Theory related to the Indian textile industry

The aim of this chapter is to provide knowledge to previous literature and theory related to the Indian textile industry. Therefore, this chapter will conglomerate the literature which has already been debated on the issues of impact of Multi-fibre Arrangement and its phase out, India’s competitive advantage in production of textiles and India’s competitive performance in United States and European Union. In section 2.2 Porters diamond framework is discussed in order to analyze the competitive advantage of textile industry of India. While 2.3 provides explanation on performance of Indian textile industry in both USA and EU. Section 2.4 will concentrate on the theory of Multi-fibre Arrangement and its phase out.

However, it is essential to note that there is not abundant literature available on this topic; hence study will be mostly based on the facts and issues which have been discovered on the topics like competitive advantage of India, India’s export performance and phasing out of MFA.

2.2 India’s Competitive Advantage in Textile Industry

India’s enduring achievement and expansion is aided by various key benefits that country enjoys like easy availability of raw material and labour, huge market demand, presence of supporting industries and supporting policy initiative from the government. These benefits can be demonstrated with the help of four determinants of Porter’s Diamond Framework given in the figure below and further explained in subsequent segments (Kathuria, 2008; IBEF, 2006).

Figure: The Indian Textile Industry- Porters Diamond Analysis

Source: India Brand Equity Foundation, 2006.

Porters Diamond Model

The intense debate on competitiveness was initially given by Michael E. Porter in his book ‘The Competitive Advantage of Nations’ which was published in 1990. His vital idea in this book was to explain the reasons why some social groups, economic institutions, and nations progress and flourish. The competitive advantage of Indian textile Industry has been made with the help of four determinants of Porter’s Diamond Framework. The four determinants are factor conditions, demand conditions, related and supporting industries and firm/strategy/rivalry (Porter, 1990).

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Factor Conditions

According to Porter, factor conditions are the most significant part of theory of competitive advantage of nations. Each nation owns factors of production such as labour, capital, natural resources, arable land and infrastructure which are essential to compete in every industry. As porter says, a nation’s firms achieve competitive advantage if they enjoy low-cost or distinctively high-quality factors of the specific types that are important to competition in a finicky industry. He also points out that competitive gain from the factor depends on how efficiently and effectively they are used (Porter, 1990).

India is the second largest producer of cotton in the world. India has skilled manpower in both technical and management fields. India has the largest area under cotton cultivation and also produces nearly twenty three types of cotton. Also it has been predicted that India has low labour cost. India has a fully established textile value chain from fibre to cloth to garment exports which cuts down the lead time for production and reduces the shipping time (Kathuria, 2008; IBEF, 2006).

Demand Conditions

The second important determinant of ‘diamond’ framework of porter is home demand conditions for the industry’s product or service. It is very essential for an economy to have a mature domestic market. The three necessary elements of home demand are ”composition of home demand, the size and pattern of growth of home demand and the mechanisms by which a nation’s domestic preferences are transmitted to foreign markets” (Porter, 1990). He argues that firms are highly responsive to the requirements of their closest consumers; therefore if the demand in the home nation is high it stimulates the firms to innovate and meet high benchmarks which will enhance the firm competitiveness continuously. The home base should offer former indication of demand trends to its home country seller before its overseas competitors (Grant, 1991).

India being the second largest populated country in the world has the vast domestic demand for textiles and clothing. There is a boost in the consumption of both domestic and imported products due to the rise in the disposable income levels, consumer awareness and prosperity to spend. Therefore, it provides growth opportunities for textile and clothing companies. Also, the retail sector is playing a main part in the construction of Indian domestic market, supported by malls, supermarkets and franchises across India (IBEF, 2006).

Related and Supporting Industries

The third determinant to attain national gain in an industry is “presence in the nation of supplier industries or related industries that are internationally competitive” (Porter, 1990).India’s textile industry is supported by developed supporting industries and organizations that supply inputs and knowledge to the industry in terms of design, engineering and machinery. India has built the sufficient infrastructure in various textile departments like design, production, sourcing and merchandising. Various institutes like National Institute of Fashion Technology, Indian Institute of Technology and Apparel training Institutes offers many courses in Textile Engineering. Indian textile machinery manufacturers have produced sophisticated machines with higher speed and production capacity at reasonable prices (IBEF, 2006).

Competition within the Industry

The last determinant of diamond model explains the situation in which firms are created, organized, managed and the nature of domestic rivalry between them. The central idea given my porter in this determinant is that it is essential for firms to be familiar with the national rivalry and strategies played them in order to be successful globally (Porter, 1990). Porter further adds the relationship between domestic rivalry and determination of competitive advantage is very attractive. Rivalry creates pressures on the firms to decrease costs, improve quality and innovate (Grant, 1991). The existence of large number of small players makes the Indian textile industry extremely competitive. Many Multinational Companies like banana republic, FCUK, GAP have entered Indian textile market in distinct areas. The intense competition within industry propels the firms to work in order to increase production (IBEF, 2006).

