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China’s loss is India’s gain in the textile sector, but it’s not that easy

The textile industry is one of the country’s largest sources of employment, with an estimated 45 million people directly engaged in this sector.  (Photo: Bloomberg)

After a disappointing three years, India’s textile exports have jumped to $44 billion (compared to $33 billion in 2020-21) in 2021-22, buoyed by some new orders and record high prices. The numbers have brought cheer, since textile exports had been declining at a compound annual growth rate (CAGR) of 9.6% between 2018-19 and 2020-21. India’s total exports declined in the same period too, but by a narrower margin of 6% CAGR.

For example, polyester manufacturer IndoRama Synthetics clocked its highest ever turnover of 4,000 crore (about $515 million) in 2021-22. Chairman and managing director O.P. Lohia says factories are running full steam and he would be investing a significant amount in capex in the next 12-18 months in anticipation of another spike in demand. According to a CRISIL Ratings projection, export demand for readymade garment makers should grow by 12-15% this fiscal, despite a higher base.

Worldwide, overseas customers are continuing to diversify their supplier base in light of the economic crisis in Sri Lanka and the fresh covid wave in China. A larger geopolitical shift is also pushing global firms to look for alternatives to China.

China Plus One

Global textile trade has traditionally been dominated by China with its economies of scale and duty-free access to large markets like the European Union (EU) and the US.

The pandemic has dented this supremacy. Supply chain disruptions are a factor. More crucial could be the US decision in December 2021 to ban imports from Xinjiang province due to alleged human rights violations. To put this in context, the US market alone accounts for about 15% of global textile and apparel imports.

Other western markets too have come around to the ‘China Plus One’ strategy that aims to cut down on an exclusive dependence on Chinese supply chains and do business with more countries. This might trigger a seismic change in the global textiles trade order—away from China.

And so, the Chinese crisis is not something that India can afford to waste. The three markets (US, EU and UK) account for nearly half of our textile and apparel exports, after all.

This opportunity ties in well with the government’s ambitions to generate jobs and incomes. The textile industry is one of the country’s largest sources of employment, with an estimated 45 million people directly engaged in this sector, including a large chunk of the rural population and women (specially in activities like sericulture).

In a report tabled in the Budget session of Parliament this year, the standing committee on commerce said India needs to leverage ‘China Plus One’ to become an alternative investment destination for major global companies. “The committee therefore recommends that policy measures to benefit from the strategy should be devised … to develop a business-friendly environment and best-in-class infrastructure for incoming investments. It further recommends that the government should endeavour to pursue Free or Preferential Trade Agreements (FTA) or an interim and mini trade agreement with countries that seek to invest in India under the ‘China Plus One’ strategy," it said.

The opportunity

Global textile trade (exports) is projected to be $940 billion by 2026, according to a CII-Kearney report titled, “Creating a competitive advantage for India in the global textile and apparel industry". The Indian government and the industry have set their sights on taking textile and apparel exports to $100 billion by 2030, up from just $44 billion in 2021-22. That means textile exports need to have a high cumulative annual growth rate in the next eight years. “If we hit $65 billion in textile exports by 2026, India’s share in global textiles trade will jump to 6.6%. This will place the industry favourably on the path to achieving $100 billion in exports by 2030," says Karan Dhall, partner at Kearney, a global management consulting firm.

The truth, however, is that India continues to punch below its weight in the world textiles trade. From second position in 2015, India lost its share of trade, slipping to the fifth spot by 2019 with just 4.5% market share. In the same period, smaller economies Bangladesh and Vietnam surged past India. "We have lost share partly due to continued restricted access to select key markets. US, UK and EU account for nearly half of Indian textile and apparel exports but we face duties in all of them. And while other competitors (like Bangladesh and Vietnam) also face duties in US, they have trade deals with UK and EU which give them a significant duty advantage over India," says Dhall.

Gautam Nair, owner of Matrix Clothing, a garment manufacturer with units in Gurugram and Ranchi, points out that China too has been losing share of the global apparel market. In 2012, it held more than a third or 38% share of the global apparel business but this reduced to 29% by 2019. Decisions to increase minimum wages (they nearly doubled in five years) and labour shortages that some say are a fallout of the one-child norm have played their part.

While Shanmugham, Lohia and many other Indian exporters have got larger orders recently, most Indian textile exporters have not been able to cash in on the opportunity.

