Apparel industry's position in Indian economy

The significance of this sector and historically, itscontribution to India need not be stressed. This industry is the largest netforeign exchange earner, contributing to over 20 per cent of India's exports and 14 per cent of industrial output, accounting for more than 5 per centof GDP and largest employment generator after agriculture. Currently, theIndian textile and clothing sector has a share of 3.9% in the global textileexport trade.

Competitors such as China have a share of 20.2% (excludingChinese Taipei with 4.8%), Republic of Korea having 5.1%, Pakistan 3.5%, Turkey3.5%, Indonesia 1.7% and Thailand 1.4%. This is where my focus is how to geta larger share of the global market. The nominal 3% growth in apparel exports in2006-07 and a sure decline in 2008-09 brings the question of "Way Forward".

Global positioning of Indian apparel

As per WTO's reports, India presently has 3.3% share inworld apparel trade, a mere 0.2% increase in the last five years. If we comparethis to the commonly used benchmark, i.e. of China's growth, we see that China's share has increased by 12.4% during this same period. With apparel exports worthUS$ 95 bn in 2006 and a world share of 30.6% in the apparel market, it hasraced much ahead of India. India's performance in 2005 had promised to reducethe gap between the two countries performance with India's exports growing at amuch faster rate that that of China, but 2006 and 2007 has shown that the longterm growth trajectory would be much lower than the growth rates achieved in2005.

Estimates from UN Database shows that India's share in apparel exports in the world is around 3.13%. However, the basic point remainsthat India is fast loosing market share to some of the much smaller economies.During 2006-07, apparel exports grew by only 3.1%, one of the lowest among theother major Asian suppliers. China and Vietnam had the fastest growth, thoughsome of the challenges being faced by the Chinese industry, like rising Yuanand labour costs are similar in nature to the Indian industry.

Performance of leading suppliers ofapparel in 2006

Notes: India's figures are from DGCI&Sand are for financial year. Data for other countries are sourced from UNDatabase for the calendar years.

In fact, comparing with China has started sounding optimisticand the focus has now shifted to much smaller economies like Bangladesh, Vietnam, Indonesia and Cambodia, many of whom are threatening to or have alreadysurpassed India, in terms of growth rates. Most of these countries have takenadvantage of the safeguard quotas on China to increase their market share inthe US and the EU, while India has missed this "limited period" opportunitygiven the currency disadvantage it has been facing since early 2007.

The current market positions can also be gauged by theperformance of all these countries in the US market where the competition hasreally heated up. In the US market, it was clearly the year of the smallereconomies, especially Vietnam. While China grew by 23%, Vietnam grew by 35%, overtaking Indonesia and India. India slipped from being the third largestsupplier in 2005, to the 5^th position and may be soon overtaken by Bangladesh with the value difference between exports of the two countries narrowing downdrastically this year.

State of affairs

Presently, the entire textiles and clothing industry is going through a serious slowdown and there are no hopes of an immediate escape from this situation.

For the garment industry, the biggest setback to India's competitiveness has come from the sharp appreciation in rupee since early 2007-08. The rupee appreciated nearly 14% during the year as against 6.4% appreciation in China and 2.4% in Bangladesh. This, coupled with imminent recession in the US economy and the consequent cut in federal rates have maintained the pressure on the rupee and the exporter's margins. Given the not-so short term nature of the problem, the industry has to rework its strategies in terms of improving productivities and adopting new technologies.

Cost competitiveness is fast becoming a loosing game for India. The two areas where India had some cost advantage, i.e. labour and raw material, both seem to have diluted. Studies have showed that lower productivity has more than offset the low per hour wages in India. In fact India is 50% costilier than Bangladesh, 20% than Indonesia and 55% than Vietnam in total wage costs, though per hour wages are lower here.

The gains from better forward and backward linkages has been completely eroded due to rising prices on one end and sluggish demand from the end users at the other end. The entire supply chain, from yarn manufacturers to apparel exports are facing slow down in their demand.

Identifying issues

The industry is plagued with external deficiencies which have been affecting its performance like infrastructure, labour or policy related problems. But introspection shows that the industry also has lacked dynamism in many areas. One such area is lack of diversification in terms of product range as also destinations served. A comparison of the present product coverage of India and China in one of the biggest global market, the USA shows that of the 104 apparel items imported by USA, China has presence in 102 items, i.e. 98% of the import basket of USA, while India's Presence is in 66 items, i.e. 63% of the market. Also, 80% of India's exports come from 12 of these MFA categories while 80% of China's exports come from 34 of these MFA categories. It has been found that 38 RMG categories and 37% of the US market is still to be tapped by India.