Government Regulations and Support

Porter says that, the key role of government in the ‘diamond’ is to influence the four determinants. The government can manipulate the four determinants either positively or negatively. For example, the government can affect the factor conditions through subsidies, policies towards capital markets etc (Porter, 1990). As textile industry is the most important sector of the Indian economy, therefore it has been the main focus area for the government of India. The government has passed numerous policies for the growth and development of Indian textile industry.

The Technology Upgradation Fund Scheme (TUFS)

The government of India started Technology Upgradation Fund Scheme (TUFS) so that the manufacturing units can have access to medium and long term low-interest loans for technology upgradation from IDBI, SIDBI and IFCI. Under this scheme the government ensures credit availability for upgradation of the technology at rates that are 5% lower than the interest rates charged by banks and financial institutions (IBEF, 2006; Verma, 2002).

Modernisation

The government of India provides credit linked capital support of 10 percent in addition to the existing 5 percent interest compensation for modernising the processing sector. In the powerloom sector, the government gives 20 percent capital subsidy for obtainment of new advanced machinery (IBEF, 2006).

Quality Improvement

The Ministry of textiles encourages firms in the industry to improve their quality of products. They also provide firms recognised quality certifications. There are 136 firms which are certified with ISO 9001. The other two certifications given by the textile commission are ISO 14000 Environmental Management Standards and SA 8000 Code of Conduct Management Standards (IBEF, 2006).

Foreign Direct Investment (FDI)

The government is taking various steps from time to time to liberalize policy for foreign direct investment in the textile industry. Recently, government has allowed 100% FDI in this sector (Ministry of Textiles, 2006).

Global Trade in Textile and Clothing: India’s Competitive Performance

The rising interaction of national economies with the world economies is termed as ‘globalization’. Once a futuristic perception, globalization is a reality now. Globalization has made the world closer. The globalization of economies has modified the self-reliant national economies into an integrated system of global production and distribution. Globalization has benefitted the worldwide economy by bringing diverse products at lesser prices because of the difference in cost of production in different parts of the world. For example, developed countries like US are facing the rising challenge of sharing their national markets with low cost manufactures in other developing countries like India, China, and Bangladesh etc (Dickerson, 1999).

Earlier textile and apparel industries comprises of numerous self-reliant sectors and sovereign markets all over the world. At present the textile industry has developed one global market and no longer function in seclusion. According to Ramaswamy and Gereffi (2000), the innovative characteristic that discrete the globalization from previous stages in the international division of labour is the capability of the manufactures to split up the value chain i.e. to break the production procedure into numerous geographically separated regions. As a result the goods are manufactured in a number of steps in multiplicity locations adding value at every step. Further they say, “… process of slicing up the value chain provides greater room for developing countries to specialize in the labor-intensive stages of the manufacturing process of a commodity, which as a whole might be capital-intensive” (Ramaswamy and Gereffi, 2000). For example in the apparel industry, globalization of manufacturing activities meant that a garment can be designed in New York, manufactured by using the material made in the Republic of Korea, cut in Hong Kong and assembled in china for final distribution in United Kingdom or United States. The major reasons which have put in to the globalization of world apparel industry are labour- intensive techniques for garment production, decrease in transportation and communication costs and look for manufacturing locations with lesser labour costs etc. It has been found that approximately half of the total production capacity in garment industry has been shifted to developing countries from developed countries over the past three decades. The key reason for the shift is national variations in hourly wage rates in apparel industry (Ramaswamy and Gereffi, 2000; Dickerson, 1999).

According to Tewari, the Indian textile and apparel industry has become progressively incorporated into international markets since the late 1980’s. In 1998, India was one of the top-ten exporters of textiles and clothing in the world. India’s key markets are the USA and EU and in 2003 both the nations jointly engrossed almost 83% of the Indian garment exports. India’s clothing exports grew at an average rate of 13 percent in the 1990s. India exported above $ 13.5 billion worth of textiles and clothing by 2003 as compared to $0.9 billion which it exported in 1985. The India’s share in the world textile and clothing market is $408 billion. Tewari further adds that, this export growth is slow in contrast to countries like China and Mexico but still it’s remarkable since it happened in spite of many reasons like low productivity in clothing and textiles, fragmented capacities, low scale of operations, rigid labor laws and technological obsolescence (Tewari, 2006).