“So far, loss of business for China has benefited Bangladesh and Vietnam, not India. Vietnam was nowhere in 2010 but in 2021-22, its apparel exports were far more than India’s. Bangladesh exported apparel worth more than double what India did. We did just $16 billion worth of apparel exports last fiscal," Nair says.

The recent spike in cotton and yarn prices has only made matters worse. Shanmugham says apparel makers have been in “dire straits" for nearly 18 months as input prices have more than doubled, and they have been unable to pass the costs on to customers. Small companies are bearing the brunt of this price escalation and some of these units are on the verge of closure, he says.

Advantages and hurdles

Nevertheless, India has several things going for it. We have an integrated market with enough raw material supplies; the government has taken steps to help textile manufacturing such as setting up textile parks (Mega Integrated Textile Region and Apparel or MITRA) and launched a production-linked incentive (PLI) scheme worth 10,683 crore for man-made fibre garments, fabrics and technical textiles.

Negotiations for a trade agreement with the UK have re-started and the industry expects a pact by the end of this year or early next year. This will allow duty-free access to Indian textiles and put us on a par with other exporters like Bangladesh and Vietnam. An EU FTA would similarly benefit the industry as would agreements with moderate-sized markets such as Australia, Canada and Japan.

There are snags in the system, of course. The Amended Technical Upgradation Funds (ATUF) scheme, which provides a capital investment subsidy of 10-15% to textile manufacturers, is about to expire and the industry has little clarity on whether the scheme is getting an extension. As for credit support, banks continue to be hesitant to offer credit to small and medium textile units, which form a bulk of this industry.

Dhall of Kearney says Indian companies lack scale, with manufacturing fragmented for most parts of the value chain. Shanmugham of Tirupur says replacing Chinese suppliers is difficult precisely for this reason. “Tirupur has 2,000 exporting factories and the quantities we produce together are managed by just 50 factories in China. Just a handful of units here have 5,000 machines; Chinese manufacturers work with up to 20,000 machines each," he says.

One of the reasons for this is high capital expenditure and unattractive returns on investments. “The sector sees a suboptimal investment-to-return ratio of 8-11 %, that is below the typical cost of capital (12–15 %). Capex is costly as most machines are imported and they attract import duty of about 27 %," Dhall says. It is hardly any surprise that in garments, small- and medium-sized players account for 90% share of manufacturing; in fabrics, less than 5% production happens in large organized mills, and the remaining share is made up by handlooms, power looms and hosiery manufacturers.

Shanmugham says the MITRA scheme could help create large players. “One or two companies from Tirupur will benefit if a park comes up in Tamil Nadu. But it could take up to three years to set it up, since it needs 1,000 acres of land and many clearances," he says.

Besides lack of scale and restricted access to key markets, factor costs—labour, power—in India are higher vis-a-vis Bangladesh and Vietnam, making our exports more uncompetitive. Bangladesh enjoys up to 40% lower power costs and up to 20% lower labour costs, for example.

Nair says Indian exporters need immediate raw material security as cotton and yarn prices have flared up. In the short term, the government could calibrate exports of cotton and yarn—restrict these through quotas or an export duty levy—in addition to having removed the 11% effective import duty on cotton till September. “India urgently needs to increase capacity while investing in green factories which meet and exceed international standards in environmental sustainability, compliance and safety. Our time to grow in the international apparel supply chain is now," says Nair.

Betting big

Some Indian textile companies are already committing investments to expand in the near term. IndoRama is investing 600 crore in expanding capacity to six lakh tonnes by 2023-24, by when turnover should increase to 6,000 crore ( 4,000 crore in 2021-22). Lohia says demand for Indian products has increased in the last 18 months and his factories are now using 100% installed capacity.

Nair’s company has increased capacity by 40% and plans to further double it in two years with a turnover target of 1,200 crore ( 550 crore in 2021-22) by 2024-25 from the apparel business.

According to CRISIL Ratings’ analysis, there would only be a marginal increase in the working capital requirement for garment exporters because of an improved working capital cycle. So, while domestic as well as export demand will remain healthy in the current fiscal, readymade garment manufacturers are expected to have enough unutilized capacity to meet the expected surge; capital spends are not expected to be high.

It is hard to argue with the fact that opportunity is knocking on India’s door in a new world order. But we can exploit it only when Indian textile manufacturers think big and get adequate policy support to set up manufacturing at scale. Input prices need to be secured, manufacturing processes improved and delivery timelines streamlined so that a weakening Chinese grip can result in more order flow towards India, instead of Bangladesh or Vietnam. Else, the $100 billion export target by 2030 may remain just a pipe dream.