Loosely spun

Since large parts of China’s textile exports will continue to remain under quota for the next three years, it is obvious that competition to Indian suppliers will be somewhat muted even after the Multi-Fibre Agreement’s country quota regime finally comes to an end in December.

With the government’s domestic policy regime at long last encouraging textile firms to invest in both production scale and modernisation, money is once again being attracted to the sector and new capacities are being created.

This augurs well for India’s exports in the post-MFA world, and is a denouement for which the country has waited for nearly a decade, since the conclusion of the Uruguay Round agreement — which in turn was launched as far back as 1986.

The benefits that can be expected to flow India’s way, on account of a freer international textile market, can be judged to some degree from the fact that, in the last decade, India’s non-quota exports grew faster than quota ones, for this is a sure sign that India is competitive in this sector.

Yet, for all the positives, few expect the government’s target of $ 50 billion of textile exports by the end of the decade (compared to $13.5 billion today) to come good.

The reasons for this are of course well known, and a recent report by McKinsey & Company, done for the logistics firm DHL, brings the issues into focus very clearly.

Indian exports, the report says, have a productivity that’s just a third of US levels and around half that of Chinese competitors. And when it comes to the productivity of the domestic textile/apparel industry, it’s under a sixth that of the US.

The reasons for this, again, are well known. Owing to the small size of their operations, Indian firms lose out on the advantages of scale, and this is especially important in an industry whose market, globally, is getting consolidated: during the last decade, the share of large buyers like WalMart and Nike has grown 10 percentage points, to 40 per cent of the retail US and European markets.

While such large buyers prefer to source directly from large producers (instead of the old model of buyers sourcing from hundreds of small producers), another trend that will hurt Indian exports is the fact that these suppliers are now wanting even faster turnaround time for exports.

Apart from the problems that fragmented Indian suppliers face in terms of their ability to meet such standards (the average rejection levels for Indian goods are close to double Asian levels), there are other infrastructure problems as well.

Shipping goods from India to the US takes 24 days, on an average, as against 15 days from China and three from Mexico.

According to McKinsey, if India doesn’t move quickly to fix these problems — without labour reforms, large units will not come up, and so efficiency gains and quality issues will never get sorted out — textile exports will grow at just around 8 per cent per year, when effective reforms could double that growth rate.

What’s unfortunate is that the government is not moving in areas where it can do so with relative ease. Since a major disadvantage India faces vis-à-vis China is the poor quality of fabric, the solution till such time that Indian mills are able to expand capacity, is to import fabric and convert it into garments.

Yet, import duties on fabrics are around 25 per cent, and while it is theoretically possible to get an advance licence for duty-free fabric import against garment exports, it still takes several weeks to get such permission.