Table: India’s Clothing and Textile Exports 1985, 2003

Source: WTO Statistics, 2005

India’s Competitive Performance in US

Verma (2002) in his study says that, India increased its market share by 10% in US import market in cotton dresses (336), W&G woven skirts (341) and cotton Skirts (342). Indian exports of chosen cotton apparels to the US market belong to 40 to 50 percentiles as compared to other countries in the given MFA product category. In cotton apparels, India faces competition from Malaysia, Indonesia, Hong Kong, Philippines, Sri Lanka and Bangladesh. In textiles India had performed remarkably in 363 and 362 and it is the largest exporter of terry towels to US. Verma further argues that, in 11 apparel categories both cotton and mmf, China is not a close competitor of India as UVR of its exports to US is considerably superior than India’s and both these nations function in different price scenario. The exports of India will be badly affected if China decides to devalue its currency (Verma, 2002). The below tables will enlighten the performance of India in both textiles and garment in US market.

India’s Competitive Performance in EU

According to Verma (2002), EU imports of yarns and fabrics is decreasing whereas imports of made-up and garments are visible. Except category 26 in garments, EU imports of all the other garment categories have developed substantially in value terms. Verma further adds that, India’s performance in EU market is moderate in both value and UVR. India had performed decent in Synthetic products in textiles (Verma, 200). The following table shows the export performance of India in both textiles and garment in each category in EU market.

THE MULTIFIBRE ARRANGEMENT AND ITS PHASEOUT

The volume of global trade in clothing and textiles is governed by the Multifibre Arrangement (MFA) which was initiated in 1974. This was an acknowledgement to the accelerated expansion of textiles in cotton and man-made fibre from the developing nations to developed nations throughout the interval 1962 to 1974 (Ramaswamy and Gereffi, 2000). The MFA offers the structure under which developed countries like United States, European Union and Canada charge quotas on exports of textiles, yarn and apparel from developing countries to impede the volume of exports of peculiar commodity classification. The aim of MFA was to save the national manufactures in developed nations from the market disruptions. The exporting country government controls the MFA export quotas and distributes these quotas to distinct exporting corporations on the basis of past export behaviour or existing exports of liberal products. The United States is the major importer of textiles and apparel worldwide and has a powerful influence on global markets. The United States maintains quotas on clothing and textiles from 46 countries together with 6 non WTO members. European Union has quotas on apparels and textiles from 21 countries together with 5 non WTO members (Elbehri, 2004; Ramaswamy and Gereffi, 2000; Martin, 1998).

Landes et al’s (2005) puts that, in 1994, MFA quotas administer copious trade in 105 textile and garment categories which in turn limits the supply from exporters to developed countries like United States, Canada, European Union and Norway. As a result global textile and apparel production and trade became remnant. The quotas encouraged manufacturing in developed nations and in nations which have quotas to supply to these markets. Hence production was not concentrated in nations with lower costs. According to Landes et al’s quotas have mixed impact on developing nations. The countries like India, China and Pakistan where production was low, the supply of textiles and clothing were reduced by quotas. Whereas in other low -income nations like Bangladesh and Mauritius and in higher-income countries like South Korea and Taiwan, the quotas access encouraged the export industry that contrarily would have been smaller and nonexistent (Landes et al’s, 2005).

The elimination of MFA took place in December 2004 under the Uruguay Round Agreement in the three stages. The agreement on textiles and clothing (ATC) offers the phase out of import quotas and points out the schedule between which international trade in textiles and clothing will be constantly incorporated into the GATT/WTO structure between 1995 and 2005 (Elbehri, 2004; Ramaswamy and Gereffi, 2000).

The end of MFA on 1 January 2005 has undoubtedly amended the policies of commerce in the clothing and textile industry. According to Tewari, as the international rivalry boost beneath the recent quota- free trading policies, nations all over the globe are preparing for dominant developments in the network of sourcing and clothing supply worldwide. Countries like China, India and Mexico etc with steady supply networks and well established capacities will benefit from the removal of quotas. The author further argues that China will become the ‘supplier of choice’ for the world’s giant traders and customers accounting more than half of the world supply of clothing, followed by India with roughly 15% share. The combined export share of India and China is estimated around 65% post MFA and which was 20% in 2003 (Tewari, 2006).

Kathuria, Martin and Bhardwaj (2001) argue that India has the ability to gain significantly from the removal of quotas in terms of bigger market access, employment, output growth and increase in productivity. This will happen only if domestic reforms (abolition of taxes and concessions that compliment decentralized production arrangements and reducing delays in shipping and custom clearance of imported material which are used in manufacturing etc) are executed to modernize and boost productivity which will be essential to facilitate India to prosper in an era of sharp global competition (Kathuria, Martin and Bhardwaj, 2001).

