India has lagged behind in textile exports. Can the sector become competitive?
India’s textiles exports traditionally lagged behind China because of cost and scale factors, but now it has been beaten by countries such as Bangladesh and Vietnam due to another factor – the duty disadvantage.
According to a recent CRISIL report, India’s share in global exports of cotton yarn shrunk 600 basis points to 23% in 2020 from 29% in 2015, while in readymade garments, its share has stagnated at 3-4% over the past decade. “Lack of free trade agreements (FTAs) and significant improvement in peer competitiveness have caused this,” the report summed up the reasons.
The Covid-19 pandemic, which led to a 68-day nationwide lockdown from March 25, 2020, also hit the Indian economy in general and textile sector in particular last year. According to commerce ministry’s data, export of textile products plunged 9.57% to $31.69 billion in 2020-21 compared to $35.04 billion in the same period a year ago.
However, the sector is hopeful for a better future. A strong recovery has been witnessed in the current financial year with opening of the business activities and rapid vaccination. Textiles exports, which had contracted over 87% at $390 million in the first five months of 2020-21, saw a robust recovery in the same period this fiscal year. Textiles export in April 2021 surged over 787% at $3.46 billion, but on a lower base. According to official data, exports of yarns, fabrics, garments, woollen products and handicrafts witnessed a year-on-year jump of 107% in the first five months of current financial year at $13.69 billion.
Need for structural reforms
Is the recovery an indication of robust growth of textile exports? Experts say that structural changes are required if India wants to become a leader in global textiles market. These include favourable trade agreements with countries that are key markets, labour law flexibility due to the seasonal character of the apparel sector, and prompt reimbursement of all taxes and local levies.
According to Garments Exporters & Manufacturers Association (GEMA) secretary general Ajay K Singla, the sector is facing structural issues, particularly unequal competition with countries such as Bangladesh due to its trade agreements in key markets. “Textile export is a low margin business and it is very difficult for Indian exporters to withstand a 10% duty disadvantage,” he said.
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One textile sector expert, who wished not to be named, said other structural issues are policy uncertainty and inflexible labour laws. “It is accepted principle that all duties and local levies should be reimbursed before exporting a product, as you don’t export taxes. But, reimbursement has been a major issue. Bureaucrats behave as if they are doing favour by reimbursing levies. Denying full reimbursements and delays in getting money have been detrimental as they block working capital. Although the government has recently announced to clear all backlogs, who is responsible for huge pending dues?,” the expert said.
The government on Thursday decided to budget ₹56,027 crore in the current financial year to pay all pending export incentives due to exporters. The move will provide liquidity to over 45,000 exporters, mostly micro, small and medium entrepreneurs (MSMEs), and textile exports are also a major gainer.
The PLI push
The Cabinet, last Wednesday, also approved ₹10,683 crore production-linked incentive (PLI) scheme for domestic technical textiles firms and manufacturers of fabrics and apparels in the man-made fibre segment, provided they make specific investment in greenfield projects and achieve stipulated turnover — a move aimed at boosting investments in the labour-intensive sector, as also exports.
According to government estimates, the scheme will attract fresh investments of at least ₹19,000 crore in five years and result in a cumulative turnover of over ₹3 lakh crore with additional employment generation of around 750,000 jobs in the textile sector, particularly in the man-made fibre (MMF) and technical textiles segment. MMF is synthetic fibre as against cotton, which is a natural fibre. Technical textiles are used for technical properties rather than aesthetic, for example agro-textiles, geo-textiles, sports-textiles and medical textiles, including personal protective equipment (PPE) kits.
Federation of Indian Export Organisations (FIEO) president A Sakthivel called the move “a game changer” for the textiles industry. “Global MMF market is about $200 billion and India should aim to get 10% of the market in the next five years. The scheme will help in realigning our exports strategy which so far has been dependent on cotton products to move to man-made and technical textiles which together account for roughly two-thirds of the global trade in textiles,” he said. MMF apparel currently account for 20% of India’s overall apparel exports and the country should aim to increase its share to 50% in next five years, he added.
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Interacting with leaders of the textile sector on September 3 this year, Union minister for commerce, textiles and consumer affairs Piyush Goyal said that the industry should aim to raise textile exports to $100 billion at the earliest. “We must all collectively resolve to reach the target of $44 billion of exports in 2021-22 for textiles and apparel, including handicrafts,” he said. Goyal said Indian textile industry has advantage of centuries old knowledge, craft and techniques to create timeless fabrics.
Sakthivel, who is also chairmen of Apparel Export Promotion Council (AEPC) said the government’s decision to release ₹56,027 crore pending amount to exporters will also help apparel exporters bag additional export orders for the coming festive season. “It will help exporters commit to bigger export orders and thus help achieve the ambitious target of exporting $400 billion of merchandise this year,” he said.
“It will be extremely beneficial to the apparel exporters in particular as there is healthy recovery in international demand for apparels ahead of the festive season. I expect a robust growth in apparel exports this fiscal going well above the pre-Covid levels,” he said.
The road ahead
The CRISIL report, Structural stitch, quoted above also said while recent measures are positive for textile exports, more policy reforms are needed.
“Textiles is important to India’s $313 billion merchandise exports as it accounts for [around] 11% of the pie. The sector is also a significant employment generator. Given its economic importance, the sector has seen a slew of measures from the government of late, including the textile parks announced in Union Budget 2021-22 and inclusion of the sector for allocations under the PLI scheme,” it said.
The report pointed out that as far as cotton yarn was concerned, India had lost market share over the past decade to Vietnam and China “because of high cost and lack of FTAs [Free Trade Agreements] amid intensifying competition”. In readymade garments (RMG), the report said that India had done well to maintain its share even as global trade in the segment contracted. But competitors such as Vietnam and Bangladesh did even better, capitalising on China’s falling share in the past five fiscals, while India could not, the report pointed out.
The government’s decision to align exports incentive with rules of World Trade Organisation (WTO) also hit Indian textiles players. They were pushed to the brink in 2020 as the government reduced export incentives in line with guidelines of the WTO, the report said.
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Although the government has now launched new incentive scheme addressing WTO’s concerns of subsidies to exporters, CRISIL report does not expect any significant improvement in incentives with the launch of the Remission of Duties and Taxes on Export Products (RoDTEP) scheme. The scheme aims to reduce tax burden of exporting entities.
Experts are relying on integrated textile parks, PLI scheme for textiles, RoDTEP and payment of pending dues to exporters to boost textile trade, provided these schemes are implemented well, without bureaucratic hassles.
Much will also depend on trade negotiations with key markets such as the United Kingdom, European Union and the United States. A commerce ministry official, requesting anonymity, said that India is holding favourable trade negotiations with all these countries.
Addressing a meeting of textile industry earlier this month, commerce and textile minister Piyush Goyal said that India was is negotiating trade agreements with “democracies” that believe in “transparent rule-based trading opportunities” and it was in an advanced stage to conclude early harvest FTA with the UK.
The government is working with different countries to expand market access, he said at the meeting. “We are engaged with... advance stage of discussions with UK,” he said adding that India has also launched negotiations with EU. “Though, I think, UK will happen faster. At least the early harvest... EU is a longer drawn process... [involving] 27 countries,” he said. India is also engaged with the US, United Arab Emirate (UAE), Canada and Australia for FTAs or PTAs.
Goyal, however, cautioned Indian textile industry to become competitive as market-access is a two-way traffic. “One problem I face when I do FTA negotiations... An industry cannot say open access for me... I want access in other countries, but please don’t allow them to come to India... It is a two-way traffic,” he said.
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