The textile industry had a dream run in the five years preceding 2007-8. There was an unprecedented investment boom fuelled by the Technology Upgradation Fund Scheme from 2002-03 onwards, with investments doubling year on year till 2006-07, totalling Rs 1.25 lakh crore. The annual growth rate in yarn and fabric production since 2002-03 averaged 8-10% and it was hoped that in the 11th Plan period, the growth rate would touch 12%.
On the export front also it was a rosy picture with growth rates of 25%, 7% and 17% in the three years following the January 2005 abolition of the quota system. It seemed Indian textile sector was overcoming its weaknesses of non-modernised, small sized units in unorganised sectors with poor weaving and processing capabilities. The policy of creating world class integrated textile parks was expected to carry modernisation further.
However, things started changing since mid-2007—first the rupee appreciation hit our exports and then came the massive demand contraction in western markets. (The US textile imports went down by 26% in November 2008 compared to the previous month). Among major retailers, except for Wal Mart, all others had a decline in sale of 10 to 20% with Abercrombie and Fitch going down by 28%. Though the situation in Europe is not that gloomy, it’s hardly free from the contagion effect.
Even in domestic markets, one has started experiencing decline in demand. So the 7.8% decline in fabric production in November 2008 compared to that a year ago. Apparel manufacturing is also experiencing similar decline. Surely the textile sector has hit a major road block, at least in the short term. There are already significant job losses, especially in the unorganised sector. Export-oriented, labour-intensive apparel sector is also facing the spectre of substantial lay-offs.
The crisis is not India-specific. China, Pakistan, Indonesia, Vietnam and Turkey are facing similar problems. While the Indian government has improved the cash-flow position of the industry by paying old dues of TUFS to the extent of Rs 1,400 crore and has eased other credit terms across all sectors, some more textile and apparel-oriented incentives would make the sector more competitive.
The cotton textile sector in India (constituting about 52% of the total industry) also requires some support to offset the increase in the Minimum Support Price of cotton by about 40% in one year. While this decision related to MSP has proved to be a big boon to the farmers during the time of global commodity price decline, it has made Indian textile sector less competitive to that extent by making domestic cotton costly. In the medium term, a moratorium of two years for the loan extended to the sector may also be considered.
In the long term, however, our exports can become more competitive only if infrastructural bottlenecks are tackled. Labour flexibility also remains a major issue as this sector experiences demand cycles. Transaction costs also has to be cut down. For the export sector at least, the state levies can be refunded. Note that through concerted policy action Bangladesh has overtaken India in apparel exports.
Not everything is gloomy though. Raw material costs are at very low levels, demand has apparently bottomed out and can only go up now, there’s less pressure now to increase wages as inflation is moderate. But unless the short- and medium-term relief is immediately provided to the industry, the situation won’t improve.
One must also utilize this crisis period to push through the long-term reforms, especially, on the labour front. The sector employs over 35 million people directly, next only to agriculture. This means a growth rate of 10-12% can create job opportunities for about 12-15 lakh people annually, especially in the semi-skilled category. The sector can create jobs at very low capital cost.
