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Research: For India, stepped-up reforms hold key to boosting textile and clothing exports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2006
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With the elimination of textile and clothing export quotas on January 1, 2005, some countries, notably China, have moved quickly to expand their share of the global export market. Is India in a position to do likewise? Not yet, according to a new IMF Working Paper that examines the country’s prospects and suggests that India’s gains will be limited without stepped-up reforms and more investment to bolster the sector’s competitiveness.

India’s textile and clothing sector has long played an important role in the country’s economy, including its exports. In 2003, the sector contributed 4 percent to GDP and 14 percent to value added in manufacturing, employed 35 million people (about 10 percent of the workforce), and accounted for $13 billion in exports (23 percent of total exports). For India, the end of quotas on textile and clothing exports represents both an opportunity and a challenge. There is significant potential for expanding market share, but markets are no longer guaranteed and competition is intensifying. In its favor, India has a large and relatively low-cost labor force, a sizable domestic supply of fabrics, a strong and diverse raw material base for manufacturing natural and artificial fibers, and a capacity-based advantage in spinning. The extent to which India can leverage these assets and benefit from the quota elimination, however, will depend on the degree to which it can remove existing constraints.

In China’s shadow

Clearly, India’s performance since 1995, when the liberalization of textile and clothing quotas started, has not been as spectacular as China’s. Globally, India’s market share increased only marginally in both the textile and garment sectors between 1995 and 2003, while China’s share grew significantly. India has expanded its access to U.S. and Canadian markets since 1995, but has lost market share in the European Union and has managed to capture only a negligible share of the Japanese market (see chart).

Indeed, preliminary U.S. data for the first half of 2005 indicate that China increased its textile and clothing exports in products liberalized after January 2005 by about 242 percent, while India’s textile exports to the United States grew by 34 percent. A similar development is evident in the European Union, where China’s exports surged by 80 percent, while India’s posted a more modest increase of 10 percent.

What the future may hold

To gain a better sense of how Indian textile and clothing exports might fare in the post-quota world, the study examines two scenarios—one in which temporary safeguards are in place limiting Chinese exports and another in which the end of quotas is allowed to have its full effect. The results of these simulations give India little cause for optimism. Its textile and clothing exports would likely continue to expand in the presence of safeguards limiting Chinese exports but suffer once these safeguards are lifted. Specifically, in a scenario in which a 50 percent quota is imposed on Chinese imports to the United States and the European Union, Indian textiles and clothing exports would grow by 13 percent and 11 percent, respectively. In the scenario in which all quotas are lifted, however, India’s textile exports grow by 5.6 percent and clothing exports fall by 4 percent (see table).

Weaknesses to be addressed

If India is to seize the opportunities afforded by the elimination of quotas, key weaknesses will need to be tackled. The sector’s output and productivity are currently constrained by the low quality of textile products, fragmentation of the industry, a continued concentration on low- to medium-priced apparel, lengthy delivery times, delays in customs clearance, little infusion of new technology, lack of scale economies, high transportation costs, and high input costs.

Eyeing the Chinese dragon

India has not matched the rapid pace of growth BnCnTiesetexrjIeana clothing exports.

(percent of total)

Citation: 35, 1; 10.5089/9781451967654.023.A010

Data: World Trade Organization.

Temporary shelter

Scenarios suggest that India’s exports would likely see a sharp increase with safeguards on China’s exports, but fare much less well with all quotas lifted.

Export valuesExport volumesExport prices
(percent change)
Full elimination of quotas
TextilesIndia5.610.3-4.3
China51.066.2-9.2
ClothingIndia-4.00.6-4.7
China85.1113.5-13.4
Partial elimination of quotas on China1
TextilesIndia12.517.2-4.0
China19.624.7-4.1
ClothingIndia10.715.8-4.4
China36.746.4-6.6

This scenario assumes a complete elimination of quotas for all countries except China, for which a 50 percent reduction in quotas is assumed.

Data: IMF Working Paper No. 05/214

This scenario assumes a complete elimination of quotas for all countries except China, for which a 50 percent reduction in quotas is assumed.

Data: IMF Working Paper No. 05/214

In the future, textile and clothing prices are expected to fall to market-determined levels, and growth in exports will depend on the enhancement of efficiency. Specifically, in a competitive environment, success will hinge on improvements in quality, price, delivery schedules, and marketing skills. To date, India’s reforms have produced only rather modest enhancements in performance, but further domestic reforms can provide the basis for a more rapid increase in India’s clothing and textile exports.

Such reforms could include the following:

Creatinganenablingenvironment. India has much to gain from improving its infrastructure, removing inefficiencies in its power sector, increasing efficiency in customs procedures, and introducing greater flexibility in the labor market so that the country can set up mega production plants similar to those in China.

Enhancing its technological capacity. In an increasingly competitive market, technological development will play a more critical role. The government should, therefore, encourage technology transfer and diffusion of innovation. To minimize lead times, India will need to further integrate the supply chain and develop strong textile clusters capable of coordinating all stages of production. Foreign investment and transfer of technology can do much to make the industry more technologically advanced, improve quality, and boost productivity. India’s image as a major exporter would also benefit from a greater emphasis on quality certification and branding.

Boostingcottonproductivity. Although India is one of the world’s largest producers of cotton yarn and fabric, its productivity (measured in ton per hectare) is lower than that of China, Turkey, Brazil, and many other countries. With market share shifting, at least temporarily, to man-made fibers, India will need to increase capacity and enhance its technology in this subsector. Because it is not clear whether this shift is cyclical or structural in nature, India’s efforts to improve the productivity and quality of cotton production—its core strength—should continue.

Developing services-related expertise. India’s efforts to boost market share will also depend on its ability to improve its designing, marketing, retailing, and financing skills, and to gather market intelligence on foreign markets. India does not yet permit foreign direct investment in its retail segment, but it may be appropriate to allow such investment in retail distribution services for textiles and clothing. This has been done in China, where foreign retailers have the right to set up distribution networks through wholly owned foreign enterprises, without any geographical or quantitative restrictions.

Broadening its product range. The clothing sector needs to make greater inroads into the high-fashion and customized clothing segment. Extensive use of computer-aided design and computer-aided manufacture systems will aid innovation and enhance competitive efficiency by reducing lead times. Technical textiles—such as those required for packaging, sports, medical and hygiene needs, and military uses—represent a huge market, but one that requires expensive equipment and more skilled labor. India should encourage diversification of established textile firms to capture this growing market.

Improvingresponseanddeliverytimes. To reduce lead times and improve delivery times of products to retailers, there might be scope for greater use of air freight for garment exports. A policy approach that encourages setting up textile clusters linked to small airports that emphasizes freight and business traffic could a be viable medium-term option until ports and other facilities can be enlarged.

Ultimately, realizing India’s huge untapped potential for textile and clothing exports will require substantial additional investment, and greater opening and modernization of this sector. Broader reforms aimed at removing infrastructure constraints and making the labor market more flexible will also be needed to facilitate this process.

Copies of IMF Working Paper No. 05/214, The Impact on India of Trade Liberalization in the Textiles and Clothing Sector, by Prasad Ananthakrishnan and Sonali Jain-Chandra, are available for $15.00 each from IMF Publication Services. Please see page 16 for ordering details. The full text is also available on the IMF’s website (www.imf.org).

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