KOLKATA - Raman Sethi saw it earlier than most
of his peers. Three years back, when his exporter
brethren were about to ramp up their businesses hoping
to "grab a chunk of the global textiles markets" in the
post-Multi-Fiber Arrangement (MFA) quota regime from
January 1, 2005, Sethi, owner of PCL Exports, a
Delhi-based garment exporter, dismayed his peers by
suddenly diversifying into call-center operations.
"Because when the quota regime for exporters ends,
intense price wars would send earnings crashing," said
Sethi, adding that "only big players would survive".
But now, Sethi is not alone. In fact the expiry
of the MFA - established in 1975 to allocate quotas on
the amount of clothing and textiles that developing
nations with cheap labor can export to rich countries -
has opened up an unexpected business opportunity for
Parsec Technologies, a Gurgaon-based
information-technology-enabled consultancy outfit.
According to its sales head D J Dutta, over the past few
months, 20 small and medium textile and garment
exporters from hubs such as Delhi, Ahmedabad (Gujarat),
Ludhiana and Chandigarh (both in Punjab) have already
sought Parsec's help to diversify into IT-enabled
services sectors. "Under the quota regime, exports from
India have an assured buyer in the world. But post-2004,
it will be free and fair wars between individual
countries," says Dutta. "These exporters are clearly
worried and are looking at other lines of business."
Indeed, for Indian textile exporters, smaller
ones in particular, the initial euphoria about textile
and garment exports gaining automatically (since India
has a very small quota - less than 5% - compared with
other competing textiles exporting countries), is slowly
giving way to the realization that in the post-quota
regime, perhaps "India is poised to actually miss the
bus rather than getting on it".
"This sector is
likely to face a very challenging time with the phasing
out of quotas," says Arvind Singhal. "Anyone who
believes that a quota phase-out will automatically
translate into an immediate volume and value increase
for the business might find the going tougher than under
the quota regime."
Singhal's fears are worth
noting. Besides being an acknowledged industry expert,
Singhal is also the chairman of KSA Technopak, the
Indian subsidiary of Kurt Salmon Associates, a
65-year-old multinational management-consulting firm for
consumer products, retail and health-care industries.
According to Singhal, the main
reason for India's compromised competitive situation
post-MFA is government policies in the past
Some of the government policies
hindering growth in the Indian textile/garment
sector:
Differential rate of taxation for organized
and unorganized sector, making the organized
sector un-competitive.
Labor laws that did not allow the hire and
fire of labor, while allowing for unionization,
thereby promoting a culture of low accountability
and productivity.
Limitation of investments in the apparel
manufacturing sector to restrict it to an SSI
(small scale industry), thereby not promoting
"scale".
two decades, which have
"systematically destroyed the core of this industry" and
have resulted in the peculiar structure of the Indian
textile and clothing industry. A Technopak study says
that in fiscal 2002-03, the organized textile makers
produced just about 3.6 percent of all fabric production
in India (and about 5.5 percent in terms of value) while
the remaining came from the unorganized manufacturing
sector that mostly use backdated power-operated weaving
machines (called powerlooms) or just manually operated
ones (handlooms).
On the revenue side too, the
industry structure is highly skewed. Excluding the
output of leading producers (such as Reliance Ind,
Indorama and Grasim), the total revenues of the top 20
textiles and clothing companies in India do not exceed
US$2 billion. There are no more than 15 apparel
exporters in the country that have revenues in excess of
$22 million; another 30 between $1 million and $22
million; while none of the numerous rest even touch the
million-dollar mark.
"It is difficult to find
such a large-scale industry in the country (or anywhere
in the world, for that matter) that is so disorganized
as the Indian textile industry," says Singhal.
Technopak also feels that because of the
lopsided government policies of yesteryear, investment
in new capacity, crucial for the country's textile
sector to take advantage of the post-quota regime, has
almost come to a halt in the past five years. According
to Technopak, total new investment in the Indian textile
and clothing sector, including some modernization in the
past five years, has been about $2 billion: puny for an
industry that, according to the country's Planning
Commission as well as Technopak's estimates, requires
more than $21 billion over the next three to five years
to be competitive and on an industry-matching global
scale.
Moreover, the sector has received
practically no foreign direct investment and there are
no signs of this trend reversing any time in the near
future.
Which is why, even as many estimates and
studies have projected the outstanding potential of the
Indian textile industry in the wake of the phase-out of
quotas, experts such as Singhal foresee that, amid a
world of rapid consolidation of brands and retailers,
which require larger suppliers, India's exports
potential remains a suspect since the strength of even
the biggest of Indian companies (barring a few) to scale
up to global size is untested.
But that's not
all. India's export-product basket for garments caters
to just three categories in a list of the top 10. In
fabrics, for instance, India's exports were largely
"gray" (unfinished) fabrics, "but with buyers seeking
packages, fabrics have to be processed and converted
into garments", says Singhal. And on fibers, the
country's strength so far is largely confined to cotton,
which has only a seasonal demand in spring/summer.
Moreover, according to Atul Kohli of Delhi-based
Akriti International, who has been supplying ethnic wear
to retail chains such as Newlook and Pilot in the United
Kingdom and La Torres in Spain: "Once the free-trade
regime sets in and all country quotas are abolished, we
will be outgunned by the cheaper stuff from Malaysia,
Bangladesh and China."
"And obviously," says
Raghav Gupta, associate director of Technopak, "the
maximum threat to the industry is from China.
"Hence," adds Gupta, "while most of the major
organized players will perhaps benefit from the quota
phase-out, their overall numbers and contribution to the
total Indian textile and clothing industry [about $28
billion in revenues including local and exports in 2003]
may add up to an incremental increase of not more than
$900 million in 2005 at current prices, or just about
5-6 percent of total export value in 2003-04."
But even that 5-6 percent growth is optimistic.
Gupta also says that because of the likelihood of a
steep decline in export prices in the post quota
phase-out, the real possibility of stagnation or even an
actual decline in India's textile and clothing exports
in value terms immediately after January 2005 looms
large.
The tantalizing question therefore is,
how can many estimates and studies - including that of
the United States International Trade Commission and
DHL-McKinsey Apparel and Textile Trade report - conclude
that the post-quota regime can give India a winning edge
in the world? The DHL-McKinsey study, for instance, has
projected a splendid potential of as much as $30 billion
in apparel exports by 2009, compared with just close to
$5.5 billion in 2004.
Making projections is
easy, feels Singhal. "On the potential front, we can
take almost any sector in India - for example,
agriculture, tourism, health care or pharmaceuticals -
and come up with multibillion-dollar export
opportunities for the country," he says, adding,
however, that they don't guarantee success.
Yet
there's a silver lining. "Most significant foreign
buyers have announced plans to increase sourcing and are
following up words with actions," says Gupta. UK retail
giant Marks and Spencer is in fact setting up its
sourcing office in Bangalore in the near future and
"based on interaction with companies like Gap, Wal-Mart,
Ikea, J C Penney, Li & Fung, H&M, etc, most are
planning to increase their sourcing" from India.
Besides, a number of large apparel outsourcing companies
in Hong Kong, Sri Lanka, and other Asian countries are
being asked by their buyers to set up manufacturing
factories in India, reports suggest.
"We believe
more and more buyers will start treating South Asia as
one supply base and will base their sourcing offices in
India," says Gupta.
And that could come as a
sort of consolation for the jittery nerves of smaller
Indian textiles exporters.
(Copyright 2004 Asia
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