A comparison of market coverage between India and China show that India's concentration levels in certain regions is very high. For India 3 Destinations comprised over 80% of India's export market in 1999-00. Same destinations constitute 86% of India's apparel exports in 2006-07

Destination wise analysis shows that at country level, 13 countries have shares more than 1% and the total contribution of these countries to the Indian apparel exports is around 87%. In the case of China, 6 Destinations accounted for 80% of China's exports in 2004. The number has increased to 12 in 2007. In 2005, the top 20 countries had 84% share. This has come down to 77% in 2006. Thus there is a movement towards lesser market concentration.

The other important issues are weak fabric base, restrictions on contract labour, Low level of investment have due to predominance of largely decentralized and small scaled units, low R&D and skill component leading to lower productivities.

The Way Forward

Diversification of Market The dominance of a few countries in our export basket has made us vulnerable to economic shocks in these countries. Diversifying to emerging economies in the Far East as also revive our markets in Japan, Australia and LAC would not only protect us from such external shocks but also take our growth rates to higher trajectories.

Brand Promotion the apparel trade is presently buyer driven which does not give much flexibility to the exporters in terms of price fixation or product segmentation. Building a "Brand India Fund" has to be mooted for better value realization and better positioning of the Indian products in global markets.

Also create on overall marketing strategy whereby road shows, buyer seller meets and delegations have to be made more Country/Region Specific or Product focused in tandem with a duly evaluated target.

Technology Mission for Knitwear industry - This industry has been the driving force behind India's apparel growth story in the last few years but is still perceived as a low value segment as India's presence is still largely in the low end categories. The knitwear industry needs to be put on Mission Mode to develop new blends and technology and enhance productivity and value realizations in this sector.

Integration of fabric base - A poor fabric base has to be countered by improving its supplies, domestically as also through imports. Imports of fabric has to be facilitated through liberal exim and input-output norms.

Tapping the domestic market We are fast loosing the domestic market to cheaper imports, specially facilitated by the new FTAs. With shrinking export growth, additional capacities build in the garment sector can be sustained by catering to the fast growing domestic market.

Labour laws - Issues like restrictions on contract labour, fixed time employment, employment of women in night shift, retrenchment, closure of loss making units, etc. needed to be addressed immediately. Labour laws should be amended keeping in view the seasonal nature of this industry. If laws cannot be changed across the board then apparel export industry's case may be taken on priority basis.

Larger Investment - Large scale capital investment to be encouraged through fiscal policies. Schemes like TUFS, cluster programmes and SITP should be availed by the industry in large scales, especially with the renewed budgetary focus on these schemes.

Improving Productivity - Productivity improvement through training processes is being done by the various ATDC centres of AEPC. The process needs to be fast tracked and new technologies inducted at this stage to ensure technological upgradation of the entire industry.

Policy support Although the industry has been receiving attention of the policy makers, there is still a huge gap in the policy support available to this industry in some of our competing countries which has lead to stead loss of market share to these countries. Hence, refund of state duties, access to credit at cheaper rates and better terms, moratorium on loans, etc have been some of the recommendations of AEPC.

Tackling the rupee Although the strengthening of the rupee is a fallout of a typical capital market conditions, the policy makers cannot leave it entirely to the market. While China's US$ 100 bn worth of dollar inflows hasn't thrown the economy out of control, why is India is finding it hard to manage US$ 18 bn worth of inflows? More importantly, these inflows are a result of incentives and tax benefits, the desirability of which needs a relook now. There should be proactive approach on the part of the Government, SEBI and RBI to calibrate the in flow of foreign exchange, which makes rupee stronger day by day.

Sunset to sunrise to....?

The garment industry has seen many ups and downs. From being termed the sunset industry, the whole textile chain saw remarkable growth during 2004 to 2006. However 2007 saw the industry loose precious share to smaller economies. Bangladesh surpassed India's apparel exports, China increased its share and Vietnam started biting into India's global market. But the industry has survived in the past and will sure find ways to do the same now. Although the budget this year has not enhanced policy support to the extent desired, extension of schemes like TUFS, SITP and cluster development programmes may infuse more funds for modernizations, marketing and brand building. More importantly, I am confident that the inherent resilience of this sector will show innovative answers to the question of Way Forward.

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