan period (1997-2002) and mere 4.21 percent during 10th Plan period (2002-2007). A scenario based merely on post growth would have given us a target of paltry 6 percent CAGR during 2007-12. Yet, now we are confident of achieving a 12 percent cloth production CAGR during 2007-12 - a confidence which is the consequence of the entire Indian economy having taken a high-growth path.
Some detailed economic calculation led us to this conclusion. Estimating 8.5 percent as the GDP growth rate p.a. during 2007-12, and estimating a marginal increase in clothing expenditure as percent of PFCE (Private Final Consumption Expenditure) from 5.3 percent in 2005-06 to 5.9 percent in 2011-12(due to several demand and supply side drivers), the total demand for fabric came to 92.6 billion sq.metres of cloth - very close to 12 percent CAGR for fabric production during 2007-12. It would be interesting at this point to briefly understand the growth drivers which are expected to boost the textile demand in the country and in the export sector.
Growth Drivers boosting Indian Textile Demand
In the domestic sector, the increasing GDP per capita has led to greater disposable income with the Indian people. There have been more working female population leading to increasing purchase; the greater usages of credit cards have also facilitated purchases of textile and clothing items. Also, India is expected to gain substantially from the 'demographic dividend'- a major increase in the percentage of younger and hopefully employable people till 2025, who will boost India's overall wealth. Above all, the growing penetration of organized retail (the percentage is expected to increase from the present 3% to 10% by 2010) will increase the availability and hence the purchase of textile and clothing by the Indian consumers.
In the export sector, the removal of the MFA has given a boost to the Indian textile entrepreneurs, a trend which has only been augmented by the progressive dismantling of spinning and weaving from the developed world. And the quota limit on China till 2008 is another incentive to the Indian industry to strengthen itself in the meantime.
Implications for achieving these targets
These targets look phenomenal when seen through the prism of past history, but in the present scenario of optimism and India's overall high growth trajectory, they are certainly achievable. At the macro level, these targets also have some implications in terms of requirement for investment, machinery, infrastructure and manpower.*
The investment required during 2007-12 would be Rs. 1.5 lakh crores (certainly achievable when compared to the investment in 2006-07), the trained manpower requirement would be 6.5 million; there will have to heavy influx of machineries, which will mean practically doubling of the existing capacity of 29.59 million. spindles in spinning adding over 1 lakh shuttle-less looms in weaving, and a very substantial investment in processing, to cover at least 50 percent of the projected fabric under continuous power processing. We will have to add 38.48 billion sq.metres capacity of such plant to our existing capacity of 7.62 billion sq.metres. of continuous power processing.
* For details see 'Report of The Working Group on Textile and Jute Industry for the 11th 5- Year Plan'
For Industry's perspective, see CITI 'Vision for the Indian Textile and Clothing Industry' prepared by CRISIL
Are these investments possible domestically? According to informed industry and government estimates, the continuance of Technology Upgradation Fund will ensure at least two-third to three-fourth of the required investments to come from the domestic textile industry.
Requirement for FDI/Foreign Equity
For the remaining at least 25 to 35 percent investment, Indian will have to depend on Foreign Direct Investment or even Private Equity coming in a major way. One may not compare Indian with relatively smaller economics, but even in China (which like India straddles in the full range of textile and apparel value chain), out of Chinas' overall exports of textile and clothing, foreign-investment enterprises accounted for about one-third in 2004. In fact official statistics confirm the presence of over 20000 foreign invested enterprises, with an FDI inflow of $ 5.3 billion in 2004**.
In India's case, we would require FDI for high quality fabric manufacturing especially by further investments in processing, in synthetic fibres, technical textiles as also in widening the base of technical machinery sector.
** For further details, see, Appelbaum, Richard, P., (2005) TNCs and the Removal of Textile and Clothing Quotas, UNCTAD.
D. New Trends in the Sector
Several new trends can be seen in the textile & clothing sector, which would only serve to strengthen the sector.
1. There is a significant scaling up by way of horizontal consolidation and vertical integration. The majority of the investment under TUFS has come not from new entrants but by the existing players. As the restrictions on capacity increases were removed since the progressive liberalization in this sector starting since mid 1980s and continuing all the way since 2000s, the mean investment per firm in plant and machinery has significantly increased - this trend being greatly accelerated in the last two years. The largest Indian firms like Arvind, Indian Rayons, Vardhaman, Welspun, Alok etc., have sanctioned investments of over Rs.10000 crores in the last few years (Source - Office of the Textile Commissioner). Second, there has been a significant forward integration by yarn makers, spinners and major weavers into garments. One can name Arvind Mills and Vardhman to exemplify this trend. Very interestingly, significant member of ginners are forward integrating into spinning as can be seen in the cotton areas of Andhra Pradesh and Punjab. Third, significant backward integration by small and medium knitwear exporters into yarn making is being witnessed in the Coimbatore-Tirupur area. Finally, firms are also adopting IT - driven production process control systems as also productivity enhancing energy audits. In fact, there was a huge response to the seminar organized by SIMA & SITRA on usage of IT in Small and Medium enterprises in the textile and clothing sector in early 2006.
