The Indian Textile and Garment Industry - Export Case Study

Abstract

This article throws light on the Export performance of the textile and garment industry of India; it probes the different factors which affect the industry, such as government policies, Foreign Exchange rate and economic scenario of the target market i.e. the importers. The article also tries to ascertain the effect of the rising competition from other South East Asian countries such as China, Vietnam and Bangladesh with better technology and lower labor costs on the export performance of the Indian Textile Industry (2006-2011). The article gives you a glimpse of the effect of Rupee depreciation (2011) on the export performance of the garment industry. Finally we look at the future vision of the industry and analyze what changes are bound to occur in the industry and also the kind of reforms that are needed to achieve this vision.

Introduction

The Indian Textile and Garment Industry is the second largest industry of the country, behind agriculture. It adds around 14% to the country's total industry production and around 5% to the Indian GDP. The industry currently accounts for 20% of the total Indian exports. The industry has been categorized into two segments i.e. Textile and Apparel, which cater to the domestic and international market. The textile segment constitutes around 40.72% of the total market, while Apparel serves the rest 59.42%.

The Indian Textile and Garment Industry has always been an unorganized sector. There are very few big players in the industry and it mainly compromises of small privately held companies. Due to this reason there is an immense competition, which again results in company playing with low margins.

The industry exports have boomed over the years, exporting around US$ 13 billion worth of goods every year to the international market. The exports have been growing in this sector as the foreign buyers have started to look at India as an alternative to China.

The deregulation of the Multi-Fiber Arrangement (MFA) in the year 2005 played a vital role in boosting up the exports. The textile and garments exports which contributed 4% to the total exports rose to 24% during the year 2006-2007. The major countries where the bulk of India's export comes from are the US, the European Union and Canada. Such a business environment has recently encouraged Foreign Direct Investment (FDI) amounting to US$ 1.07 billion cumulatively.

Major Determinants of Textile and Garment Exports

The performance of exports in the Indian Textile and Garment Industry has been determined by various socio-economic factors. These factors have resulted in the overall growth or decline of the industry. Some of the factors which have been playing a major role are as follows:

Impact of Multi Fiber Agreement

The multi-fiber agreement was brought into action in the year 1974 by the WTO to give opportunity to underdeveloped countries to progress by setting up import quotas to the developed nations, on the quantity each nation can import from developing nations. This agreement helped a lot of underdeveloped countries to setup new industries, but the agreement was a setback to countries like India and China which had production capacities always larger than their assigned quota. Due to this the WTO decided to phase out MFA and bring in the ATC (Agreement on Textiles and Clothing) in 2005 which allowed free trade across nations.

This new era of free trade ushered in explosive growth in the exports of the textile and readymade garment industry. After Phasing out the Multi Fiber Agreement, the exports in this sector registered a two fold increase from $272 billion (1994) to $530 billion (2006). This sector registered a 9.7% growth in 2006 and 10.6% in 2007. After the MFA agreement was phased out, Textile exports from Asia to Africa increased by 19% on an average, of which India had a major share. Also exports increased from Asia to Europe by an average of 14%, also the clothing exports from South America to North America declined by 6.5% on an average as the exports from India and Bangladesh were less expensive due to the relatively low cost of labor. According to the textiles ministry, the garment exports increased by 28.25% in 2008-09, whereas the exports of textiles by only 3.06%. It showed that the Indian textile industry was far more efficient and advanced in producing readymade clothes which increased by 12.93%% after phasing out MFA in 2008-09.

The phasing out of MFA which caused a huge growth in the textile industry also increased the demand for cotton in the country. This was helped by the Government as it promoted the cultivation of more cotton increasing the land under cotton cultivation to 290% of 2001 levels. It also increased the productivity/area cultivated by promoting the cultivation of BT cotton which produced high yields. The growth also prompted an increased FDI inflow in this sector; it increased nearly 10 fold from 2000 to 2011. There has been an additional investment of US$500 billion through various government initiatives.

Impact of the Recession on Exports

The major importers of the Indian Textile industry are the EU27 (accounting for 33% of total exports) countries, the United States and Japan. The sudden onset of the Economic slowdown in the last quarter of 2008 caused a major decrease in the demand in the local markets of these countries; this ultimately affected the exports of the textile industry in India. The EU27 experienced a recession starting in the third quarter of 2008; this caused a decrease of 15% (y-o-y) in the 3rd quarter of 2008 and a decrease of 21% (y-o-y) in the 4th Quarter. The exports to UK declined by 21% in Q3 of 2008 and by 20% in Q4 of 2008(Exhibit 1). Garment imports had already decreased in the 1st 2 quarters of 2008 due to an appreciated rupee.

The United States is the second largest importer from India after the EU27, which accounts to 21% of the total textiles exports of India. The US is also the largest importer of Readymade Garments from