How India can seize the $700 billion global opportunity in textile and clothing

We Indians love to compare ourselves with China. However, when it comes to textile and clothing, India’s export of $40b lags far behind China’s $269b despite its long history and obvious advantage in raw material and labour. Forget China, India is now behind Bangladesh and Vietnam.

Between 2000 and 2010, China doubled its global export share in apparels from 18.2% to 36.4%, but India’s share inched up from 3% to 3.2%. Again, between 2010 and 2016, China was able to retain its global market share at 36%, Bangladesh could increase it from 4.2% to 6.4%, Vietnam almost doubled it from 2.9% to 5.5%, but India managed to raise it from 3.2% to 4%. 

Many argue that industrial wages in China have been rising, so it’s time for India to move decisively and seize the global opportunity of $284b of textiles and another $443b of clothing that’s knocking on its door. But, India may not grab it unless it addresses the regulatory mess that its successive governments have created over the years.

A series of un-prudent regulations on fibre, wages and trade policy have made India mainly a supplier of raw material i.e. cotton fibre and yarn. No surprise, India’s apparel export accounts for 40% of its total textile export which has been hovering around $40 billion for the last five years. 

The apparel export of developing countries be it Bangladesh, China India or Vietnam is primarily a commodity business wherein the exporter is merely a contract manufacturer. It thrives on cost arbitrage and thinner margins. For India, its apparel export is dominated by SMEs which lack not only pricing power but also access to cheaper institutional credit, technical know-how and skilled manpower. Any additional inefficiency either due to raw material, logistics or border and customs procedures is bound to result in loss of orders. There’s a limit to how much export incentives can make up for such inefficiencies even if such incentives are not challenged at WTO.

Labour woes 

A recent BCG study finds that labour productivity in India's apparel factories is lower than that in Vietnam and Bangladesh, yet the government has been hiking minimum wages, and is flirting with the idea for a national minimum wage. Such policies though well-intentioned will make India’s textile sector further lose its cost competitiveness.

The hikes in factory wages must have some reference to worker's productivity otherwise it will induce relocation of factories to cheaper destinations. In fact, that’s already happening with top textile companies such as Arvind Mills and Raymond setting up factories in Ethiopia where electricity and labour wages cost less and being an LDC, it has duty free access to top consuming markets such as EU, Japan and the US.

Besides, it makes sense for large companies in the organised sector with deeper pocket to focus on quality and design upgrade, and raising worker's productivity to remain competitive as India can't have wages as low as LDCs like Bangladesh and Ethiopia even if politicians refrain from wages populism. 

Fibre mess

The Indian government favours cotton so it attracts lower import and GST vis-a-vis synthetic fibres and yarns. That artificially keeps cotton cheaper and over-promotes its use.  Thus, India must adopt a fibre neutral taxation policy to make fibre production and consumption in line with global demand trends i.e. more use of synthetic fibres than natural fibres.

Trade policy

Despite the potential role that trade can play in textile and clothing, India has failed to use trade policy to its advantage - for pushing its exports to major consuming markets starting from the EU, Eurasia Economic Union (EEU), Japan to North and South America, or safeguarding its domestic industry from the influx of cheap imports from countries such as Bangladesh or China. 

The EU is the world’s largest apparel importing destination with an annual import of $85-90 billion. However, India’s exports are subject to 9-10% import duties versus 0% for Bangladesh, Sri Lanka and African countries. A free trade fact with EU will remove this duty disadvantage but India has been dragging its feet on it. Similarly, an FTA with Russia-led EEU will open a completely new market (so far dependent upon imports from China) for India’s value added textile products. 

Textile and clothing market in Mercosur (comprising Argentina, Brazil, Paraguay, Uruguay and Venezuela) is highly protected with basic customs duties being as high as 26-35%. High import duties along with high logistics cost have kept this big market virtually inaccessible. Though, there’s a limited preferential trading arrangement (PTA) with Mercosur trade bloc, it doesn’t cover textile and clothing items. Thus, the expansion of India-Mercosur PTA into a full-fledged FTA will be immensely helpful.

China is a top consuming market but it imposes high import duties (10-15%) on clothing items. Australia is another $10-15 billion clothing market. The RCEP negotiating platform can be used to get improved market access for apparels in Australia and China.

It’s not that India is not pushing FTAs that could help its textile exports. Indian trade negotiators have also failed badly in securing favourable terms for textile and clothing in FTAs that are already operational such as SAFTA or India-Japan CEPA. Allowing duty free imports from Bangladesh (under SAFTA) and other LDCs under unilateral duty free quota free (DFQF) facility without any sourcing restrictions have resulted in ever increasing import of apparels made of Chinese fabrics that’s hurting the whole of India’s textile value chain comprising of fibre, yarn, fabrics and apparels. That calls for urgent tweaking in sourcing rules.

Similarly, stringent sourcing restrictions imposed by Japan under India-Japan free trade pact have resulted in a virtual denial of market access for India’s apparel exports. India should use the review mechanism of the trade pact to get these provisions relaxed or removed.

Moreover, inverted duties (higher import duties on raw materials and lower on finished products) encourage import (rather than export) of finished goods. India should use the upcoming budget in Feb to end this self-inflicting trade policy measure.

To summarise, so far, India has failed to tap the global textile and clothing opportunity. It can still improve things by tweaking its regulations on labour, fibres and trade.

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This article was first published by Times of India here. A different version of this piece catering to international readers who're not well-aware about India's textile and clothing sector has earlier been published by Nikkei Asian Review from Nikkei-Financial Times Group. You can find that here