In fact, some of the best examples of full integration are exemplified by M/s. Alok, M/s. Welspun Industries and M/s Vardhman Industries, who straddle the entire range from spinning to branded garments and home textiles.
2. Blurring of Boundaries between Export & Domestic Markets
As the purchasing power in the Indian market has increased, due to India's increasing GDP and 'demographic dividend', there has been a rapid rise of domestic brands. Practically all twenty to thirty textile and apparel firms have introduced their domestic brands & are aggressively positioning themselves within segments of domestic markets. This trend had started with Zodiac and Monte Carlo brands some decades ago, but the market size for branded wear has now grown very big and hence one witnesses extreme competition. Several of them have purchased international brands to penetrate the First World market as also supplying to the domestic market under that brand name. For example in the home textile market, Welspun has purchased Christy, GHCL has purchased Dan River and Roseby's, Creative has purchased Portico brands to facilitate their entry into US & EU markets. Thus, slowly the earlier difference between domestic manufacturer and exporter is whittling away- the successful textile player has to constantly look at opportunities both in the domestic and export market.
3. Role of BIG Retail Buyers
More than any other factor, the entry of the BIG retailers in India like Reliance, Bharati - Walmart, Aditya Birla Group, Tata-Trent are going to have a significant impact on the future direction of textile and clothing industry. Though presently organized retailer's penetration is only 3 percent in India, it is expected to grow to around 12-15 percent by 2012. As clothing form an important aspect or organized retail, the sale of clothing through organized retail chain shops can go more than 15-20 percent of total sales of clothings. This would still be much less than US, where the 24 biggest retailers account for 98 percent of apparel sales. The position in EU is also similar.
Now, the international experience suggests that these high-volume retail chains, because of their large distribution network and considerable buying power, exert a great deal of control over prices and dictate quality terms. Already there are reports of Reliance chain dictating a particular price for jeans. The retail experience has two other features as well. First is 'lean retailing' which allows retailers to maintain lean inventory, but will coerce suppliers for 'rapid replenishment' of goods. Second is the concept of 'full packaging' in that the retailer would not buy fabric from different sources and then get converted into apparels again from different sources, but would prefer a 'full package' solution from a limited member of sources.
Thus, the increasing presence of major retailers in India would result into even greater formal and informal vertical integration and horizontal consolidation in the sector, as also enhancing the quality trends. The pressure on margins will serve to reduce inefficiencies in the system by way of further modernization, consolidation and integration. The best outcome, however is the increase in the demand of fabric and hence increase in the size of the sector.
E. Any Risk Factors? Conclusions
Any major downturn in the Indian economy, and to a lesser extent, a downturn in the global economy, can seriously decelerate consumer spending including clothing purchase, which would have a strong negative impact on this sector. To that extent the global and domestic economic factors can seriously affect the growth and progress of this sector.
The conclusion of Free-Trade Agreements especially with Asian countries (who are otherwise our strong competitor in this field, though not in high technological sector) can have a deleterious effect on the domestic industry if Rules of Origin clause is not fully and strongly adhered to.
The China factor is always present, and especially after 2008, when the quantitative restrictions on China are removed from the major US and EU markets, the impact would be felt by all textiles and clothing producing countries including India. Indeed a foretaste of China's impact could be seen in 2005- the first year of quota removal- when China's export surged by almost 60% in all major areas. In effect, India has been provided a window of opportunity till this period and it behoves on the textile entrepreneurs to significantly modernize and consolidate their industries.
In conclusion, it must be understood that despite the recent advances in this sector, India has still a very long way to go. The industry is still quite fragmented and requires significant modernization and consolidation. Hence heavy investment in this sector must be continued for next several years, building further on the recent positive trends. The Industry will also have to introduce greater fashion and design elements so as to have a much higher per unit value realization than at present.
On government's part, all forward looking schemes including TUFS requires to be continued at least till the next five years, so that Indian industry is in a strong position to face the global competition. The Scheme for Integrated Textile Parks of the government is also expected to go a long way in providing for informal consolidation and integration in the sector.
Only a coordinated effort by all - government, industry and individual units, can make India achieve its apparently high and stretch targets of 2012. The next five years are thus indeed a period of reckoning when the future directions of the Indian textile and clothing sector will be set for all times to come. This period 2007-12 will also show whether India has successfully grabbed the momentous and unprecedented opportunity that has come its way.
About the author:
Shri Jagadip Narayan Singh is a 1983 Batch of IAS Officer and presently working as Textile Commissioner, Government of India. He started his Civil Service career as Assistant Collector, Veraval, Gujarat in 1984.Since 1984; he held different position in various offices and departments of Government of Gujarat. Among important positions he held was Joint Managing Director, Gujarat Industrial Development Corporation, Director (Marketing) of Gujarat Alkalies and Chemicals, M.D. of Gujarat Industries Power Company Ltd. and Secretary (Information Technology) in Gujarat.
He was born in Patna, (Bihar) on 2nd May 1959. He has a bright academic career, ranker in SSC, topped in J. N. University and topper with Distinction in Management Studies from Asian Institute of Management, Philippines.
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