Nordas used the GTAP model to throw some light on the issue of phase out MFA. He thinks that this general equilibrium model for the global economy is beneficial for trade and policy evaluation and it is excellent at predicting relative performance of nations than absolute performance. The results are declared in the pattern of expansion in the market share of key textile and clothing exporter to United States, Canada and European Union. The GTAP model has 1997 as its base year while the ATC was commenced in 1995 and all the quotas were removed by 2005. The United States and Canada are combined as one region in this model (Nordas, 2004).

Table 1: Export tax equivalent of quotas base year

Source: Nordas, 2004

Table 1 shows the GTAP estimates of the export tax equivalent of the textile and clothing quotas in the base year. From the above table it is concluded that United States has more restrictive quotas and EU has no quotas on the Central and Eastern Europe. It is also seen that quotas more restricted for clothing sector as compared to textile sector except in countries like Bangladesh and Eastern European countries. The most restricted nations are India and China. The exporting nations included in the table are those for which equivalent tax is more than 5 percent in the United States/Canada and European Union. Nordas using the GTAP model concluded that India and china will dominate the world textile and clothing market after the removal of quotas. His study estimates that China will benefit extremely and India will expand its market share modestly (Nordas, 2004).

The market share of demand for textiles and clothing in the United States/Canada and European Union before and after elimination of quotas are shown in the figures below.

Figure: Market share before and after quota elimination, textiles, EU

SOURCE: Nordas, 2004

From figure no we can see that after the removal of quotas, China is benefitted the most followed by India.

Figure: Market share before and after quota elimination, clothing, EU

SOURCE: Nordas, 2004

The above figure no depicts that both India and China has nearly doubled their market share. China is the single biggest exporter of clothing to EU.

Figure: Market share before and after quota elimination, textiles, USA

Source: Nordas, 2004

After the elimination of quotas, China has increased their market share in textiles in USA almost by 50 percent. There is no change in the market share of India.

Figure: Market share before and after quota elimination, clothing, USA

Source: Nordas, 2004

The market share of clothing in USA before and after quota elimination is very impressive. Both Indian and China account 65% of the total export market. China triples its market share and India increases its market share by almost 4 times.

SUMMARY

The principal intention of this chapter was to recognize and assess the literature on the competitiveness and globalization of textile industry. Competitive advantage of nations is enlightened with reference to the Porter’s diamond model. The debate on Impact of MFA and its phase out is discussed with reference to many authors.

REFERENCES

Grant, R.M. 1991. Porter’s Competitive Advantage of Nation’s: An Assessment. Strategic Management Journal. 12, pp.535-548

Kathuria, L.M. 2008. An Analysis of Competitiveness of Indian Clothing Export Sector Using Porter’s Model. The Icfai University Journal of International Business. 3(4).

Porter, M.E. 1990. The Competitive Advantage of Nations. London: The Macmillan Press.

Porter, M.E. 1998. The Competitive Advantage of Nations (With a New Introduction). New York: Palgrave.

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Ministry of Textiles, 2006. Textile Exports. Annual Report 2005-06.

Ministry of Textiles, 2010. World Cotton Production. Report.

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Ramaswamy, K.V. and Gereffi, G. 2000. India’s Apparel Exports: The Challenge of Global Markets. Journal of the Developing Economies. 38(2), pp.186-210.

Tewari, M. 2006. Adjustment in India’s textile and apparel industry: reworking historical legacies in a post – MFA world. Environmental and Planning A 2006. 38, pp.2325-2344.

WTO Statistics. 2005. Trade Statistics. World Trade Organisation, Washington, DC.

Verma, S. 2002. Export Competitiveness of Indian Textile and Garment Industry. Indian council for research on international economic relations. Working Paper No 94.

Nordas, H.K. 2004. The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing. World Trade Organization. Discussion Paper No.5. Geneva.

Elbehri, A. 2004. MFA Quota Removal and Global Textile and Cotton Trade: Estimating Quota Trade Restrictiveness and Quantifying Post- MFA Trade Patterns. The 7Th Annual conference on Global Economic Analysis. Washington, D.C.

Landes et al, 2005. Growth Prospects for India’s Cotton and Textile Industries. Economic Research Service. United States Department of Agriculture.

Kathuria, S., Martin, W., and Bhardwaj, A. 2001. Implications for South Asian Countries of Abolishing the Multifibre Arrangement. World Bank

Martin, W. 1998. The Abolition of the Multi-fibre Arrangements and its Implications for Fibre Markets[online] Allied Publishers. [Accessed 15 July 2010], Available from: http://books.google.com/books?id=1W74ooMj4XgC&pg=PA137&dq=the+abolition+of+multi+fibre+arrangements&hl=en&ei=ouhqTNXFMd2eOLeSodQB&sa=X&oi=book_result&ct=result&resnum=3&ved=0CD8Q6AEwAg#v=onepage&q=the%20abolition%20of%20multi%20fibre%20arrangements&f=false